Enterprise Resilience Management Blog

Litigating the Past

There is an old joke that if you want to be competitive with a country like China all you have to do is send over a 1,000 lawyers and let them go to work -- the cost of China's goods will surely rise. The U.S. certainly has lawyers to spare. A decade ago BusinessWeek reported that Japan had only 16,800 licensed lawyers compared to 900,000 in the U.S. In the succeeding decade, the U.S. has produced a couple of hundred thousand more lawyers. With so many lawyers, it's not surprising that the United States became a litigious society. It's also not surprising that a percentage of those lawyers see class-action lawsuits as the road to riches. They have been able to convince untold numbers of litigants that there is easy money to be made by suing rich and well-insured businesses. When you look at many settlements, however, the only people who really seem to get rich are the lawyers. I don't mean to imply that the causes taken up by contingency fee lawyers aren't important -- they are. But most people believe that the primary beneficiaries of such lawsuits should be the victims not the lawyers. When big money is involved, however, the temptation to win at all costs is almost overpowering. That is why BusinessWeek reports that "multinationals have long worried about U.S.-style lawsuits taking root in other countries" ["A Bunch of Fake Claims Against Dole?" 6 July 2009 print issue]. The lawsuit against the Dole Food company in Nicaragua is an interesting case in point.

"In suits against Dole Food, Nicaraguan courts awarded $2.2 billion in damages to workers claiming they were made sterile by exposure to the pesticide DBCP on Dole banana farms in the 1970s. Dole has been battling efforts in U.S. courts to enforce these judgments at the same time it fights thousands of additional Nicaraguan DBCP claims filed in the U.S. In 2007 a handful of plaintiffs won $1.5 million in a trial presided over by Los Angeles Superior Court Judge Victoria Chaney. All of this inspired a documentary, Bananas!, which casts the farmworkers' legal team in a positive light. But a 60-page ruling released on June 17 [2009] by Judge Chaney concludes that many and perhaps all of the DBCP claims are fabricated. ... Chaney's 'findings of fact' chronicle a scheme in Nicaragua by attorneys, judges, and others to mass-produce fake cases. Among the findings: Recruiters rounded up men who never worked on a banana farm, providing them with manuals, videos, and 'field trips' to make them credible plaintiffs. Nicaraguan medical labs faked test results. 'An entire industry has developed around DBCP litigation in Nicaragua for the purpose of bringing fraudulent claims,' wrote Chaney, who authorized an investigation and hearings after Dole raised the issue of trumped-up claims. Chaney identified U.S. lawyers who, she says, 'actively participated' in the 'litigation fraud.'"

Dole may or may not have clean hands in this matter. Historically large corporations operating in developing countries have shown little regard for working or environmental conditions -- and those practices are coming back to bite them. The oil industry appears to be on the verge of an era of litigation and the possibility of bogus lawsuits, like the one against Dole, can only send shivers throughout the sector. There have been court cases against Shell in Nigeria, Chevron in Ecuador, and Exxon Mobil in Indonesia ["Oil Industry Braces for Trial on Rights Abuses," by Jad Mouawad, New York Times, 21 May 2009]. One of the most serious charges being made is against Royal Dutch Shell, which is accused of paying to have a Nigerian author and activist Ken Saro-Wiwa executed by Nigeria’s former military regime. Shell, of course, denied the charges but nevertheless agreed to settle the case for the $15.5 million ["Spilling over," The Economist, 13 June 2009 print issue].

"Shell denies any wrongdoing. It says the payout was a “humanitarian gesture”; some of the money will go to a new trust fund for the Ogoni. Shell now hopes that it might even resume oil production in the region. But things are unlikely to be that simple. There has been a mixed reaction to the settlement in Ogoniland. Some Ogonis are disinclined to forget years of mistrust and others are in talks to clean up the oil spills that have been left untended, still oozing into farmland and rivers after 15 years. Ogoniland is just a sliver of Shell’s onshore oil fields, and the out-of-court settlement is unlikely to end the company’s longstanding troubles in a volatile part of Nigeria that is even more violent now than it was back in the 1990s."

Shell was likely willing to settle because the trial that was to be held in New York was going to accuse the company of "crimes against humanity" according to Mouawad. He reports that "the trial [was] the latest in a series of cases aimed at some of the world’s biggest oil companies, asserting misdeeds in developing countries where they were once seen as unassailable. Oil companies are being sued on charges of environmental damage, collusion with repressive governments and contributing to human rights abuses, among others." According to The Economist, Shell's settlement is unlikely to end litigation against the company.

"The payout could also spark further court battles invoking the same American law, the Alien Tort Claims Act of 1789, originally intended to counter piracy, under which the Shell case was brought. It has been used to great effect in recent years, first against foreign officials who violated human rights, and later against firms that appeared to abet such acts. Most of the lawsuits against big companies, however, have been settled out of court, setting no clear precedents."

Mouawad reports that other companies involved in ongoing or past litigation include:

"Chevron [which] could face up to $27 billion in liability in Ecuador for pollution of the jungle. [And] Exxon Mobil [which] is being sued by Indonesian villagers from the province of Aceh who allege human rights violations committed by soldiers hired to guard a natural gas plant. ... In 2004, Unocal, a California oil company accused of using slave labor in the construction of a pipeline in Burma during the 1990s, agreed to compensate villagers there. The terms of the settlement were not made public."

One of the challenges facing leaders of large, multinational companies is ensuring that a system of values is infused through the workforce. The reason that enforcing a value system is so difficult is because ambitious individuals are likely to ignore the values if they believe doing so will advance their careers. I'm a believer, however, that a company must behave ethically and morally and those values cannot be situational. If you care about pollution in your own backyard, you should care about pollution in someone else's backyard. Good corporate behavior is not just the morally correct thing to do, it is also good business. Just look at the potential ramifications of the case against Chevron in Ecuador ["In Ecuador, High Stakes in Case Against Chevron," by Juan Forero, Washington Post, 28 April 2009].

"If the judge rules against Chevron, the company could face the largest damages award ever handed down in an environmental case, dwarfing the $3.9 billion awarded against ExxonMobil for the 1989 spill in Alaska. A report by a court-appointed team last year concluded that pollution caused mainly by Texaco's Ecuadoran affiliate, Texaco Petroleum, had led to 1,401 cancer deaths in this stretch of Amazonian jungle. The team's leader, Ecuadoran geologist Richard Cabrera, reported finding high levels of toxins in soil and water samples near Texaco's production sites and assessed damages at up to $27.3 billion."

Forero reports that "the case has attracted the attention of energy companies worldwide." Companies are beginning (very slowly) to change their ways according to an article published last year in The Economist ["Strange bedfellows," 24 May 2008 print edition].

"A survey by Greener World Media, a consultancy, found that although companies made plenty of announcements in 2007, real environmental progress was hard to spot. But firms are keen to form partnerships with environmental groups precisely to avoid being accused of 'greenwashing'. Besides providing expertise, activists can lend credibility to a company's environmental programmes. Whether activists are 'selling out' when they deal with big firms is the subject of much debate. ... Yet alliances between companies and activists are not as strange as they might seem. For bosses planning long-term capital investments, says Michael Lenox, an expert on corporate sustainability at Duke University, 'uncertainty is more damaging than regulation.' This puts bosses in the same boat as activists: both want regulators to hurry up and set the rules. 'We can't solve these big global challenges without business engagement,' says Mr Cramer, 'and business can't operate without solving these problems. So there is philosophical alignment.' Even so, there is a limit to how much voluntary action can achieve, says James Speth, dean of Yale's School of Forestry and Environmental Studies. In a new book, 'The Bridge at the Edge of the World', he argues that environmental externalities are an unavoidable feature of capitalism, and that bosses are trapped in a system that requires them to act unsustainably when they have the chance. 'In the end,' he says, 'a responsible company is one that is required to be responsible by law.' But until regulators act, companies may find that teaming up with activists is the best hedge against uncertainty."

I'm probably not quite as cynical as Professor Speth. I believe that companies can be responsible without being required to legally act that way. I do agree, however, that regulations help as do standards. Behavior that is measured and monitored is generally improved. The industrial age corporate world is beginning to learn that there is a price to pay for poor performance in the past. Let's hope that the information age brings with it more informed and better behaved businesses. The lawyers will always find something to sue over, but reducing the number causes they pursue is good for both consumers and business. It just may not be good for the lawyers.

Lest readers think that I'm anti-lawyer, let me set the record straight. I take full advantage of legal protections both personally and professionally. My company's general counsel is my most trusted advisor and friend. Any business leader who believes that he or she can be successful without good legal advice is acting the fool. When you really need a lawyer, they can be your best friend. Lawyers, unfortunately, have received a bad reputation from the unethical behavior of a small percentage of lawyers. Past abuses by large corporations will continue to be litigated in the courts. Where real abuses have been committed, it is only right that they should be corrected. My focus, however, is on the future and trying to convince companies in emerging market countries to start out doing things right so that they don't have to look back at some future time and start worrying about getting sued for past misdeeds.

Will Asia Drive Global Growth?

The news out of Asia was good this morning as China reported "its economy [had] accelerated in the second quarter, expanding by 7.9 percent, amid a surge in consumer spending and factory output on the back of massive government stimulus measures" ["Asia stocks rise as China growth buoys confidence," by Jeremiah Marquez, Washington Post, 16 July 2009]. Marquez continues:

"Analysts said the quicker expansion, above most market forecasts, put the world's third-largest economy within reach of the government's 8 percent full-year growth target. It offered yet more assurances for global investors who, thrilled by China's ability to keep its economy growing as other countries slump, have already driven Shanghai's stock market up nearly 75 percent this year. 'This should give people confidence that China's economy is on strong footing and that there are a lot better days ahead,' said Alan Landau, Hong Kong-based president of Marco Polo Pure Asset Management, which oversees about $120 million in mostly mainland Chinese equities."

Back in March, a panel of Asian researchers claimed that "the global financial crisis has underlined the critical need for the region to grow less export-dependent and instead foster domestic demand" ["Experts Say Asia Needs to Rely Less on Exports," by Yuri Kageyama, AP Business Writer]. They believed the recession would provide the catalyst needed to change.

"The representatives from the Asian Development Bank Institute, which brings together economic experts on the region, acknowledged such change will require time, perhaps as much as a decade. ... The vulnerability of Asia economies caused by their extreme reliance on exports has been viewed as a major problem for decades. But the U.S. financial crisis, which threatens to bring more joblessness, poverty and social instability to Asia, is making the need for change more pressing than ever, researchers said."

Even if Asian economies become more consumer-oriented, the experts believed that most of the demand would be for products from within the region. For western countries looking to increase exports to Asia in the near future, this prediction doesn't offer much encouragement.

"'Exports to developed economies will be less of an engine of growth for the region,' said Masahiro Kawai, dean of Asian Development Bank Institute, and one of 19 researchers from Asian think tanks who signed the report. 'East Asia will need policies to facilitate a shift toward inclusive, sustainable growth driven by regional demand,' he said at the Foreign Correspondents' Club of Japan in Tokyo."

The Economist, however, notes that the rest of world hopes that a change in consumerism in Asia will have positive repercussions globally ["Shopaholics wanted," 27 June 2009 print issue].

"Asia’s emerging economies are bouncing back much more strongly than any others. While America’s industrial production continued to slide in May, output in emerging Asia has regained its pre-crisis level. This is largely due to China; but although production in the region’s smaller economies is still well down on a year ago, it is rebounding in those countries too. ... Meanwhile, export markets in developed economies are likely to remain weak. So the recovery in Asian economies will stumble unless domestic spending, notably consumption, perks up."

Every country, of course, has unique challenges and spending patterns. The article observes that "consumers’ appetite to spend varies hugely across the region." One reason is that about 50 million people who were on the verge of becoming part of the lower middle class have been plunged back into "absolute poverty" according to the World Bank ["Is Globalization Beating a Hasty Retreat," `, 6 July 2009 print issue]. Nevertheless, The Economist indicates that in some regions consumer spending is growing impressively.

"In China, India and Indonesia spending has increased by annual rates of more than 5% during the global downturn. China’s retail sales have soared by 15% over the past year. This overstates the true growth rate because it includes government purchases, but official household surveys suggest that real spending is growing at a still-impressive rate of 9%. In the year to May, sales of household electronics were up by 12%, clothing by 22% and cars by a stunning 47%. Elsewhere in the region, spending has stumbled, squeezed by higher unemployment and lower wages. In Hong Kong, Singapore and South Korea real consumer spending was 4-5% lower in the first quarter than a year earlier, a much bigger drop than in America. But Frederic Neumann, an economist at HSBC, sees tentative signs that spending is picking up. Taiwan’s retail sales rose in May for the third consecutive month. Department-store sales in South Korea rose by 5% in the year to May."

Although government stimulus packages are important to ensure that credit remains available, economic recovery rests in the perceptions, hopes, and activities of individual consumers. The article reports that much of developed world views Asia as a region where people save too much and spend too little. It claims that picture is not a fair one.

"During the past five years consumer spending in emerging Asia has grown by an annual average of 6.5%, much faster than in any other part of the world. It is true that consumption has fallen as a share of GDP, but that is because investment and exports have grown even faster, not because spending has been weak. Relative to American consumer spending, Asian consumption has soared. In most Asian economies, private consumption is 50-60% of GDP, which is not out of line with rates in countries at similar levels of income elsewhere."

The article reports that there is one surprising exception -- China.

"Private consumption there fell from 46% of GDP in 2000 to only 35% last year—half that in America. In dollar terms, spending is only one-sixth of that in America. (Singapore’s consumption is also low, at just under 40% of GDP.) This explains why China’s government has recently taken bolder action than others to boost consumption. Over the past six months the government in Beijing has introduced a host of incentives to encourage households to open their wallets. Rural residents get subsidies for buying vehicles and other goods such as televisions, refrigerators, computers and mobile phones; urban residents get a subsidy if they trade in cars and home appliances for new goods; tax rates on low-emission cars have also been cut. There is huge potential for higher consumption in the countryside as incomes rise: only 30% of rural households have a refrigerator, for example, compared with virtually all urban households."

China is also trying to shore up its social security system to ease its citizens long-term concerns and, hopefully, spend a little more of their hard-earned money. Increased consumerism would certainly help turn the global economy around, but that consumerism can't be based on credit given to people living beyond their means. So far, that has not been the case in Asia. The article concludes:

"A bigger test of Asian governments’ resolve to shift the balance of growth from exports towards domestic spending is whether they will allow their exchange rates to rise. A revaluation would lift consumers’ real purchasing power and give firms reason to shift resources towards producing for the domestic market. But so far, policymakers have been reluctant to let currencies rise too fast. Asian spending is already an important engine of global growth. Even before the crisis, emerging Asia’s consumer spending contributed slightly more (in absolute dollar terms) to the growth in global demand than did America’s. But it could be even bigger if Asians enjoyed the full fruits of their hard labour, rather than subsidising Western consumers through undervalued currencies. It is time for an even greater shift in spending power from the West to the East."

In the BusinessWeek article cited above, it was reported that "global trade is set to fall this year, for the first time in more than two decades, while capital flows to emerging markets are projected to decline by more than half from 2008; commodity prices, with the exception of oil, are in the dumps. That's all taking an especially hard toll on developing nations." What all this indicates that the U.S. is unlikely to emerge from this crisis with the same amount of economic influence that it possessed going in. Even the world's poorest countries believe they should have a greater say in the economic system because they are often victims of crises not of their making ["Poor countries want greater role in world economy," by Michael Astor, Washington Post, 25 June 2009]. Astor reports:

"At ... a three-day U.N. financial summit, country after country laid blame for the crisis on financial liberalization and deregulation in the United States and other rich nations and said it was time to reform the world financial system under the auspices of the United Nations. 'The reforms based on the belief in the efficiency of the market and the diminution of government did not work,' said Bangladesh's Foreign Minister Dipu Moni, speaking on behalf of the world's poorest nations. 'Reforms are needed to enhance productivity and capacity to cope with risks.' Nobel Economics Laureate Joseph Stiglitz, who headed a Commission of Experts on Financial and Monetary Reform that developed recommendations for the conference, said that 'as globalization has proceeded we haven't created global financial institutions.' He called for the creation of a Global Economic Coordination Council to deal with the fallout wrought by the crisis that began in 2008. ... The draft [report presented at the conference] calls for the International Monetary Fund, the World Bank and other lending institutions to be flexible in imposing conditions on developing countries so they can take action to deal with the economic crisis, including adopting stimulus packages. The draft also calls for measures to avoid a new debt crisis and new approaches to restructuring debt."

Bangladesh's Foreign Minister was correct in his assessment that the world's poorest nation's need to "enhance productivity and capacity to cope with risks." Part of that increased capacity must include the diversification of national economies. As the BusinessWeek article noted, "commodity prices, with the exception of oil, are in the dumps" and nations dependent on high commodity prices are suffering. Zambia is a good example of a bad situation ["Zambia's Copperbelt Reels From Global Crisis," by Karin Brulliard, Washington Post, 25 March 2009]. She reports:

"The global economic meltdown swept into this company town [Luanshya] and took down the copper mine in January. It left in its wake a crisis measured in unsold tomatoes at the market, empty stomachs and desperate people. ... Mines here in Zambia's Copperbelt region drive this poor nation's economy, but a plunge in global trade has slashed demand for the copper used to construct electronics and houses in the United States and Asia. That is prompting mines here to slow and shut, limiting tens of thousands of Zambians' access to schooling, health care and regular meals."

Brulliard notes that Zambia is not alone:

"Africa's resource-fueled economies have grown steadily in recent years, improving the lives of millions of people. Now, as prices drop for Botswana's diamonds, Chad's oil and Tanzania's cotton, a crisis that began in the rich world is threatening to drive millions more into poverty, according to the World Bank, and raising the specter of unrest."

Both economic diversification and increased regional trade can help mitigate the effects of fluctuating commodity prices. That is a message I continually communicate as I discuss Enterra Solutions' Development-in-a-Box™ with government and business leaders in emerging market companies. Brulliard also discusses a number of other subjects that I've been talking about for years -- including the need for increased foreign direct investment in developing countries.

"The problem is not just a collapse in commodities prices. Foreign investment is receding in countries such as South Africa and Kenya. Remittances are dropping in Liberia. Aid flows from economically stressed donor countries might retreat. Much will depend on how quickly advanced economies recover, according to experts and African leaders, who warn that a prolonged downturn could stir turmoil."

If The Economist is right, African countries shouldn't be looking to "advanced economies" as much as emerging market economies for the quickest recovery from the current recession. Like Asian nations, African nations need to become less dependent on exports (in their case, commodity exports) and they need to encourage more local consumerism. This can't happen without a good strategy for economic diversification. Even with a good strategy, most African countries are decades away from achieving sustainable economies. Asia, however, is much more likely to diversify and as a result will drive global economic growth over the next few years.

Building Little Houses

The foreclosure rate on homes in America remains high. One of the reasons is that people, believing that housing prices would continue to rise forever, bought larger houses than they could really afford. During those optimistic years, U.S. home shows were filled with luxury houses that had indoor basketball courts, swimming pools, multiple-car garages that were large enough to fit boats and recreational vehicles as well as automobiles, and entertainment rooms fitted out like mini-theaters. Today, many of those homes sit unoccupied. Modest and reasonably priced homes continue to sell while luxury homes languish on the market. Of course, a "modest" home in America would be considered a luxury home in many countries. Too many people around the world live in slums -- hodgepodges of thrown-together shanties crammed with people living in poverty. Slums lack basic running water and sanitation systems. Disease can spread quickly through the ranks of those living there. As a result, governments are eager to eliminate slums, but they understand that the people living in them have no place else to go.

India is one of the countries where too many people live in slums. The Economist reports that "last month ten-year-old Azharuddin Ismail was woken in the middle of the night by the sound of bulldozers. As policemen beat him with a bamboo stick to shoo him and his family away, his home in Mumbai’s slums was swiftly demolished. Azhar, a celebrity since appearing in the film 'Slumdog Millionaire', has since been given a new home by the filmmakers. But other residents were not so fortunate" ["The nano home," 13 June 2009 print issue]. The article continues:

"India’s cities need at least 25m more homes, according to report from McKinsey, a consultancy, and the Federation of Indian Chambers of Commerce. In Mumbai, the commercial capital, more than 8m people now live in shantytowns, often paying substantial rent for the privilege. But buying a home of their own is way out of reach for most of them: a 70-square-metre flat [approximately 750 square feet] in the centre of the city costs $500,000 or so."

BusinessWeek reports that "luxury flats in Mumbai can cost more than ones in Manhattan" ["Now, the Nano Home," by Prashant Gopal, 8 June 2009 print issue]. Tata, the company that builds the world's cheapest car, the Nano (starting at $2,500), is now turning its attention to housing. Its real estate division is building 1,300 basic units at Boisar, "an industrial area where many lower-wage commuters already rent. These apartments will be absolutely tiny. The carpeted area of the smallest units will be 218 square feet, too small even for most Manhattanites. The largest units would be about 373 square feet. ... The community would have its own garden, post office, meeting hall, schools, and hospital." As you can see from the attached floor plan of the smallest model, fitting a family into one of these units would be challenging. Yet they are much better than any shanty found in the slums surrounding India's large cities. The problem is that India's poorest class (or even its lower middle class) can't even afford these tiny apartments. According to Gopal, the apartments "are targeted at folks earning an annual salary of $6,000 to $10,000. The average call center employee with 10 to 20 years experience earns 320,000 rupees or about $6,400 a year."

The Economist reports that Tata is not the only developer looking to get into the small housing market. Matheran Realty, "is in the process of building 15,000 flats with prices starting at just 210,000 rupees ($4,500) for 19-square-metre [205 square feet] units." The development is being constructed in Karjat, 90km east of Mumbai.

"The cost is being kept low chiefly because the flats are being built outside big cities, where land is much cheaper. Owners are expected to commute. The units are also very small and spartan. The simplest consist of a single room with a sink in the corner and a toilet behind a partition. They are in buildings of no more than three storeys, so there is no need for expensive structural works. Instead of bricks, lightweight moulded concrete blocks are used for the walls. The concrete is often made with foam, fly-ash or other waste materials to make it lighter as well as cheaper. There are no lifts and just one staircase per block. All this means that the homes can be built very quickly and with unskilled labour."

Of course, such construction techniques couldn't be used in areas prone to earthquakes where much more substantial structures are needed. It is important, however, that people are finally turning their attention to the needs of poorer consumers. Gopal reports that "some business consultants (most prominently, C.K. Prahalad) [have been] arguing that companies would profit handsomely if they target the 'bottom of the pyramid' where the bulk of consumers are." Tata and Matheran have finally focused on the housing market on that group. The potential profits, The Economist reports, are enormous.

"The developers say the potential for very cheap housing in India is huge. Many of those living in slums today are employed as drivers, factory workers or tailors, with incomes of around 90,000 rupees a year—easily enough to afford a flat which costs 200,000-400,000 rupees. According to Ashish Karamchandani of Monitor Group, another consulting firm, India has 23m urban families with incomes of 60,000-130,000 rupees a year. Including rural areas, Tata Housing sees an even larger market of 180m households earning between 90,000 and 200,000 rupees."

The article concludes by noting that the last big hurdle was securing financing for those seeking to back the small apartments.

"Banks were unwilling to lend money to people without credit histories or proof of permanent residence. But two government-owned banks—the National Housing Bank and the National Bank for Agriculture and Rural Development—have agreed to provide funds to finance companies so that they can offer mortgages to such buyers. To reduce risk, buyers must put down at least a quarter of the purchase price and employers must confirm their income. Borrowers are then charged little more interest than those with an established credit history. Lenders and developers are convinced that they have struck gold. Who would have guessed that the combination of subprime loans and a building boom would have become attractive again so soon?"

One of the reasons that The Economist refers to the loans as "subprime" is because the current economic recession has even affected the microfinance sector -- which its champions had hoped would be isolated from larger global ills ["Sub-par but not subprime," The Economist, 21 March 2009 print issue]. Their depiction of the microfinance sector as sub-par rather than subprime is more accurate.

"A global credit crisis caused by subprime mortgages is hardly the ideal backdrop for a business making unsecured loans to poor people without a credit history. Yet big microfinance companies, which do exactly that, seem to be in rude health. Mohammad Yunus, the unflappably optimistic founder of Grameen Bank in Bangladesh, a microfinance institution for which he won the Nobel Peace Prize in 2006, is adamant that business remains unscathed. 'We have not been touched in any way by the financial crisis,' he said on a recent visit to Japan. 'The simple reason is because we are rooted to the real economy—we are not paper-based, paper-chasing banking. When we give a loan of $100, behind the $100 there are chickens, there are cows. It is not something imaginary.' He is not alone in thinking that microfinance is insulated from the problems of the global economy. Its proponents argue that any similarity with subprime loans is misleading. Microfinance institutions (MFIs) lend relatively small sums of money to people in developing countries to start small, profitable businesses, not to buy overpriced homes. Many of those businesses serve local needs, which has more merit at a time when exports are collapsing. And microfinance’s reliance on peer pressure for repayment must be the envy of any mainstream banker struggling with rising foreclosures and 'jingle mail'; delinquency rates are microscopic."

The problem, according to the article, is that many of the institutions that make micro-loans are not as insulated from the global economy as the recipients of the loans. Nevertheless, I suspect that the mortgages being drawn up for "nano homes" are better depicted as sub-par than subprime. People who have moved out of shantytowns are likely to work hard to maintain ownership of their new homes. If the building boom in India does well, I suspect that it will be copied by contractors in other emerging market countries. The real concern is that unscrupulous builders will use shoddy work and substandard material to cut corners so that their profits can be increased. Developing countries don't need potential death traps being built in the name of progress. What the poor need is quality work and durable materials so that their hard-earned money is invested into something of lasting value.

Foreign Aid (Good and Bad)

Among those eager to tell the incoming Obama administration how to do its job were Lorne Craner, the president of the International Republican Institute; Bill Frist, a former Republican leader of the Senate; Kenneth Hackett, the president of Catholic Relief Services; and Alan Patricof, a founder of a venture capital firm. All of them are appointees to the Millennium Challenge Corporation’s board of directors and together they wrote an op-ed piece last December about how U.S. foreign aid should be dispersed ["U.S. Aid Should Be Earned," New York Times, 20 December 2008]. They wrote:

"Not all foreign aid is the same. Hard lessons learned over the past five decades have taught us that good governance, accountability, local ownership and long-term engagement are the keys to success. In January, the new administration will inherit the five-year-old Millennium Challenge Corporation, which was created by Congress to ensure that foreign assistance operates according to these principles. He would do well to adopt it as a core development tool. Aid works best in countries whose governments are capable and committed. Before directing any American aid to a country, the corporation measures its performance on 17 indicators of democratic government, anti-corruption efforts, investments in health and education (particularly for girls) and economic freedom. Only those countries that perform strongly are allowed to compete for a five-year compact that makes them eligible to receive American aid for programs intended to reduce poverty and stimulate economic growth. By building its program around independent measures of policy performance, the corporation has been able to catalyze reform in poor countries — sometimes before any aid money is spent."

As readers of this blog know, I'm a big fan of standards. The fact that those administering the Millennium Challenge Corporation have witnessed reforms in recipient countries even "before any money is spent" underscores the truth that given goals to achieve most countries will make an effort. The World Bank found this to be true when it established its Doing Business Index. Countries immediately began reforms that would help them move up on the Index without the World Bank having to invest a dime. The MCC directors continue:

"Aid programs are sustainable only when they are designed and carried out by the country that needs them. The Millennium Challenge Corporation insists on playing a robust consulting role to ensure that any program the United States helps finance has a good rate of return and a clear effect on reducing poverty, and that the highest standards of accounting are followed. But it also requires that poor countries assume primary responsibility for their own development to ensure that our assistance truly helps the poor help themselves."

One challenge to this approach has been that countries like China and Venezuela have offered some poor nations aid without conditions (see my post entitled Rogue Aid). They provide this "no strings aid" because, as Moises Naim writes, "they seek to further their own national interests, advance an ideological agenda or even line their own pockets. Rogue aid providers couldn’t care less about the long-term well-being of the population of the countries they aid." Countries that have accepted such aid are now seeing the downside of depending on it ["As Chinese Investment in Africa Drops, Hope Sinks," by Lydia Polgreen, New York Times, 25 March 2009]. Reporting from Conakry, Guinea, Polgreen wrote:

"With a no-strings-attached approach and a strong appetite for risk, China seemed to offer Africa a complete economic and political alternative to the heavily conditioned aid and economic restructuring that Western countries and international aid agencies pressed on Africa for years, often with uninspiring consequences. Rising China, seeking friends and resources, seemed to be issuing blank checks. ... But Chinese companies are now driving harder bargains and avoiding some of the most chaotic corners of the continent. African governments facing falling revenues are realizing that they may still need the West’s help after all."

The Economist reports that rogue aid hasn't completely gone away ["An (iron) fistful of help," 6 June 2009 print issue]. The magazine writes:

"Authoritarian governments are using their money to buy influence abroad. Sometimes the money comes as a commercial loan; sometimes, as a grant; frequently, as both. These flows are changing the business of aid, undermining attempts by Western countries to improve their programmes and encouraging recipients to play donors off against each other."

What prompted the article was the release of a study entitled Undermining Democracy that was conducted by Freedom House, Radio Free Europe/Radio Liberty, and Radio Free Asia. The study took a detailed look "at the use by China, Iran, Russia and Venezuela of what it calls 'authoritarian aid'. The study is the first attempt to estimate the global scale of such operations."

"Autocracies offer an alternative to western aid in several ways. In the past decade rich countries have tried to improve a dismal record of development spending by linking aid closely to the priorities of recipients (rather than financing a big project which the country does not need) and by demanding good governance. China and the rest do not. Much of their aid is overtly political. Iran’s offer of free electricity to Shia parts of Iraq is one example, Venezuela’s bankrolling of Cuba another. Most is steered towards a few friendly regimes, or (in China’s case) places with natural resources."

The study was mostly conducted before the current recession hit. Many of deals that China was making in Africa are now in jeopardy Polgreen reports. She continues:

"In 2007 China announced a $9 billion deal with Congo for access to its giant trove of copper, cobalt, tin and gold in exchange for developing roads, schools, dams and railways needed to rebuild a country roughly the size of Western Europe and shattered by more than a decade of war. But that deal is now in doubt as falling prices have left Congo in a much weaker negotiating position."

In fact, The Economist reports that the Congo "and the International Monetary Fund are arguing about a bail-out. ... But the sticking point is, unexpectedly, not the country’s economic policy, but how exactly to repay a $9 billion credit that Congo secured last year from China." The article notes that the long-term impacts of rogue aid can be harmful.

"Naturally, help from harsh regimes is rarely encumbered with pesky demands for good governance. This makes it welcome to corrupt officials and even to those merely sick of being lectured by Westerners. Alas, it can encourage bad governance. China, the report says, is training 1,000 Central Asian policemen and judicial officials 'most of whom could be classified as working in anti-democratic enterprises'. The report concludes that authoritarian regimes are using aid to boost their soft power. If so, the spread of authoritarian aid is a challenge to more than just Western ideas of the right sort of giving."

Current global economic woes make foreign aid a touchy subject in some quarters. Why are we helping people in other countries when there is so much need at home right now? Shouldn't we be taking care of Americans first? The problem with that kind of thinking is twofold. First, ignoring the plight of others would forever knock out the moral underpinnings of U.S. foreign policy. Second, an improved economy at home may well rest on the recovery of emerging market countries abroad. The World Bank estimates that approximately 50 million more people will "tumble into poverty this year amid the largest decline in global trade in 80 years" ["Haiti’s Woes Are Top Test for Aid Effort," by Neil MacFarquhar, New York Times, 30 March 2009]. MacFarquhar continues:

"The results ripple through every index. An additional 200,000 to 400,000 infants, for example, may die every year for the next six years because of the crisis, the bank said. Amid the turmoil, the United Nations is reminding the world’s wealthy nations, however embattled their finances, not to forget the poorest."

One of the recommendations that winds its way through most discussions of aid is allowing recipient countries to play a major role in establishing priorities and methods of implementing development programs. Jeffrey Sachs, the well-known director of the Earth Institute at Columbia University, recommends that "recipient countries ... be invited to prepare plans and budgets that would be reviewed by independent experts" ["Homegrown Aid," New York Times, 8 April 2009]. Sachs continues:

"These plans would describe the inputs needed by the farmers, the expected increase in production, how the strategy would be put into place and how much money would be required. Such plans, if described with care, could then be closely monitored by the United States and other donors to gauge results and avoid corruption. Two international programs during the last decade, championed jointly by the United States, other governments and the Gates Foundation, have demonstrated the benefits of such a scientific, results-based aid approach: the Global Alliance for Vaccines and Immunization, and the Global Fund to Fight AIDS, Tuberculosis and Malaria. These programs have saved millions of lives and protected hundreds of millions more from disease and infection."

Aid, of course, is not going to bring the global economy out of recession. At best, aid provides a holding strategy in the most desperate countries that buys time to develop a market-driven recovery. I have stressed time and again that foreign direct investment plays a much more important role in sustainable development than does official development aid. Aid, however, is required to help establish some of the pre-conditions necessary to attract FDI. Public, commercial, and non-governmental organizations must work together to move a sustainable development agenda forward. Without goals and standards, such an agenda cannot be achieved. That is why not all aid is good.

Tensions Continue in Northern Iraq

During the general election in Iraq, things were mostly quiet and in order except in Northern Iraq in the area surrounding Mosul (see my post The Iraqi Election). Tension in the region is caused by three principal factors: crime, the continued insurgency, and mistrust between Kurds and Arabs. For more details about the latter situation, read my post Nastiness in Nineveh. I concluded that post with these words:

"With the June deadline looming for the withdrawal of American troops from Iraqi cities, renewed efforts need to be made to find a solution to growing tensions. Unfortunately, many people in the area believe that only confrontation will result in a solution. Such an outcome would be bad for both sides since it would set back development efforts and drain scarce resources which could be put to better use than fighting a civil war. Nineveh may never achieve the greatness it enjoyed in the past, but men of good will can make it better than it is today."

June has come and gone; but men of good will have yet to emerge. Tensions seem to be increasing rather than diminishing ["Insurgency Remains Tenacious in North Iraq," by Steven Lee Myers and Campbell Robertson, New York Times, 9 July 2009]. Myers and Robertson report:

"Now that American troops have largely pulled back from Iraq’s cities, one violent region remains particularly intractable: Nineveh Province and its turbulent capital, Mosul. Even a major military offensive in the months before the withdrawal did not quell the insurgency or reduce the violence. On Thursday, a twin suicide attack by bombers wearing explosive vests punctuated a recent string of attacks, a wave of violence that shows little sign of relenting. ... The persistent violence in Mosul and Nineveh underscores the broader turmoil afflicting Iraq. But it also reflects the region’s unique mixture of insurgency and ethnic tensions between Kurds and Arabs, as well as a proliferation of criminal gangs, that makes the north the most dangerous part of the country."

The article points out that the insurgency was defeated elsewhere in Iraq by gaining the support of the local populace against the insurgents. With tensions remaining high between Kurds and Arabs, cooperation between the groups has been non-existent. As a result, the strategy used elsewhere in Iraq has failed to take hold in Nineveh. The most recent violence, however, wasn't between Kurds and Arabs. The attacks appeared to be the work of the Islamic State of Iraq, an umbrella insurgency group that includes Al Qaeda in Mesopotamia. Although the "attack occurred in a Shiite neighborhood in a city largely populated by Turkmen Sunnis, ... it appears to have been aimed at Iraq’s security forces." With the future of both Southern and Northern Iraq hanging in the balance, now would be a good time for Kurds and Arabs to set aside differences and defeat the insurgency. That, however, appears unlikely. As a result, hope is slowly being sapped from the area's citizens as the constant threat of insurrection hangs over the area like a pall.

"The attacks in Mosul ... are ... often small, directed and constant, with a toll that accumulates inexorably even as it draws less attention. For three months, policemen have been killed at the rate of roughly one a day. Lawyers have been singled out and shot, as have university professors, students, government officials, retired soldiers, mothers and daughters, and even the coach of the Iraqi national karate team. In all of Nineveh, 94 Iraqis were killed last month, the vast majority of them in Mosul, Iraqi security officials and employees of Nineveh’s morgue said. July is already on track to be equally deadly, or worse. With its proximity to the Syrian border, a crossing point for foreign fighters, the region has long been one of the most difficult to pacify. Although initially calm after the American invasion, the region became a haven for insurgents pushed out of Baghdad and other parts of Iraq after the large influx of American troops — the so-called surge — began in 2007."

Although most the attacks in Nineveh have been against police and other security officers, tensions on the political stage remain focused on disagreements between Kurds and Arabs. Political changes in the semiautonomous Kurdish region are not helping the situation ["Kurds Defy Baghdad, Laying Claim to Land and Oil," by Sam Dagher, New York Times, 9 July 2009]. Dagher reports:

"With little notice and almost no public debate, Iraq’s Kurdish leaders are pushing ahead with a new constitution for their semiautonomous region, a step that has alarmed Iraqi and American officials who fear that the move poses a new threat to the country’s unity. The new constitution, approved by Kurdistan’s parliament two weeks ago and scheduled for a referendum this year, underscores the level of mistrust and bad faith between the region and the central government in Baghdad. And it raises the question of whether a peaceful resolution of disputes between the two is possible, despite intensive cajoling by the United States. The proposed constitution enshrines Kurdish claims to territories and the oil and gas beneath them. But these claims are disputed by both the federal government in Baghdad and ethnic groups on the ground, and were supposed to be resolved in talks begun quietly last month between the Iraqi and Kurdish governments, sponsored by the United Nations and backed by the United States. Instead, the Kurdish parliament pushed ahead and passed the constitution, partly as a message that it would resist pressure from the American and Iraqi governments to make concessions."

Iraq's central government and the United States fear that the new constitution is another step toward creating a separate Kurdish state -- a move that both governments oppose. For their part, the Kurds remain both mistrustful and frustrated with Iraq's central government.

"Kurdish officials defended their efforts to adopt a new constitution that defines the Kurdistan region as comprising their three provinces and also tries to add all of hotly contested and oil-rich Kirkuk Province, as well as other disputed areas in Nineveh and Diyala Provinces. Iraq’s federal Constitution allows the Kurds the right to their own constitution, referring any conflicts to Iraq’s highest court. Susan Shihab, a member of Kurdistan’s parliament, said she no longer had faith that the rights of Kurds under the federal constitution from 2005 would be respected. 'What is missing the most in the new Iraq is confidence,' she said. At the same time, though, some Kurds acknowledge that they have grown frustrated with the halting talks to resolve territorial disputes and other issues involving Kurds’ political power in Iraq."

Although U.S. officials understand Kurdish frustration, they find the push for a new constitution "unhelpful." Not all Kurds favor the new constitution. Dagher concludes:

"Many people in Kurdistan are deeply troubled by how the constitution was hastily passed and the extraordinary powers it gives the president, without meaningful checks and balances. A group of civil society organizations in the Kurdish city of Sulaimaniya began a campaign last month opposing the constitution. Namo Sharif, an activist involved in the effort, said a Kurdish government official called him a 'traitor.' Kwestan Mohammed, a member of the regional parliament who joined a new coalition running against the two ruling parties in the July elections, said that Kurdistan needed its own constitution but that the document in its current form planted the seeds of endless conflict with the central government and made the region’s president an 'absolute' ruler."

Although rationale individuals would admit that the best way forward would be peaceful negotiation of differences, history has so colored the relationship between Kurds and Arabs that emotions, not logic, are the governing force in the region. For the time being, the Kurdistan Regional Government and the central Iraqi government need to isolate the more peaceful areas of the country from the more unstable ones. They can't permit tensions in the north to disrupt economic progress being made elsewhere in the country. Since the Kurds and the Arabs are unlikely to work out a solution on their own, the international community needs to remain a primary player in ongoing negotiations.

Innovation, Inventions, and Investment

As I noted in my post entitled Innovating the Future, more and more headlines are asking where are all the jobs are that were supposed to be created by Congress' trillion-dollar stimulus package? In earlier posts about how to get the U.S. and global economies back on track, I have promoted the notion that the Obama administration and Congress should pay more attention to fostering conditions that will promote innovation and entrepreneurs (see for example, my post entitled Entrepreneurs and Economic Recovery). New York Times' columnist Thomas Friedman is also a believer in the power of innovation ["Invent, Invent, Invent," 27 June 2009]. He reports about a chance meeting he had in St. Petersburg, Russia, with the former chairman of Intel Craig Barrett. He asked Barrett how the U.S. could get itself out of its current economic conundrum and Barrett surprised him by saying that every person who gets a driver's license in the U.S. should have a high school diploma first. His logic was simple: "No diploma — no license. Hey, why would we want to put a kid who can barely add, read or write behind the wheel of a car?" Like Friedman, you might wonder what getting a driver's license has to do with getting the U.S. out of its current recession. Friedman writes:

"Now what does that have to do with pulling us out of the Great Recession? A lot. Historically, recessions have been a time when new companies, like Microsoft, get born, and good companies separate themselves from their competition. It makes sense. When times are tight, people look for new, less expensive ways to do old things. Necessity breeds invention. Therefore, the country that uses this crisis to make its population smarter and more innovative — and endows its people with more tools and basic research to invent new goods and services — is the one that will not just survive but thrive down the road. We might be able to stimulate our way back to stability, but we can only invent our way back to prosperity. We need everyone at every level to get smarter. I still believe that America, with its unrivaled freedoms, venture capital industry, research universities and openness to new immigrants has the best assets to be taking advantage of this moment — to out-innovate our competition. But we should be pressing these advantages to the max right now."

Almost everyone has been exposed to the notion that most new jobs are going to be created by small businesses and in new industries. That being the case, we can only sit back and marvel as the government spends so much time and money trying to save dying businesses. The future awaits; but it won't wait for long. Friedman continues:

"We should be taking advantage. Now is when we should be stapling a green card to the diploma of any foreign student who earns an advanced degree at any U.S. university, and we should be ending all H-1B visa restrictions on knowledge workers who want to come here. They would invent many more jobs than they would supplant. The world’s best brains are on sale. Let’s buy more! Barrett argues that we should also use this crisis to: 1) require every state to benchmark their education standards against the best in the world, not the state next door; 2) double the budgets for basic scientific research at the National Science Foundation, the Department of Energy and the National Institute of Standards and Technology; 3) lower the corporate tax rate; 4) revamp Sarbanes-Oxley so that it is easier to start a small business; 5) find a cost-effective way to extend health care to every American. We need to do all we can now to get more brains connected to more capital to spawn more new companies faster. As Jeff Immelt, the chief of General Electric, put it in a speech on Friday, this moment is 'an opportunity to turn financial adversity into national advantage, to launch innovations of lasting value to our country.'"

Friedman's point about finding ways "to get more brains connected to more capital to spawn new companies faster" is one the things that the state of Maryland is trying to do ["Biotech Start-Ups Show Dedication, Line Up Again for Tax Credits," by Kim Hart, Washington Post, 29 June 2009]. Hart reports that a Maryland tax credit program "encourages investment in Maryland biotechnology start-ups by letting investors receive a tax credit for 50 percent of the money they put into eligible companies. The state provides $6 million a year for the tax credits. The funding for the program was in danger of getting slashed this year due to tightened budgets, despite Gov. Martin O'Malley's efforts to increase it. The credit cannot exceed $50,000 for individual investors and $250,000 for corporations and venture capital firms." The program is so popular that individuals and company representatives begin lining up for "first come, first served" opportunity a week before applications can be submitted. For the first time, the state has made University of Maryland's BioPark facility available to applicants beginning five days before applications can be submitted. The building has a gym, a shower and carpeted floors. Applicants used to have camp on the street outside. The fact that Maryland's legislature threatened to cancel the program indicates how out of tune many politicians are with solutions that have the best chance of making a difference in the future. The first four companies waiting in line to receive the tax credits this year were BioMarker Strategies, a cancer diagnostics company, Zymetis, an alternative fuel-producing firm, Sequella, which develops treatments for infectious diseases, and Gliknik, a firm that develops drugs for autoimmune diseases.

To find out how someone in the state felt about the tax credit program and how it affects economic development in Maryland, I contacted Dr. Richard Zakour, Executive Director of the MdBio Division of the Tech Council of Maryland. He said, "In leading the effort to organize a campaign to maintain the funding of this program, the Tech Council of Maryland has stressed how successful this program has been since its inception four years ago. The state's investment of $18 million has been more than matched by $30 million of private investment in 38 different companies in Maryland. This funding has not only helped many of these companies to survive, but has led to the creation of new jobs that will be around for a number of years." Dr. Zakour notes that this program is recognized as being one of the most innovative in the country.

Another organization that sees a bright future for innovative companies and is willing to invest in them is Google. It recently announced that it was establishing a for-profit venture fund that would invest up to $100 million over the next twelve months ["Google to Announce Venture Fund," by Miguel Helft, New York Times, 31 March 2009]. Helft reports that "Google will tap the connections of its employees and its ties to the venture capital world to find promising startups in areas like the Internet, clean technology and life sciences." Some analysts argue that the problem today is not too little but too much venture capital ["Venture Capitalists Look for a Return to the A B C’s," by Claire Cain Miller, New York Times, 6 July 2009]. Miller writes:

"The biggest names in the industry are concerned about low returns and are blaming several factors: funds that have grown too large, the M.B.A.’s that have invaded the industry and older partners who have lost touch with what is new in technology. 'I personally believe and I think the evidence proves that the venture industry has gotten too big, the funds have gotten too big,' said Alan Patricof, an investor for 40 years who backed America Online and Apple, at a recent venture investing conference in San Francisco. 'Our biggest challenge today for venture capital is to think smaller.' Mr. Patricof is part of a growing chorus of voices calling for the amount of money in venture funds to shrink drastically to levels last seen two decades ago. His firm, Greycroft Partners, is taking a retro approach with a $75 million fund that makes smaller investments."

It may seem counterintuitive during a time of crisis to conclude that there is too much investment money available. It wouldn't really be a problem if there were enough good ideas to go around. In the post cited at the beginning of this one, I discuss an article by Michael Mandel of BusinessWeek who believes that that past decade has seen a drought of new ideas. As a result, too much money is chasing too few ideas. Miller continues:

"Instead of figuring out how much start-ups actually need, too many firms calculate how much they have in their funds, divide it by the number of partners and the number of boards they can sit on, and come up with a sum to invest in each start-up, said Ben Horowitz, a partner in a new venture firm, Andreesen Horowitz. That often means forcing $3 million into a company that needs $300,000, he said. Overfinancing results in too many firms backing too many start-ups that do the same thing, some critics say, and it inflates the valuation of companies so that investors get smaller returns when they eventually sell."

The good news is that VC firms looking to invest less could actually stimulate greater innovation. Entrepreneurs are more likely to believe they have a chance of obtaining venture capital when the amount they are seeking is modest. Although most VC firms are looking for significant returns on investment, not all good ideas are found in the for-profit world. There are innovative ideas in the non-profit world that also deserve access to capital, but finding that capital is challenging -- very challenging. A New York Times' editorial discusses a White House initiative that could make the challenge of finding capital less daunting ["Communities, Innovation and Washington," 1 June 2009]. The editorial staff writes:

"Central to the initiative is the creation of a Social Innovation Fund housed at the Corporation for National and Community Service. Congress has authorized the fund, and President Obama’s 2010 budget allots $50 million for it to start. The plan recognizes a hard reality of the nonprofit world: It is a lot easier to secure foundation grants and other short-term financing to develop a model program than it is to come up with the capital to expand successful programs and their potential for systemic change. The fund is supposed to address that problem by identifying successful high-impact programs prime for further development and expansion and then using government dollars as a catalyst to raise sustainable financing from foundations, businesses and individual donors."

The Social Innovation Fund would be a source of seed money to help programs prove themselves worthy of further investment. Sometimes a little money can go a long way. Netflix, the popular movie provider, understands that the future belongs to innovators. About three years ago it announced a million dollar prize for anyone coming up with a software program that would "that improve the movie recommendations made by Netflix’s existing software by more than 10 percent" ["And the Winner of the $1 Million Netflix Prize (Probably) Is …" by Steve Lohr, New York Times, 26 June 2009]. Lohr reports that "after nearly three years and entries from more than 50,000 contestants, a multinational team says that it has met the requirements to win the million-dollar Netflix Prize." Is this a good deal for Netflix? Run the numbers. If each of those 50,000 contestants had spent only one hour on the project and had been paid $50/hour, that would have been $2.5 million in effort. Some "contestants" consisted of teams of more than one person and those people spent many more than one hour on the project. The savings for Netflix is enormous as are the likely rewards. Netflix says that accurate recommendations increase its appeal to its customers. Lohr writes:

"The Netflix Prize contest has been hailed as prime example of 'prize economics' and the crowdsourcing of innovation. Prize economics refers to running a contest to generate a new innovation at less cost than an in-house research and development effort, and crowd-sourcing refers to using the proverbial wisdom of crowds to accomplish a task. Netflix has said that $1 million would be a bargain price for an improved recommendation engine, which would increase customer satisfaction and generate more movie rental business."

The probable winning team is an interesting group that is actually "a coalition of four teams calling itself BellKor’s Pragmatic Chaos — made up of statisticians, machine learning experts and computer engineers from America, Austria, Canada and Israel." What is even more interesting is that they began as competitors in the contest and then joined forces.

"BellKor’s Pragmatic Chaos is a pretty elite crowd. The group is a collection of the 2007 and 2008 winners of the Netflix Progress Prizes — $50,000 a year for the teams that made the most progress toward the 10 percent improvement — and a pair of engineers from Montreal who have long been near the top of the contest’s leaderboard. The team includes Bob Bell and Chris Volinsky of the statistics research department at AT&T Research (members of the 2007 and 2008 Progress Prize-winning teams); Andreas Toscher and Michael Jahrer, machine learning experts at Commendo research and consulting in Austria (members of the 2008 winning team); Martin Piotte and Martin Chabbert, engineers and founders of Pragmatic Theory in Montreal; and Yehuda Koren, a senior scientist at Yahoo Research in Israel (a member of the 2007 and 2008 winning teams)."

In a way, the Netflix Prize served as a collaborative space that generated what Frans Johansson calls the Medici Effect -- the valuable and surprising results of sharing ideas across sectors. Individuals involved in the contest from both Netflix and the apparent winning team admitted that collaboration was the key to meeting Netflix's challenge. Under the rules of the contest, competitors now have 30 days to beat the winning entry. If none of them do, the prize will be awarded to BellKor’s Pragmatic Chaos. The articles by Friedman, Hart, Helft and Lohr share one common thread, the belief that innovation is going to mark the path to a more successful future. I agree with them. Only Miller's article threw a dash of cold water on the innovation environment; but even her article underscores the fact that there is money to be found if an idea is good enough.

The Protean Corporation

Michael Shawn Malone is a man of many talents. He has been an author, columnist, editor, investor, business-man, and television host. He is also considered one of the world's the first high tech reporters. His beat was Silicon Valley. His latest book is entitled The Future Arrived Yesterday: The Rise of the Protean Corporation and What It Means for You. Malone says he wrote the book after looking at his resume and realizing that many of the companies he worked for no longer exist. He began wondering what a company had to do to survive in an era increasingly defined by rapid change. Senior BusinessWeek writer Spencer Ante has written a review of Malone's new book ["Change is Good--So Get Used to It," 22 June 2009 print issue]. Ante believes that Malone's look into the future should be taken seriously because Malone has a history of getting things right.

"In books such as 1993's The Virtual Corporation, Malone boldly--and presciently--described how technology would reshape corporate reality. In his 2007 book, Bill & Dave: How Hewlett and Packard Built the World's Greatest Company, he reached into the past to chronicle the Valley's first startup. When he became one of the first reporters to cover technology as a beat, back in 1980 for the San Jose Mercury News, Michael S. Malone made telling the story of Silicon Valley his raison d'etre. Now, with The Future Arrived Yesterday: The Rise of the Protean Corporation and What It Means for You, Malone has his forecaster hat back on and another game-changing theory. And because his past predictions about the impact of digital technologies were so often on the mark, many people really do want to know what he's been noodling over."

From the title, we know that Malone is going to write about change. "Protean" means readily taking on varied shapes, forms, or meanings. We can also surmise that Malone believes that only companies that can change with the times will survive. Ante continues:

"The central idea here is both simple and powerful: The global economy has entered a new era, and a mercurial corporate form Malone calls the Protean Corporation will become the dominant species by the middle of the next decade. 'These Protean Corporations,' he writes, 'will behave like perpetual entrepreneurial startups, continuously changing their form, direction, even their identity. They will be true corporate shape-shifters.' This notion may not come as a shock, but the huge repercussions Malone envisions just might."

The notion certainly doesn't surprise me. My company, Enterra Solutions, is something of a shape-shifter itself. I began the company as an enterprise that would focus on automating business processes (something that it still does) but the company also morphed into one that deals heavily in helping emerging market countries promote sustainable development. Malone, however, seems just as concerned about what must remain permanent about a company as he is about what should change. Ante continues:

"The big challenge will be finding a way to protect the core DNA of a company as it reinvents itself over a time frame of months rather than once a generation or decade. Workers will need to be more adaptable than ever. 'The company that employs you for the next 20 years may radically change a dozen times, and you will have to find your place in each of those reincarnations,' writes Malone."

From what I gather, Malone doesn't believe that most workers will adapt. He thinks that every company has (or will have) a core group of employees that defines the company (even through its many transformations) and that an ever-changing cloud of transitory employees will surround them as the company changes over time. As Ante explains, Malone believes that companies will either change or they will die.

"Corporations that fail to figure out how to couple permanence with perpetual change will be 'swept away,' [Malone] says. Although it's a grandiose theory, Malone presents a strong and timely case that business is entering a phase of creative destruction where nothing can be taken for granted and change is the only constant."

Of course, there is nothing new about the notion that change is the only constant in either business or life. The Greek philosopher Heraclitus (540 BC-480 BC) wrote, "Nothing endures but change." What seems to be new about Malone's thinking is that successful corporations will organize themselves in such a way that creative destruction happens from within rather than being imposed by outside forces. Imposed creative destruction means that a company probably won't survive. Ante explains that several factors have created the conditions that make internal creative destruction a modern necessity. First, as companies become more virtual there is less structural framework to hold companies together. As Ante writes, "'Ever-greater virtualization' is eating away at organizational structures and replacing them with 'networks of free agents.'" Secondly, younger employees seem to be possessed with a greater spirit of entrepreneurism than older generations. This "entrepreneurial mindset of today's twenty-somethings will serve as a 'catalyst for radical change.'" Malone calls these people "intrapreneurs."

"Malone says these 'intrapreneurs' must be supported and given freedom, funding, technical resources, and a stake, much like a startup with venture capital. 'Companies of the future must not only support fully the creation of new entrepreneurial enterprises within their corporate operations and do whatever it takes to make the company's work environment conducive to startups, but even take the next step of basing their corporate strategy on the presence of these internal startups.' It's an idea so audacious that--in a sped-up, hypercompetitive future--it just might work."

One business leader who seems to agree with Malone is Anne Mulcahy, chairwoman and chief executive of the Xerox Corporation ["The Keeper of That Tapping Pen," by Adam Bryant, New York Times, 21 March 2009]. Bryant asked Ms. Mulcahy if she looks for specific characteristics in new employees that she might not have looked for in years past. She answered:

"Adaptability and flexibility. One of the things that is mind-boggling right now is how much we have to change all the time. For anybody who’s into comfort and structure, it gets harder and harder to feel satisfied in the company. It’s almost like you have to embrace a lot of ambiguity and be adaptable and not get into the rigidness or expectation-setting that I think there used to be 10 years ago, when you could kind of plot it out and define where you were going to go. I think it’s a lot more fluid right now. It has to be. The people who really do the best are those who actually sense it, enjoy it almost, that lack of definition around their roles and what they can contribute."

On that point, I believe Malone and Mulcahy agree completely. I don't think that Mulcahy would have any difficulty describing Xerox as a protean corporation. I agree with King Whitney, Jr., who wrote, "Change has a considerable psychological impact on the human mind. To the fearful it is threatening because it means that things may get worse. To the hopeful it is encouraging because things may get better. To the confident it is inspiring because the challenge exists to make things better." Protean companies are confident companies as well as hopeful ones.

Celebrating Freedom

Although tomorrow is the actual anniversary of America's declaration of independence from Britain, many companies are giving their employees the day off today to celebrate. After all, what good is a holiday if it doesn't get you out work! Back in January Freedom House, an American lobby group, released its report about "how the world fared with its freedoms during the Bush years -- "an initial five years of improvement were followed by a three-year decline—less in 2008 than previously, but still disappointing" ["It never stays long," The Economist, 17 January 2009 print issue]. The report was gloomy because of "Russia’s rigged elections" and developments in countries that were once part of the Soviet Union. Iraq posted "a slightly better score" than the year before but Afghanistan moved "from 'partly free' to 'not free' in Freedom House’s broad three-category system." In general, "the Middle East and north Africa region—the centrepiece of Mr Bush’s efforts to promote freedom—showed little measurable improvement over the previous year" and next year will probably be even worse based on the travesty of Iran's presidential elections [see my post entitled The Tragedy of the Iranian Elections] and the drama unfolding in Honduras. The article reports:

"More widely, the number of 'electoral democracies' (those with tolerably free and fair elections) dropped by two, to 119 (thanks to four demotions and two promotions). The general trend was down too, with declines in freedom of expression and association, and a weaker rule of law."

Although people in the United States too often equate freedom with the type of representational democracy it enjoys, there are many people who long to enjoy even the most basic of human rights. In China, human rights lawyers are being disbarred. In Africa, activists against corruption are being killed. In Iran, protesters are beaten, jailed, and even gunned down. That is why it is important to have a day that celebrates freedom and reminds us that freedom is something to be cherished and protected. We can only hope that The Economist is wrong when it declares that freedom "never stays long." Dwight D. Eisenhower, who served as both a general and a president, said this about freedom:

"Freedom has its life in the hearts, the actions, the spirit of men and so it must be daily earned and refreshed - else like a flower cut from its life-giving roots, it will wither and die."

Freedom cannot be taken for granted. If it is, leaders will inevitably come along who will claim that they must provide security by limiting freedom. With cunning and guile, they will slip the noose of tyranny around the necks of their people and claim to be leading them to the promised land. In the end, they will only tighten the noose and strangle the last gasps of freedom from a country. Celebrating freedom is a good thing; but defending it daily is even better.

"Giveaway" Reminder -- Today is the Last Day

Just a reminder that there is still time to enter to win a beautiful Knoll desk lamp (worth nearly $200) thanks to AllModern.com. For details on how to enter, see my post The Office of the Future. The winner will be drawn today at 5 EDT. I will announce the winner tomorrow.

Innovating the Future

One of the frequently asked questions about the U.S. stimulus package centers on new jobs: Where are they? States like Michigan are shedding jobs so fast that even its high-powered campaign to attract businesses to the state can't keep up ["Michigan Works to Remake Itself Without King Auto," by Bill Vlasic and Nick Bunkley, New York Times, 9 June 2009]. "About 800,000 jobs have been lost in the state about one in every six — since 2000," reports Vlasic and Bunkley, "and its unemployment rate has reached 12.7 percent, higher than any other state." Michigan is trying to attract high tech businesses through a high-powered ad campaign and it is investing heavily in retraining laid-off workers. In other words, rather than trying to save dying businesses Michigan is trying to establish conditions that will make it stronger in the future. From the beginning of this current economic crisis, I have supported the idea that government's primary role is to establish conditions favorable for entrepreneurs. New York Times' columnist Steve Lohr reports that more and more governments are exploring the best role for them to fill ["Can Governments Till the Fields of Innovation?" 20 June 2009]. He writes:

"Governments are increasingly wading into the innovation game, declaring innovation agendas and appointing senior innovation officials. The impetus comes from two fronts: daunting challenges in fields like energy, the environment and health care that require collaboration between the public and private sectors; and shortcomings of traditional economic development and industrial policies. Innovation policy, to be sure, is an emerging discipline. It lacks crisp definitions or metrics."

I favor public/private partnerships, especially in emerging market countries; but the balance between what should be public and what should be private is not an easy one to achieve. Many government leaders, including those in the Obama administration, are coming to believe that innovation and entrepreneurship are critical for a brighter future. According to Lohr, the Obama administration has directed "the Bureau of Economic Analysis to develop statistics that 'uniquely measure the role of innovation' in the economy. And the government’s new chief technology officer, Aneesh Chopra, speaks of building 'innovation platforms' to spur growth." The focus of Lohr's article was a workshop about innovation policy for government leaders "organized and moderated by John Kao, a former professor at Harvard Business School and founder of the Large Scale Innovation. ... The main participants were innovation-policy practitioners from nine countries: Australia, Brazil, Britain, Chile, Colombia, Finland, India, Norway and Singapore."

"Innovation policy is an attempt to bring some coordination to often disparate government initiatives in scientific research, education, business incentives, immigration and even intellectual property. 'It’s about setting an agenda and helping build a portfolio of skills that let an economy and a society move forward in smarter, faster ways,' Mr. Kao said. Yet if the reach of innovation policy is broad, the attendees agreed, it is best done with a lighter touch than industrial policies of the past, which often focused on specific companies for government support. They used metaphors like 'impresario' and 'orchestra conductor' to describe government’s role. The ideal, they said, is 'stewardship,' not command and control."

One of the things that governments shouldn't do, participants believed, is pick winners and losers and then implement policies that favor the winners. Governments should "create the conditions so that new industries can rise more easily." I couldn't agree more. Every country, however, faces unique challenges and encouraging innovation that targets that challenge is also important. Lohr notes, for example, that Finland has the "second-fastest-aging society in the world, after Japan." As a result, it is looking to for ways to encourage innovation in medical-related fields. Australia, faced with a harsh environment, is looking to "improve strains of drought-resistant wheat and cotton for export." Boeing is also establishing an unmanned aerial vehicle (UAV) facility in Australia because UAVs can be tested without fear of running into something. India is supporting innovative industries that can export innovative technologies to the rest of the world, reversing the trend of having to import technologies from the developed world. Evidence that India's strategy is working, Lohr claims, includes the "Nano automobile, and low-cost drugs for tuberculosis and psoriasis."

America is still considered the world's most innovative country; but, as I have written before, many people believe that it may be losing its innovative edge (for example, read my posts Another Slowdown to Worry About -- Innovation?, America's Competitive Edge and Fostering Innovation and Restoring America's Competitive Edge). One writer questions the perception that America remains the world's most innovative country. He believes that most fields of innovation have lain fallow for the past decade ["Innovation Interrupted," by Michael Mandel, BusinessWeek, 15 June 2009 print issue]. Mandel writes:

"'We live in an era of rapid innovation.' I'm sure you've heard that phrase, or some variant, over and over again. The evidence appears to be all around us: Google, Facebook, Twitter, smartphones, flat-screen televisions, the Internet itself. But what if the conventional wisdom is wrong? What if outside of a few high-profile areas, the past decade has seen far too few commercial innovations that can transform lives and move the economy forward? What if, rather than being an era of rapid innovation, this has been an era of innovation interrupted? And if that's true, is there any reason to expect the next decade to be any better? These are not comfortable questions in the U.S. Pride in America's innovative spirit is one of the few things that both Democrats and Republicans—from Bill Clinton to George W. Bush to Barack Obama—share. But there's growing evidence that the innovation shortfall of the past decade is not only real but may also have contributed to today's financial crisis."

Mandel reminds us of the optimism that preceded the bursting of the dot.com bubble. The U.S. appeared to be on the verge of an exciting and profitable era. Reality, however, didn't keep pace with expectations.

"If the reality of innovation was less than the perception, that helps explain why America's apparent boom was built on borrowing. The information technology revolution is worth cheering about, but it isn't sufficient by itself to sustain strong growth—especially since much of the actual production of tech gear shifted to Asia. With far fewer breakthrough products than expected, Americans had little new to sell to the rest of the world. Exports stagnated, stuck at around 11% of gross domestic product until 2006, while imports soared. That forced the U.S. to borrow trillions of dollars from overseas. The same surges of imports and borrowing also distorted economic statistics so that growth from 1998 to 2007, rather than averaging 2.7% per year, may have been closer to 2.3% per year. While Wall Street's mistakes may have triggered the financial crisis, the innovation shortfall helps explain why the collapse has been so broad."

Having made his case for "innovation interrupted," Mandel then provides a bit of cheer amid the gloom.

"Many of the technological high hopes of 1998, it turns out, were simply delayed. Scientific progress continued, the technologies have matured, and more innovations are coming to market—everything from the first gout treatment in 40 years to cloud computing, the long-ballyhooed phenomenon 'information at your fingertips.' The path has been long and winding, but if the rate of commercialization picks up, the current downturn may not be as protracted as expected."

For the latest on cloud computing, see my post entitled Update on Cloud Computing. One of the innovative technologies that has languished for the past decade is tissue engineering. Mandel details the story of Organogenesis, a small company in Canton, MA. A decade ago the company developed the world's first living skin substitute (called Apligraf) and had received FDA approval to sell it. Unfortunately, the tissue substitute cost more to produce than it could be sold for. The company went bankrupt. Skip forward a decade, however, and things have changed. Geoff MacKay, the new CEO of Organogenesis, has straightened out the company's manufacturing, logistics, and sales, and has turned Apligraf into a moneymaker.

"Sales of Apligraf are growing at more than 20% per year, the company is taking over two more buildings on the same street in Canton, and it has FDA approval to install high-reliability robots from Japan's Denso, the same supplier Toyota uses, he says. Employment is expected to climb from 350 jobs to about 600, the company is introducing products, and MacKay is talking about 'cautious globalization.' In other words, Organogenesis is fulfilling the promise of 1998—a decade later."

Mandel claims you can "multiply that story a hundredfold and extend it to other areas." One of those areas, he says, is "micromachines—miniaturized gyroscopes, pumps, levers, or sensors on a silicon chip—also known as MEMS (microelectromechanical systems)." A decade ago MEMS were the "next big thing" -- or maybe not. That may be changing, however, Mandel reports that a company called WiSpry "is now about to start shipping MEMS chips that will go into cell phones, improving battery life and reducing dropped calls." Another area of interrupted innovation has been the biotech sector. Mandel reports that "2008 was the first year that the U.S. biotech industry collectively made a profit, according to a recent report by Ernst & Young—and that performance is not expected to be repeated in 2009." For more on the future of biotech, see my post entitled Biotechnology's Third Wave.

"A December 2006 paper by the Brookings Institution, co-authored by Peter R. Orszag, now head of the Office of Management & Budget, observed: 'Because the U.S. is at the frontier of modern technological and scientific advances, sustaining economic growth depends substantially on our ability to advance that frontier.' The flip side: A shortfall in innovation could undercut growth and incomes, especially over a decade-long period."

Orszag's conclusion was correct. America's economy lives on the future's frontiers and its business leaders must boldly explore and advance those frontiers. Entrepreneurs are today's Lewises and Clarks. One of the things that I preach to leaders of developing countries is that they must diversify their economies. America is no different. Mandel notes that "no industrial revolution in the past has been based on a single technology." Any future economic revolution must be built on innovations in a number of sectors. Mandel concludes:

"The professor, trader, and author Nassim Nicholas Taleb calls technological breakthroughs 'positive Black Swans'—unexpected events with huge positive consequences that in retrospect look inevitable. Some, such as Google, come out of nowhere to dominate within a short time. Others take years to mature and are surprising only because people forgot they were there. We've learned over the past 10 years just how unpredictable technology can be. But right about now, the U.S. could use a few positive Black Swans."

Another BusinessWeek reporter, Reena Jana, discusses another decade-old idea that was once touted as the next big thing, automated innovation. She notes that the process turned out to be a dud for introducing new products, but "now it's a sharp tool for cutting costs" ["Dusting Off a Big Idea in Hard Times," 22 June 2009 print issue].

"Dozens of software companies are using algorithms once intended for product development to help corporations pinpoint ways to reduce spending. San Diego's Natural Selection, a 16-year-old company that created the program used by Pfizer to try to auto-invent drugs, is helping clients streamline delivery routes and retrofit facilities. Among its recent customers: General Electric and the U.S. Air Force. Some of the original corporate participants in auto-innovation are back at it, too, including Pfizer and HP. HP's adventures (or misadventures) in particular show how ideas that bombed at first can become valuable when given a second chance. 'Successful innovations are often built on the backs of failed ones,' notes Scott D. Anthony, president of business consultancy Innosight and author of a just-published book, The Silver Lining: An Innovation Playbook for Uncertain Times. 'It makes sense to make it a regular practice to go back and see what pieces of rejected ideas might offer important tools if they can be applied in new ways.' Like researchers at 3M and Google, staff scientists at HP Labs are urged to spend a chunk of their workweek on self-initiated projects. Evan Kirshenbaum, a computer programmer who has worked at HP since 1989 and holds more than 20 programming patents, began in early 1998 using his spare time on auto innovation writing code to combine and recombine snippets of ideas to discover new ones."

In past discussions about innovation, I've noted that many innovators fill their offices with interesting gadgets that they've picked up over the years hoping that someday they will help inspire a new use of an old idea. Apparently old software code can serve the same purpose. Of course I'm interested in automated computer processes because they were what initially led to me found Enterra Solutions. They remain an important part of the business. Mandel's and Jana's articles offer a glimmer of hope that we sit on the cusp of a new outburst of innovation and progress. If true, it couldn't come at a better time.

"Giveaway" Reminder -- Last Full Day to Enter

There is still time to enter to win a beautiful Knoll desk lamp (worth nearly $200) thanks to AllModern.com. For details, see my post The Office of the Future. The winner will be drawn tomorrow (5 pm EDT) and announced in on Saturday, July 4th.

Nukes, Development, and Port Security

North Korea's recent backsliding in the nuclear arena, Pakistan's troubles with the Taliban, and Iran's stunning election results have once again brought nuclear issues to the forefront. Last year, a Congressionally-charted commission concluded that "the development of nuclear arsenals by both Iran and North Korea could lead to 'a cascade of proliferation,' making it more probable that terrorists could get their hands on an atomic weapon" ["Panel Cites 'Tipping Point' On Nuclear Proliferation," by Walter Pincus, Washington Post, 16 December 2008].

"In the interim report, the commission called for a global nonproliferation strategy as the best way to keep nuclear materials out of terrorists' hands. Such a U.S. effort 'would require intense cooperation with other nations, especially other nuclear powers' and with the International Atomic Energy Agency, the panel added. It called for strong U.S. financial, technical and political support to the IAEA. ... At the same time, the commission called for the United States to begin discussing with allies how to strengthen the Non-Proliferation Treaty. That pact, the commission said, provides a legal framework but lacks the tools to make it work. 'Its effectiveness has been undermined by errors in how it has been interpreted and by failures of enforcement by the U.N. Security Council,' the panel said."

All sorts of debates rage about nuclear policy. Some individuals want to see the world freed from nuclear weapons and others want to see nuclear arsenals updated and strengthened. The Commission appeared ambivalent on this point.

"The commission said, its final report will 'define the most efficient and effective way to maintain a credible, safe, secure and reliable deterrent for the long term.' Eliminating nuclear stockpiles should remain a national goal, the panel said, although it conceded that nuclear weapons may be needed into 'the indefinite future,' albeit at a size 'appropriate to existing threats.' The commission added: 'The U.S. deterrent must be both visible and credible, not only to our possible adversaries, but to our allies as well.'"

Nuclear arms control talks -- once thought to be a relic of the cold war -- have once again begun between the United States and Russia ["Report Urges Updating of Nuclear Weapons Policy," by Walter Pincus, Washington Post, 14 April 2009]. A study by two arms-control advocacy groups, the Federation of American Scientists and Natural Resources Defense Council, concludes that the time is right to draft new nuclear policies.

"The study's main purpose is to propose a new nuclear doctrine for the United States, one it defines as 'minimal deterrence.' Under that doctrine, the nation would retain enough nuclear weaponry 'to deter nuclear use in the first place.' The study creates a new category called 'infrastructure targeting,' under which attacks would focus on 'electrical, oil and energy nodes' that support war industries. 'A minimal nuclear deterrence policy with infrastructure targeting does not require nuclear forces to be on alert or even to react quickly,' according to the study. The authors propose keeping weapons in the current stockpile but lowering their yields -- to a degree. The weapons, the report said, should remain devastating enough to deter any nation from striking the United States or any of its allies."

Talk about "infrastructure targeting" concerns a lot of countries -- many that have a reason to be concerned ["Developing Nations Seek Assurances on Nuclear Arms," by Colum Lynch, Washington Times, 16 May 2009].

"Cuba, Iran and other developing nations [have] demanded that the five original nuclear powers accept legally binding commitments to dismantle their nuclear arsenals and provide assurances they will not use such weapons against states that do not possess atomic weapons."

So-called rogue nations understand that they have been in the cross-hairs of other countries for some time. Leaders of countries like North Korea and Iran often pride themselves in taking a road apart from the rest of the world when it comes to nuclear proliferation -- on the other hand they have no desire to see nuclear weapons used against them. Other developing nations are also concerned that events in their country (such as the unwelcomed arrival of terrorists establishing training camps) could result in their infrastructure being targeted. As I have often noted, one of the things that keeps many developing nations from progressing is a lack of infrastructure. It should surprise no one that such countries are concerned that even their inadequate infrastructure could be targets for nuclear weapons. Original members of the so-called nuclear club insist that their nuclear arsenals will never be used that way; but, without binding assurances, potential target nations remain skeptical.

As a result of these differences of view, the recommended strengthening of the Nuclear Proliferation Treaty is unlikely to occur. There had been rising hopes that a strengthened treaty could be worked out. The 189 current signatories reached agreement on a procedural agenda for a major review conference on the treaty in New York next May, but the conditions insisted upon by countries like Cuba and Iran faced stiff opposition from France, who "said it would not yield to any legally binding commitments to undertake further reductions in its nuclear arsenal or to allow international inspections of its nuclear stockpile." One sign that nations are paying more attention to nuclear proliferation is that North Korea's latest nuclear weapons test "triggered a swifter, stronger and more uniform wave of international condemnation, most notably from the isolated nation's historical allies, China and Russia."

More recently, the United Nations Conference on Disarmament, after a decade of deadlock, "approved a working group to negotiate a treaty banning the production of fissionable material for nuclear weapons" ["U.N. Hopes to Ban New Fissionable Material, Space-Based Weapons," by Walter Pincus, Washington Post, 2 June 2009]. Despite the breakthrough, Pincus cautions that we shouldn't "expect quick action."

"The last international pact this 65-nation group successfully negotiated was the 1996 Comprehensive Test Ban Treaty, which has yet to come into force, partly because the U.S. Senate has not voted for its ratification. It was in 1993 that the U.N. General Assembly first passed a resolution calling for negotiations on a fissile-material treaty. Then two years elapsed before the underlying mandate for an 'effectively verifiable' one was approved by the conference. President Obama has made a fissile-material treaty part of his arms-control agenda. But there are signs a fissile pact faces problems, in part because the conference approves only by consensus, meaning everyone must agree."

All of these articles point to one truth: nuclear weapons proliferation and similar threats are likely to be around for some time. That brings me to the article that really caught my eye because it touches on port and harbor security -- one of the areas in which Enterra Solutions works. I found the article particularly intriguing because it was written by a professor of management science at the Stanford Graduate School of Business rather than a typical national security expert ["A Threat in Every Port," by Lawrence M. Wein, New York Times, 14 June 2009]. Wein writes:

"While President Obama’s future vision of 'a world with no nuclear weapons' is certainly laudable, for the present America still needs to do everything it can to prevent a terrorist from detonating such a bomb on our soil. The Domestic Nuclear Detection Office, part of the Department of Homeland Security, is in charge of developing a worldwide nuclear-detection system that, primarily, would use technology to monitor vehicles and shipping containers along the various transportation networks by which nuclear weapons could be smuggled into America. Yet the Government Accountability Office found last year that the detection office 'lacks an overarching strategic plan,' despite the $2.8 billion a year spent on the initiative."

In drafting a strategy, Wein suggests that the DHS "view the problem strategically ... through game theory."

"In this case, the government plays first and uses its budget to place detection resources — technology, security experts and the like — at the various 'nodes' along the transportation network, like seaports, airports and border stations. The terrorists, in turn, can be expected to choose the path that gives them the best chance to carry out an attack. As the accompanying chart illustrates, there are a dizzying number of paths that terrorists could use to transport a foreign-built weapon to an American target city — 132 variations, in fact, taking into consideration all four likely modes of transport: commercial airplane, cargo airplane, container ship and cruise ship. So, how do we decide which route the terrorists are most likely to choose and which path we the are most vulnerable to? Game theory implies that we should maintain an equal chance of detecting fissile material along each of the 132 paths because if we harden one path too much, the terrorists will simply choose an easier one. On top of it all, the agency needs to consider cost-effectiveness: if certain sets of nodes along the transportation network are much more cost-effective to reinforce than others, then the best defense may not come from allocating resources equitably across the system."

Wein points out that since "transferring [a nuclear bomb] to a foreign airport or seaport are the two steps that are on all 132 paths" they "represent excellent choke points." I agree with Wein's basic point. When we talk with port operation authorities, we talk about security in terms of creating a trusted supply chain. This is particularly important for developing countries, which are considered likely transit points for such a bomb. If a country can become part of the solution rather than remain part of the problem, then its opportunities for development increase. Wein goes into some detail about how to address each path noted on the above diagram, but I want to concentrate on the maritime path. Wein writes:

"The Coast Guard is undertaking a three-year pilot project aimed at securing maritime routes, but faces daunting challenges in both identifying suspect vessels and detecting fissile material amid the background radiation present at sea. This pathway will perhaps be the weakest link in our border defense for the next several years, and should be one of the highest priorities of the Domestic Nuclear Detection Office."

That is one reason that sea services are extremely interested in creating a Maritime Domain Awareness system that provides persistent ocean surveillance that can help make the identification and tracking of suspect vessels easier. For more on this subject, see my post Persistent Ocean Surveillance. Wein is concerned about this subject because he understands that screening systems, inappropriately implemented, could negatively affect the flow of commerce around the world. Since the threats would come primarily from developing countries, this could have particular impact on countries desperately trying to connect to the global economy.

"Giveaway" Reminder -- Three More Days to Enter

There is still time to enter to win a beautiful Knoll desk lamp (worth nearly $200) thanks to AllModern.com. For details, see my post The Office of the Future. The winner will be drawn this Friday (5 pm EDT) and announced in on Saturday, July 4th.