Enterprise Resilience Management Blog

Globalization and Economic Stability

In two previous posts, I examined articles that discussed two different aspects of globalization: capital flows [Financial Globalization] and the agricultural sector [Globalization, Food, and Resilience]. The post about financial globalization was about studies that question whether the free flow of capital (one of the three legs that prop up the globalization stool) is really good for developing countries. Those raising the questions note that "when investment opportunities are scarce, capital inflows simply displace domestic savings and encourage consumption." They also note that countries that tie their currencies to another currency (like the dollar) inevitably track the economic gains or woes of the economy to which their money is pegged. The rapid devaluation of the dollar has had a significant negative effect on many such economies. Their point was that dumb policies (like a lack of regulation in critical economic sectors) as well as poor savings and spending habits can generate ripple effects throughout the global economy -- especially when the economy that causes the perturbation is as large as the United States.

In the post about the agricultural sector, Anthony Faiola of the Washington Post examined why globalization hadn't made agricultural products more widely available around the globe and kept down the prices of food. One of the reasons, of course, is that there is no free flow of agricultural products as a result of food subsidies and hoarding. The point of these posts was to show that globalization is not the culprit that causes bad things to happen. Bad things happen when people do dumb things. Globalization takes the rap when those same people go looking for a scapegoat. Washington Post columnist Robert J. Samuelson examines the current global economy and wonders why globalization hasn't helped stabilize it ["A Baffling Global Economy," 16 July 2008]. He writes:

"We've been having the wrong discussion about globalization. For years, we've argued over whether this or that industry and its workers might suffer from imports and whether the social costs were worth the economic gains from foreign products, technologies and investments. By and large, the answer has been yes. But the harder questions, I think, lie elsewhere. Is an increasingly interconnected world economy basically stable? Or does it generate periodic crises that harm everyone and spawn international conflict?"

Those are excellent questions. Just as sound is transmitted faster through a solid substance than through the air, bad economic effects spread faster through the international economy the denser the economic connections. On the other hand, benefits spread faster as well. As a result, stability becomes more important with each new economy that joins the global economy. Samuelson continues:

"These questions go to the core of a great puzzle: the yawning gap between the U.S. economy's actual performance (poor, but not horrific) and mass psychology (almost horrific). June's unemployment rate of 5.5 percent, though up from 4.4 percent in early 2007, barely exceeds the average of 5.4 percent since 1990. Contrast that with consumer confidence, as measured by the Reuters-University of Michigan survey. It's at the lowest point since 1952 with two exceptions (April and May 1980). Granted, the present U.S. economic slowdown -- maybe already a recession -- stems mostly from familiar domestic causes, dominated by the burst housing 'bubble.' The Bush administration's rescue of Fannie Mae and Freddie Mac, the struggling government-sponsored housing enterprises, is the latest reminder. Still, global factors, notably high oil and food prices, have aggravated the slump. The line between what's local and what's global seems increasingly blurred, and there is a general anxiety that we are in the grip of mysterious worldwide forces."

I suspect the rest of the world would argue that the global economy is in the grip of bad choices made in America -- not so mysterious at all. Samuelson doesn't really address that point. Instead, he goes on to examine whether fingers can or should be pointed at the usual suspect -- globalization.

"The good that globalization has done is hard to dispute. Trade-driven economic growth and technology transfer have alleviated much human misery. If present economic trends continue (a big "if"), the worldwide middle class will expand by 2 billion by 2030, estimates a Goldman Sachs study. (Goldman's definition of middle class: people with incomes from $6,000 to $30,000.) In the United States, imports and foreign competition have raised incomes by 10 percent since World War II, some studies suggest. Job losses, though real, are often exaggerated. But a disorderly global economy could reverse these advances. By disorderly I mean an economy plagued by financial crises, interruptions of crucial supplies (oil, obviously), trade wars or violent business cycles. This is globalization's Achilles' heel. Connections among countries have deepened and become more contradictory. Take oil producers. On one hand, high oil prices hurt advanced countries. But on the other, oil countries have an interest in keeping advanced countries prosperous, because that's where much surplus oil wealth is invested."

Samuelson goes on to note that the current situation involves the greatest redistribution of wealth in the world's history.

"Vast global flows of money threaten unintended side effects. Foreigners own more than $1 trillion of debt issued or guaranteed by Fannie Mae and Freddie Mac, reports economist Harm Bandholz of UniCredit. In the past six years, he notes, foreigners have purchased $5.7 trillion of U.S. stocks and bonds. Bandholz says the inflow of money cut U.S. interest rates by 0.75 percentage points. So: Surplus savings from Asia and the Middle East, funneled into U.S. financial markets, may have abetted the 'subprime' mortgage crisis by encouraging sloppy American credit practices. Too much money chased too few good investment opportunities."

That is basically the argument put forth in the post about financial globalization noted above. The solution, of course, is common sense investing. There are many such investments around the world, especially in emerging market countries -- and they could use the funds. Unfortunately, they don't have the cachet of an investment in the U.S. The problem, as Samuelson points out, is that when people lose money investing in the U.S. the negative consequences can be severe.

"A loss of confidence in U.S. financial markets could be calamitous; that was one reason for the rescue of Fannie and Freddie. But just possibly, we're at a crucial -- and desirable -- turning point. For several decades, the U.S. economy has been the world's economic locomotive. Americans borrowed and shopped; the U.S. trade deficit ballooned to $759 billion in 2006, stimulating exports from other countries. The trouble is that this pattern of growth could not continue indefinitely, because it required that Americans raise their debt burdens indefinitely. Now, China and other emerging markets may be moving beyond export-led growth. Unfortunately, that shift could abort, if high inflation (8 percent in China and India) derails domestic expansion."

America needs to retool its economy. There will be some short-term pain, but if it emerges from the transformation with a higher savings rate, lower per capita debt rate, and jobs being created in new economic sectors, the pain will soon pass. Samuelson, however, writes that those who must instigate this transformation seem to be lost at sea.

"Today's global economy baffles experts -- corporate executives, bankers, economists -- as much as it puzzles ordinary people. Countries are growing economically more interdependent and politically more nationalistic. This is a combustible combination. The old global economy had few power centers (the United States, Europe, Japan), was defined mainly by trade and was committed to the dollar as the central currency. Its major countries shared democratic values and alliances. Today's global economy has many power centers (including China, Saudi Arabia and Russia), is also defined by finance and is exploring currency alternatives to the dollar. Major trading nations now lack common political values and alliances."

One had to be deaf, blind, and dumb not to have understood that America's consumer economy would eventually run out of steam if it continued to be fueled by credit. Fortunately, the new centers of power hold so many petro-dollars and so much U.S. debt that they have a vested interest in helping ensure that the U.S. economy doesn't collapse. Clearly, the U.S. can use the help. That's where globalization plays a role.

"It is no more possible to undo globalization than it was possible, in the 19th century, to undo the Industrial Revolution. But our understanding of international markets, shaped by impersonal economic forces and explicit political decisions, is poor. Countries try to maximize their advantages rather than make the system work for everyone. Considering how much could go wrong, the record is so far remarkably favorable. Alas, that's no guarantee for the future."

Samuelson hit the nail on the head when he implied that the answer to the current financial downturn is making the system work for everyone. Unfortunately, U.S. politicians on both sides of the congressional aisle are appealing to base nationalism in their attempts to get elected. This "America first" mindset will ultimately result in an "America last" outcome. America's fate rests in cooperating and collaborating with the rest of the world. The sooner this is understood, the sooner solutions for many of the challenges raised by Samuelson can be addressed.

Qatar Punches above its Weight

Qatar, the small Middle Eastern nation that pokes like a stubby finger into the Persian Gulf, has found a niche for itself in the diplomatic world ["Qatar, Playing All Sides, Is a Nonstop Mediator," by Robert F. Worth, New York Times, 9 July 2008]. Qatar's latest diplomatic foray was helping broker a deal in Lebanon.

"Editorialists praised the Qatari emir as a modern-day Metternich. Huge billboards went up on the road to the Beirut airport, proclaiming, 'We all say: Thank you Qatar.' An ice cream shop in downtown Beirut put out a sign offering a Doha Agreement Cone. But the Qataris did not linger over their diplomatic triumph. They were too busy trying to solve every other conflict in the Middle East."

Worth goes on to explain that the Qataris are becoming masters of gaining and using leverage in finding diplomatic solutions to nagging problems.

"In the past year alone, the Qatari foreign minister, Hamad bin Jassim bin Jaber Al Thani (widely known as H.B.J.), has flown his jet — repeatedly — everywhere from Morocco to Libya to Yemen, using charm, guile and large amounts of money to mediate disputes, with varying success. This work has not always earned him gratitude. In an increasingly divided Arab world, the Qataris have fashioned a reputation for themselves as independent-minded arbitrators who will cozy up to anyone — Iran, Israel, Chechen separatists — in pursuit of leverage at the bargaining table. ... Qatar has close ties with Iran, yet it also is host to one of the world’s biggest American air bases. It is home both to Israeli officials and to hard-line Islamists who advocate Israel’s destruction; to Al Jazeera, the controversial satellite TV station; and (at least until recently) to Saddam Hussein's widow. Saudi Arabia is a trusted ally, but so is Saudi Arabia's nemesis Syria, whose president, Bashar al-Assad, received an Airbus as a personal gift from the Qatari emir this year. 'They really put all the contradictions of the Middle East in one box,' said Mustafa Alani, a security analyst at the Gulf Research Center in Dubai."

Maintaining all of these strange bedfellow relationships has resulted in some interesting activities, including questionable gifts and investments. Worth reports:

"The Qataris also back their diplomacy with some eclectic investments. Many Americans know about the emir’s gift of $100 million to help Hurricane Katrina victims, but Qatar is also building a $1.5 billion oil refinery in Zimbabwe, a huge residential complex in Sudan and a $350 million tourist project in Syria."

Investments in so-called pariah states have raised more than just eyebrows. They have sometimes raised ire.

"Some call Qatar's policy deranged. The Qataris prefer to think of it as useful. Blessed with enormous oil and natural gas reserves, Qatar is surrounded by large and ambitious neighbors: Iran, Iraq and Saudi Arabia. Diplomacy has become a way for Qatar to protect itself and its riches, by forming alliances and by trying to stabilize the region. 'The idea is to try to keep everybody happy — or if we can't, to keep everybody reasonably unhappy,' said one former Qatari official, who spoke on the condition of anonymity because he was not authorized to discuss foreign policy. 'If that makes the Americans or the Russians a little cross, well, tough luck.' It does make them cross. American officials have been quietly furious about Qatar’s assistance to Iran and Syria, which includes substantial financial investments as well as votes against sanctions on Iran during Qatar's tenure on the United Nations Security Council. The Americans are also angry about Qatar’s hefty financial aid to the militant Palestinian group Hamas after it won elections in 2006."

Such patchwork pragmatism has kept both friends and foes a bit out of balance -- never really knowing what the Qataris are going to do next.

"Mr. bin Jaber, the foreign minister, who is also prime minister, has been coy about the details of Qatar's unusual diplomacy. He has given some interviews in which he says Qatar wants 'good relations with everyone' and defends his country's relationship with Israel. ... Qatar's policy was born in 1995, when the current emir, Sheik Hamad bin Khalifa Al Thani, carried out a bloodless coup against his father, who was on vacation in Switzerland. The new emir instantly began transforming Qatar from a sleepy, inward-turned backwater into a dynamic new state. At home, he began an ambitious remodeling of the emirate’s education policies with the help of his wife, Sheikha Mozah bin Nasser al-Missned. Abroad, the emir and his cousin, Mr. Jaber, began building a bold new way to engage with the world while maintaining their country’s independence."

Although its foreign policies have been met with both anger and amusement, according to Worth, they seem to be working for the country.

"Qatar ... has an absolute monarchy and virtually no domestic dissent. It is therefore free, unlike almost every other country in the world, to pursue iconoclastic policies abroad without worrying about how they play at home. The fact that Qatar also has the world's highest per capita gross domestic product, at more than $80,000, probably helps to keep things quiet. Unlike some other countries in the region, Qatar has had only one terrorist attack, a suicide bombing in March 2005 in a Doha theater popular with Westerners. One British citizen was killed and a dozen other people were wounded. Despite occasional diplomatic problems and frequent complaints, Qatar's policy seems to have worked, catapulting the country to new levels of recognition around the globe."

As further proof that Qatar has gained both reputation and respect, the country and its monarch were featured in a short article in The Economist ["Small country, big ideas," 7 June 2008 print edition]. The Economist article also alluded to the Emir's success in brokering the deal in Lebanon and it provided a bit more background on the country.

"In 1952, the year that Sheikh Hamad bin Khalifa al Thani was born, Qatar had fewer than 40,000 people, most of them barefoot nomads and fishermen, and not a single school. The emirate he rules now hosts Education City, a complex of branch campuses from some of the world's most prestigious colleges. According to IMF figures, the country's 950,000 residents this year surpassed those of Luxembourg to become the world's richest. They enjoy an income per person of $80,870. Yet that plump figure belies the far greater private wealth of native Qatari citizens, who number fewer than 200,000 but who own nearly all the emirate's assets, as opposed to the army of foreign guest workers who serve them."

Like many Gulf states, Qatari citizens enjoy the benefits of oil revenue and leave the hard work to foreigners. This may become problematic for Qataris in the long term. It's good to have money, but the day will come when the oil runs out. History has also shown that people are happiest when engaging in meaningful work that contributes to supporting the family. In the meantime, as Worth noted above, the Qataris are using their wealth to bolster their diplomatic missions. The Economist article continues:

"Qatar's oil money has certainly helped to make peace. A free week spent in one of Doha's six-star hotels would dull the meanest fighting spirit, and there are wags in Lebanon, for instance, who contend that their politicians pocketed other, bigger sweeteners. But there has been plenty of fast Qatari footwork too. Since Sheikh Hamad ousted his father in a bloodless coup in 1995, observers have questioned the apparently erratic course of Qatari foreign policy. But under the guidance of his distant cousin, Sheikh Hamad bin Jasim, the long-serving foreign minister, and more recently also prime minister, Qatar has cut the apron strings that traditionally tie smaller Gulf states to bigger, older regional powers such as Saudi Arabia and Egypt, and adopted a firmly independent line."

With Qatar's liquid natural gas output expected to double over the next five years, the short-term future of the country looks bright. Wise investments will likely keep the country flush and the growing reputation of its leaders as diplomatic troubleshooters will likely keep Qatar punching above its weight.

Oil Fuels Kurdistan Economic Boom

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Plant-based Plastics

Much has changed over the past 40 decades. Older readers may recall the 1967 motion picture "The Graduate," in which Dustin Hoffman got his first big break. One of the more memorable pieces of dialog in that film went like this:

Mr. McGuire: I want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: Plastics.

In the past few years, plastics have taken a public relations nosedive. Environmentalists decry everything from the plastic rings that harness six-packs of drinks to the plastic shopping bags that float eerily in the wind (sort of like in the 1999 film "American Beauty"). Most plastics are virtually indestructible and are clogging landfills around the globe. Shoppers have been encouraged to buy re-usable cloth sacks to help clean up the environment. The latest bad news for plastics came in reports that claim a compound used in hard transparent plastic bottles, bisphenol A, or BPA -- a compound created by a Russian chemist in 1891 -- creates health risks. The fact is, however, that the world is as dependent on plastics as it is on oil or electricity.

Like the old adage says, "necessity is the mother of invention"; and scientists are looking for safer, greener ways to make plastics ["I Have Just One Word for You: Bioplastics," by Mara Der Havanesian, BusinessWeek, 30 June 2008 print edition].

"For half of his life and all of his 25-year career as a bioengineer, Oliver P. Peoples has wanted to prove two things: that he could reengineer plants to grow biodegradable plastic in their cells and that he could make a lot of money doing it. On the first goal, Peoples has had astonishing success. His Cambridge (Mass.) company, Metabolix has harnessed the complex genetics of plant-cell metabolism and collected hundreds of patents on a process for manufacturing 'bioplastics' in large vats of microbes. A $200million factory is under construction and could start producing Metabolix's bioplastic, called Mirel, early next year. But Peoples' second mission, amassing wealth for himself and his investors, is glaringly incomplete. ... The company is now in a crucible every struggling biotech encounters. As it awaits commercial production, it is burning through cash. And it must carefully pick the right customers to showcase Mirel's wide range of applications, from gift cards and cosmetics cases to plastic bags and computer parts."

Despite the fact that Peoples burn-rate is high, so are his expectations of success. Peoples believes the timing of his product is just about perfect.

"As oil prices spike up, so does the cost of plastic materials, virtually all of which are petroleum-based. In addition, consumer groups and environmentalists around the world are in an uproar over the billions of tons of plastic waste that get dumped at sea or buried in landfills and over the health effects of related toxins. Almost 30 million tons a year of plastic solid waste is dumped into the U.S., and about 5% is recycled. These trends fuel demand for novel bioplastics that aren't linked to pricey fossil fuels and don't harm the environment."

Peoples' greatest concern should be about competitors. Even producers of traditional petroleum-based plastics are muscling their way into the bioplastics field.

"DuPont fired up its first biomaterials plant in 2006, selling more than a $100 million worth of products in the past year, including its bioplastic called Sorona. Starting in 2009, Cargill's NatureWorks unit hopes to ship 140,000 metric tons a year of a bioplastic called Ingeo, for use in fresh food containers and textiles, among other things. Brazilian petrochemical giant Braskem is spending $300 million on a factory for sugarcane-based bioplastics, while Toray Industries of Japan is making plastics from fermented plant starches and sugars. There's also a host of U.S. startups with names such as Novomer and Cereplast that make plastics from wheat, tapioca, potatoes, soy, and more. 'We've gone from being mad scientists to being visionaries,' says Frederic Scheer, CEO of Cereplast, based in Hawthorne, Calif."

Peoples, however, believes he has an edge over the competition.

"All [of the competitor] materials are green in the sense that they reduce dependence on fossil fuels. But while rival bioplastics must be incinerated or composted at high temperatures, Mirel will decompose if it is simply tossed in a home compost heap or dumped at sea. 'Mirel is the one that works in all environments,' says Joseph P. Greene, a professor in mechanical engineering and manufacturing at California State University at Chico, who was hired by the state to find the best bioplastic on the market. 'It breaks down nicely with food or yard waste. Boom, 180 days later and it's nice brown dirt.' What's more, the manufacturer determines how fast the plastic biodegrades into harmless plant materials and the conditions under which that happens."

Mirel's environment edge hasn't gone unnoticed. Organizations concerned about their "green" image from Target to the U.S. military are testing Mirel in products.

"About 50 potential customers, including Target, Revlon, Hewlett-Packard, medical supply company Labcon, and the U.S. military, are testing Mirel in more than 70 different products. 'We have to do something [because] most plastic just ends up in a bad place,' says Jim Happ, president of Labcon, which is testing Mirel to replace some 3 million pounds of plastic it uses each year in 800 products for hospital labs. 'We love their polymer,' says JoAnn Ratto, an engineer at a U.S. Army research center in Natick, Mass., which is evaluating Mirel as a liner for waste bags that are thrown overboard by naval ships. 'We can't get enough of it.'"

Der Havanesian reports that the process for producing Mirel can be simply explained but such an explanation doesn't capture the genius and hard work behind the techniques that were used to create it.

"Mirel is made in large vats of genetically modified microbes. They gorge on glucose from corn, then convert the sugar into fatty globules, which make up more than 80% of the cells by weight. These are harvested, dried, and turned into pellets. It all sounds painless enough, but getting the microbes to comply requires marvels of genetic engineering."

Peoples journey from a young boy in Scotland to entrepreneur in America is interesting and provides some insight into an entrepreneur's mindset.

"He grew up poor in Slamannan, a remote, windswept coal mining town between Glasgow and Edinburgh. His father died when he was 16, leaving little for his family of 11 children. 'Olly' was spared a life in the mines by the attention of his high school chemistry teacher, who helped him get into the prestigious University of Aberdeen. After he earned his PhD in molecular biology in 1983, he landed a postgrad spot at the Massachusetts Institute of Technology. Pulling himself out of poverty and cultivating a competitive streak at MIT prepared him for the life of an entrepreneur, says Pamela Bassett, a Cantor Fitzgerald analyst in New York. 'Most scientists want to publish, especially if you're at MIT,' she says. 'Olly wants to commercialize.' With a background in biochemistry, Peoples sensed early on that genetic engineering would open up whole new commercial landscapes. Most of his lab mates were interested in medical biotech, and several started companies that hit the jackpot, with lush buyouts by drug giants. Peoples yearned for a similar fate. But unlike many of his peers, he bypassed medicine and plunged into industrial applications. MIT filed for patents on his work in 1987, and by the time they were approved four years later, Peoples had negotiated exclusive licenses and mapped out a business plan for a new company."

In previous posts, I've noted that entrepreneurs are driven to see their ideas take shape and then take hold. Entrepreneurs are often a combination of idea generator, salesman, and motivator. They are not idealists, but passionate, hard-nosed business people who can't understand it when others fail to grasp their vision. Peoples is no exception. According to Der Havanesian, Peoples believed that others would immediately grasp the potential of his idea and that venture capital would flow freely. It didn't. To stay afloat, he went through eleven rounds of financing, plus an initial public offering. The market for bioplastics remains small but is growing.

"Total global production of bioplastics is still minuscule. All the manufacturers combined will generate only about 1 million tons a year by 2010, analysts say, compared with 500 million tons a year of the petro-based variety. But these ordinary plastics, which account for up to 10% of total U.S. oil consumption, are quickly becoming an extravagance at $138 for a barrel of crude. A switch to bioplastics not only would help reduce oil dependence but also could save companies and consumers serious money."

The one big drawback facing Mirel at the moment is that it is made from food crops. With crop prices rising and humanitarians urging companies to stop using food crops for purposes other than feeding people and livestock, Peoples is conducting more research and development to try and make Mirel even more attractive to customers.

"Having proved his science is valid, Peoples wants to scale up production of Mirel without relying on food crops such as corn. Funded by the U.S. Energy Dept., he's trying to bioengineer switchgrass and other plants to produce the plastic in their leaves. If he can pull it off, Metabolix could reap billions of pounds of bioplastics on just a fraction of the acreage currently given over to corn. It'll be a challenge, but Peoples, ever the scientist, says: 'The stuff that is easy to do is not that interesting.'"

Another BusinessWeek article written by Joshua Schneyer, reports that Brazil has big plans about becoming the world's leading producer of bioplastics ["Brazil's 'Organic' Plastics," 24 June 2008]. The country currently produces biofuels from sugarcane and is also looking to sugarcane to produce bioplastic.

"Already the No. 8 producer of petro-based plastics, Brazil will soon be the largest producer of organic ones, according to Dow and Braskem. Both companies say they've mastered technologies to turn sugar cane into polyethylene, the most popular plastic. By 2012, about 10% of Brazil's plastic will come from cane instead of petroleum."

As noted above, however, Mirel has a distinct advantage over sugarcane-based plastic in that it is biodegradable. In addition, sugarcane crops are already a source of contention for environmentalists.

"Not everyone believes that sugar cane should be used for plastics. Dow and Braskem plan to burn 300 million gallons of ethanol in 2012, around 6% of Brazil's current output. Critics say using edible crops for energy has fueled the runup in global food prices. Some say cane farming is pushing Brazil's agricultural frontier north into the Amazon forest, and that pre-harvest cane-burning, a common practice, lifts Brazil's carbon emissions. And, like conventional plastic, Brazil's cane plastic won't break down easily in the environment. That which isn't recycled may end up in landfills, or worse, swirling around the Great Garbage Patch, a Pacific Ocean vortex that eventually sucks in large volumes of plastic floating at sea."

The technology challenges involved with bioplastics will eventually be solved (Peoples has proven that) and the economics of oil will make bioplastics commonplace in the future. As a result, the plastics industry should remain sustainable and plastic products remain affordable even after the "oil age" passes. That is why BusinessWeek wrote, "I have just one word for you: bioplastics." Mr. McGuire may have been right all along.

Reviving U.S. Manufacturing

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

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

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

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

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

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

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

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

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

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

So where does Engardio see opportunities?

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

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

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

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

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

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

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

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

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

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

The Future of Desalination

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Looking for Jobs that Last

As the U.S. moves into the height of its presidential campaign season, the economy has taken center stage. Stones have been thrown at the North America Free Trade Agreement (NAFTA) because detractors claim it has cost good American jobs. The U.S. is not the only country lamenting the loss of jobs. Even nations once considered to be low-cost countries and, therefore, attractive for foreign investors, have found that it is hard to remain "low cost" enough ["The dark side of globalisation," The Economist, 31 May 2008, print edition]. For example, The Economist looks at what has happened in Slovakia over the past decade.

"A decade ago, Samorin—a small town in western Slovakia, on the banks of the river Danube—was one of many good places in which to watch the effect of globalisation on central Europe. The town was full of cheap, experienced workers in need of jobs, with unemployment at 20%. Foreign investors duly arrived, notably Samsonite, an American luggage-maker, which set up a factory there in 1997. The town’s location helped, near a four-way border where Slovakia, Hungary, Austria and the Czech Republic meet in a cat’s cradle of big roads and railway lines. There are scores of similar towns across the region that attracted jobs from higher-cost, more highly regulated labour markets farther west."

It's hard to find better conditions for an economic boom -- skilled workers, good infrastructure, and low costs. Of course, workers in countries that lost jobs weren't happy.

"Workers, trade unions and politicians in old Europe mourned each factory moving east. But, as a European Commission official explains off the record, such shifts were fully expected: offshoring 'was the whole idea of enlargement'. The process, though wrenching to some, made the European Union as a whole more competitive and spread the benefits of global trade to every corner of Europe."

Unfortunately for Slovakia, that is not where the story ends.

"So far, so familiar. But things have moved on in Samorin. Even though new investment and jobs are still arriving in Slovakia, and proximity still counts, this river town has already lost a factory to offshoring. Samsonite closed its plant in 2006, shedding all 350 staff and shifting production to China."

So what's happening? There are obviously lessons to be learned.

"Like its neighbours, Slovakia has seen wages rising fast as new jobs arrived and many of its own people headed west. In most of the new member countries, unemployment rates are lower than at any time since early 2000. But rising labour costs are only part of a more complicated story. Slovakia is still cheaper than the Czech Republic. In Samorin, unskilled workers might earn 12,000-15,000 crowns (€380-480) a month. Labour costs have risen faster in other new EU members too. In overheating Latvia, pay in the fourth quarter of 2007 was 30% up on a year earlier. Samorin is a witness to the way that globalisation is fragmenting as supply chains break into ever smaller parts, sending jobs in all directions. The European Restructuring Monitor (ERM), an EU outfit that tracks globalisation, has analysed about two dozen cases of offshoring from new members of the EU, often involving complex moves. In one example, a German lighting company shed 400 jobs in Slovenia and sent the manufacturing end jobs back to Germany. In another, a Hong Kong-owned textile-maker shut up shop in Latvia, citing a 'lack of workforce' in the region, and shifted production to Macedonia and Vietnam."

Countries that want to benefit from globalization must reconcile themselves to the reality that it fragments supply chains and sends jobs in all directions. As my colleague Tom Barnett puts it, "Globalization integrates trade by disintegrating production chains and dispersing them across economies." Slovakia apparently understands this phenomenon and accepts it.

"Slovakia is currently a European cheerleader for open markets and free trade. In a Pew Global Opinion survey last year, Slovaks were more enthusiastic than Americans, Swedes or Britons about multinational companies, with 72% agreeing that big foreign companies were good for their country, a European record (55% of French respondents thought foreign firms were bad for them, setting a record in the opposite direction)."

The fact is that the vast majority of global trade involves multinational corporations. If you want to get in front of that money you had better embrace them. Why? Not only are multinationals involved in the bulk of global trade, but half of that trade is intra-network trade -- meaning trade within industry sectors or within the multinational companies themselves. That is really what cost Samorin its Samonsite factory.

"Labour costs were higher than in Asia, but location trumped cost advantage. The factory’s role was to manage peak demand for the highest-priced products. What killed [the] plant was the effect of higher labour costs on suppliers, who one by one moved to Asia. By the end, the factory was having to fly in materials to fill urgent orders at great expense."

Understanding the supply chain is critical for understanding what types of job will last. China is likely to suffer a similar fate to Slovakia if parts manufacturing ever shifts to Africa. The Economist notes that demographics is also playing a role in Slovakia (as it is in the rest of Europe).

"Alarmingly, the idea has taken hold across central and eastern Europe that the most pressing crisis is a shortage of people. Every day, newspapers report plans to ship in Vietnamese textile-workers, Ukrainian road-builders or Moldovan waiters to fill vacancies. There may well be some immigration, but it will not be the cure-all some seem to expect. ... Small, mundane changes would help. In some countries workers who have taken early retirement would lose their pensions if they went back to work. Bulgaria has no laws covering temporary work. [One] factory in Samorin, ... has started recruiting toolmakers and other specialist workers from eastern Slovakia. But he notes that once he has persuaded skilled workers to uproot themselves and move 300-400km westward, some of them will keep going to Britain or Ireland to earn two or three times more. Everything is becoming more mobile, making life more complicated. But many central and eastern European workers remember the days when they were not free to move. They are a tough, flexible bunch and do not think the world will stop for them. The EU is lucky to have them."

Eastern European workers may be tough, but it will be their flexibility that helps them create jobs that will last. They've already learned a difficult lesson about global supply chains. The fact that they are more receptive to multinational corporations should help them find a nice fit for the future.

Poverty and Progress in Peru

When one thinks about emerging market tigers around the world, I imagine that Peru is not the first country that pops into one's mind. Peru, according to The Economist, is South America's fastest growing economy. While that is good news for a country that has been mired in poverty, the bad news is that economic progress is not spreading evenly throughout the country ["Poverty amid progress," The Economist, 10 May 2008 print edition].

"[Lima, Peru's capital,] is the visible face of a boom that has made Peru South America's fastest-growing economy. That performance owes much to record prices for mineral exports. But newer export products, from designer cotton T-shirts to mangoes and artichokes, are also flourishing. As well as trade, private investment, growing at 20% a year, and domestic consumption are driving the economy forward at an accelerating pace (in the year to February, GDP grew by 9.2%). Thanks to high world prices for food and fuel, inflation has spiked to 5.5%, having been low for years. Nevertheless, the growth looks to be built on solid foundations. The national savings rate has risen to 24% of GDP, high by regional standards, and the government last year posted a fiscal surplus of 3% of GDP. A free-trade agreement with the United States is about to come into effect. In recognition of such achievements, Peru's debt was awarded an investment-grade credit rating last month by Fitch, a ratings agency."

The United States wishes it were in such good financial condition. It, too, faces increasing inflationary pressures, but the U.S. has a much slower rate of growth and Americans save at a rate below 14%. As I noted at the beginning, however, not everyone in Peru is feeling the impact of the country's economic boom.

"Despite the growth, poverty has fallen only slowly. And many Peruvians are disgruntled. ... There are several reasons for the relatively slow fall in poverty. Although the number of formal-sector jobs is expanding at 9% a year, many Peruvians still labour in the informal sector of unregistered businesses, where productivity is low. Wages for the unskilled have been slow to rise."

We have witnessed uneven economic progress in other emerging countries, like China and India. These, however, are large countries and some geographical differences should be expected. China, after all, covers some 3,646,448 square miles and is home to about 1.3 billion people. Peru, on the other hand, covers 496,226 square miles (less than 14% of China's size) and is home to about 28 million people (roughly 2% of China's population). The fact is that geography nevertheless plays a large role in how economic development spreads, even in a small country like Peru. The Economist reports:

"The capital, the Pacific coastal strip and most of the north of the country are all thriving. The problem is the southern Andean region, where poverty reaches 70% of the population. Helped by tourism, mining and microcredit some Andean cities, such as Cajamarca, Cusco, Huaraz and Huancayo, are prospering. The big divorce is with the surrounding, often mountainous, countryside, where many Andean Indians remain trapped in subsistence farming on small plots. Whereas 60% of the labour force in Lima are waged workers, only 27% are in Apurímac, notes Efraín González, an economist at Lima's Catholic University. These unwaged people are often more or less cut off from the market economy. And it is market connections that make economic growth 'trickle down' to the poor, points out Richard Webb, a social researcher and former central-bank governor. Enabling that to happen is thus a job for public policy. Better roads, education and social policy are all needed."

As my colleague Tom Barnett and I have been preaching for some time, people need to be connected in order to take advantage of the economic benefits associated with globalization. It comes as no suprise that those "more or less cut off from the market economy" continue to struggle. Although Peru's government recognizes that they must improve infrastructure and social policy to help its citizens break poverty's grip, The Economist reports that knowing something must be done and actually doing it are two different things.

"With the help of the World Bank, the government has drawn up a new anti-poverty strategy which focuses on trying to end the malnutrition that affects 30% of Peruvian children, most of them in the southern Andes. It has ramped up social spe