bsm spring 2011

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Spring 201

Reining in Micronance The Arctic Frontier China and the American Investo

Meet the CEO: Peter Shankman Outsourced in America The Future of Aviatio

Hosted by the Yale School of ManagemenSouth Asian Business Forum and thYale Undergraduate Business Society

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Business Sphere Magazine | Spring 2012

Editor-In-Chie

Paul Joo

Editorial DirectorsJennier BarrowsMonish Shah

Managing EditorsEvan BeckNabila Chitalwala

Design Director

Aimee Marquez

Finance DirectorChristopher Lee

Operations DirectorShiv Kachru

YBS President

Shashwata Narain

Managing DirectorAdam Bao

Conerence DirectorElizabeth Andrekovich

YBS FounderJames Zhang

Faculty AdvisorLanier Benkard

Contact us:P.O. Box 200402New Haven, C 06520

www.BusinessSphere.org

In Business Sphere magazine, our writers address the complexity o business rom astudent perspective as it relates to a wide variety o popular news. Business Sphereaims to serve as a platorm or increasing awareness o and interest in the ar-ranginimplications o business in social, economic, legal and political arenas.

In this issue o BSM, we present an exclusive interview with writer and entrepreneuPeter Shankman, whose ideas have revolutionized social media around the world.You will also learn about the growth o Emirates Airlines, the award-winning ag-ship carrier o Dubai. In other eatured articles, Yale students cover topics ranging

rom credit deault swaps to high-speed rail inrastructure.

Our spring issue also contains a special section dedicated to the Asia omorrowConerence, the annual agship conerence o the Yale Undergraduate BusinessSociety, co-hosted by the Yale School o Managements South Asian Business ForumYou can read more about Asia omorrows exciting schedule and speaker lineupstarting on page 4.

Special thanks go to the Yale Undergraduate Business Society or its continuedsupport and collaboration. I would also like to extend a heartelt thank-you to theeditorial and design teams or their tireless eorts, without which this publication

would not have been possible.

Sincerely,Paul Joo, Editor-In-Chie

From the Editor

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C O N E N S

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6

Welcome

Schedule and Map

Keynote Speakers

Panel Descriptions

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7

Te Economic Fast rack

Dakota Meyers

Inovao Brasileira Paul Joo

Outsourced in America Jennier Barrows

Credit Deault Swaps:A icking ime Bomb? Monish Shah

China and the AmericanInvestor Evan Beck

Reining in Micronance Nabila Chitalwala

Emirates and theFuture o Aviation Shiv Kachru

Te Arctic Frontier Courtney Kaplan

Meet the CEO:Peter Shankman Jennier Barrows

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Asia 3.0: Technologys Next Transition

PresidentShashwata Narain

Managing DirectorAdam Bao

Asia omorrow DirectorElizabeth Andrekovich

Brand ManagementAimee Marquez

Finance DirectorsChristopher LeeDong Won Lee

On-Campus Aairs

Daniel ChengMelissa Hou

Director EmeritusKaiyuan Wang

Founder,President EmeritusJames Zhang

Dear Conerence Attendee,

It is with great pleasure that we welcome you to the third annual Asia omorrowConerence. Our concept is simple: to establish an intellectual orum that engages ouaudience on pertinent global issues rom emerging markets development to the utuo corporate sustainability. Our theme this year, Asia 3.0: echnologys Next ransitiotakes an integrated business-technology perspective to examine the multi-dimensioneects o innovation on a changing business landscape.

oday, you will join some o the worlds oremost thinkers and leaders in business,academia, and politics to explore issues ranging rom healthcare economics and cleaenergy to intellectual property rights and online entrepreneurialism. Additionally, thbreakast networking session and speaker luncheons will allow you to initiate one-onone conversations with speakers and to explore key issues in urther detail.

We hope that the breadth and depth o todays dialogues provide you with a compre-hensive understanding o the contemporary debates aced by the Asian corporate secWe encourage you to make the most o this conerence by asking tough questions,contributing to discussions, and acquiring new insights. A special vote o thanks goeout to all YBS, SABF, and BSM sta or working tirelessly over the past year to organ

the conerence and make this conerence issue o the magazine possible. We hope thyou enjoy the conerence as much as we enjoyed organizing it or you.

Sincerely,Executive BoardYale Undergraduate Business Society and South Asian Business Forum

From the Executive BoardYBS Board

SABF BoardAsia omorrowLucy ChenNabila ChitalwalaSamuel Genecin

Kyle HutzlerInho MunYohanna PepaUyen PhanObaid SyedCharlotte WangYujiang Wu*

WebmasterEddie Chen

Devi MehrotraDakota Meyers*Alyssa MooreJacqueline Murphy*

Alda PontesDon raubertJames anMichelle sengJoanna ZhengAlbert Wu**

On-Campus AairsEddie ChenGang Chen

Brand ManagementJustin OnyejiLisa WangAdam Weser

FinancePrateek BaghelFrancesco De CamilliIvan FanKenneth FangDaniel Kelly*Michael LeiRebecca LiuWilliam Martin

Co-Presidents

Anjai LalRahul Setiya

Managing DirectorsNeha MadamRasheq Rahman

Karen ChenAnanya HemvijiPriyanka KanwaAly Kerr

Nick LetizioYidan LiDawn LuJie Min*

*eam Manager**Senior Advisor


hosted by

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Time Event Description/Location

8:00 AM 9:00 AM Breakfast Networking Session -LC 104

9:15 AM 9:25 AM Opening Remarks - Art Gallery Auditorium

9:30 AM 10:30 AM Morning Keynote, Part I -Art Gallery Auditorium

10:40 AM 11:40 AM Morning Keynote, Part II -Art Gallery Auditorium

11:55 AM 12:55 PMAsia 3.0: Restructuring

and Innovation - LC 102The Power of Clean - LC 211

1:00 PM 2:30 PM Lunch - Residential Dining Halls

2:50 PM 3:50 PM Future of Finance - LC 102 Entrepreneurialism Online - LC 211

4:00 PM 5:00 PM I.P. Rights vs. Asia Inc. - LC 102 Healthcare Tomorrow - LC 211

5:20 PM 6:20 PM Evening Keynote: A New Global Order -LC 102

6:25 PM 6:30 PM Closing Remarks - LC 102

March 26, 2011

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2

Linsly-Chittenden Hall (LC)

Art Gallery Auditorium

Event Locations1

2

SCHEDULE

Spring 2011 |Business Sphere Magazine

Yale

Undergraduate

Business

Society

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Keynote Speakers

Morning

Edmund PhelpsMcVickar Proessor o Political Economy, Columbia University

Nobel Prize in Economics

Proessor Phelps is McVickar Proessor o Political Economy at Columbia University andDirector o Columbias Center on Capitalism and Society. He was the winner o the 2006Nobel Prize in Economics. His career began with a stint at the RAND Corporation. Aerthat, he held positions at Yale and its Cowles Foundation until 1966, then a proessorshipor ve years at the University o Pennsylvania, beore joining Columbia in 1971.

James ChanosPresident and Founder, Kynikos Associates

Mr. Chanos is the ounder and managing partner o Kynikos Associates, an exclusivshort-selling investment rm. Mr. Chanos opened Kynikos Associates in 1985 to implment investment strategies he had uncovered while beginning his Wall Street career asnancial analyst with Paine Webber, Gilord Securities, and Deutsche Bank. Troughout hinvestment career, Mr. Chanos has identied and sold short the shares o numerous weknown corporate nancial disasters, including Baldwin-United, Commodore InternationColeco, Integrated Resources, Boston Chicken, Sunbeam, Conseco, and yco Internation

Stephen Roach, Conerence ChairNon-Executive Chairman, Morgan Stanley Asia

Senior Lecturer & Fellow, Jackson Institute or Global Aairs, Yale University

Dr. Roach is Non-Executive Chairman o Morgan Stanley Asia, where he has worked anheld senior positions, including chie economist, or twenty-eight years. Dr. Roach alserves as a senior ellow and lecturer at the Jackson Institute or Global Aairs and the YaSchool o Management. Prior to joining Morgan Stanley, Dr. Roach served on the researsta o the Federal Reserve Board and was also a research ellow at the Brookings Institutio


James Woolsey

Director o the US Central Intelligence Agency during the Clinton Administration

Mr. Woolsey is a senior ellow at Yale Universitys Jackson Institute or Global Aairs, ocounsel to the law rm Goodwin Procter, and chairman o the Strategic Advisory Groupo Paladin Capital Corporation. He was previously a venture partner and senior advi-sor o VantagePoint Venture Partners. Beore VantagePoint, Mr. Woolsey was a partner atBooz Allen Hamilton, specializing in energy and security issues. Mr. Woolsey also servedin the US government ve times over 12 years, holding presidential appointments in twoRepublican and two Democratic administrations.

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Jerey Sonneneld, ModeratorSenior Associate Dean or Executive Programs & Lester Crown Proessor in the Practice oManagement, Yale University

Aer teaching at Emorys Goizueta Business School and Harvard Business School, ProessorSonneneld currently serves as the Senior Associate Dean o Executive Programs as well asthe Lester Crown Proessor at the Yale School o Management. Proessor Sonnenelds related

research has been published in roughly 100 scholarly articles and eight books, including TeHeros Farewell, an award-winning study o CEO succession, and another best seller, Firing Back,a study on leadership resilience in the ace o adversity.

Ambassador Arun K. SinghDeputy Chie o Mission oEmbassy o India, Washington

Ambassador Singh joined the Indian Foreign Service in 1979, aer completing hisMasters Degree in Economics rom Delhi University and teaching or two years. Heserved as Deputy Secretary o the East Asia and Pakistan Divisions rom 1988-1991

beore heading the Oces o the Foreign Secretary and the External Aairs Ministryo India. Ambassador Singh served at the Permanent Mission o India to the UnitedNations Oce, New York rom 1993-1997 and served at the Indian Mission in Moscowagain as Minister rom 1997-2000. He also served as Ambassador to Israel rom 2005-2008. He then assumed his new assignment as Deputy Chie o Mission at the Embassyo India, Washington, D.C in 2008.

Jonathan SpenceProessor Emeritus, Yale University

Mr. Spence is a British-born historian and public intellectual specializing in Chineshistory. He was Sterling Proessor o History at Yale University rom 1993 to 2008His most amous book is Te Search or Modern China, which has become one o thstandard texts on the last several hundred years o Chinese history. A prolic authoreviewer, and essayist, he has written a dozen books on China. Mr. Spences majointerest is modern China, especially its relations with the West. A notable recurrintheme in Mr. Spences work is his interest in eorts on the part o both Westerner

and Chinese to westernize China.

Evening

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Asia 3.0: Restructuring and InnovationTodays Producer, Tomorrows Consumer?

As Asia experiences the growing pains o rapid economic development, it must adopt a more balanced growth strateless vulnerable to the volatility o external demand. Can the continent emerge rom this recent recession by harnessinthe power o its 3.5 billion consumers? How might the domestic consumer drive innovation, and how should glob

businesses respond? How could Asia develop an integrative economic ramework around the domestic consumedespite the export competition and nationalistic tensions that have been the status quo o past decades? What are tsocial implications and negative externalities concomitant with such growth?

LC 102 11:55 AM 12:55 PM

John HaleyChie Executive Ocer & Chairman o the Board o Directors, owers Watson

Mr. Haley is the chie executive ocer o owers Watson. Prior to the merg-er o Watson Wyatt Worldwide and owers Perrin, Mr. Haley was president,chie executive ocer, and chairman o the board o Watson Wyatt. Mr. Haley also serves onthe board o directors o the U.S.-China Business Council and is a ellow o both the Society oActuaries and the Conerence o Consulting Actuaries.

Paul CohenPartner and Senior Vice President, Ketchum

Mr. Cohen is a partner and senior vce president in the corporate practice o Ketchum, a leading global public relations consultancy. In this role, he oversees cross-border communicatioprograms or multinational companies and governmental bodies. Mr. Cohen has extensivexperience in reputation management, media relations, brand development and crisis communications, and has represented a wide range o clients, including A&, FedEx, GazpromStarbucks, and the government o the Russian Federation.

Harry EdelsonManaging Director, Edelson echnology PartnersChairman, China Investment Group

Mr. Edelson has been named an All-Star Security Analyst by Institutional Investor magazinand was the most quoted analyst on Wall Street or a decade. Te Edelson echnology Partnunds invested in ten early stage companies that grew to have market capitalizations o mothan $1 billion and up to $30 billion.

Stephen Roach, Conerence ChairNon-Executive Chairman, Morgan Stanley AsiaSenior Lecturer & Fellow, Jackson Institute or Global Aairs, Yale University

Dr. Roach is Non-Executive Chairman o Morgan Stanley Asia, where he has worked andheld senior positions, including chie economist, or twenty-eight years. Dr. Roach alsoserves as a senior ellow and lecturer at the Jackson Institute or Global Aairs and the Yale

School o Management. Prior to joining Morgan Stanley, Dr. Roach served on the researchsta o the Federal Reserve Board and was also a research ellow at the Brookings Institution.


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The Power of CleanChartered Connected Cities

om MurcottExecutive Vice President and Chie Marketing Ocer, Gale International

Mr. Murcott is the executive vice president and chie marketing ocer o Gale Internationaone o the largest real estate development rms in the world. Mr. Murcott is responsible ooverseeing all corporate and project communications programs. Mr. Murcott has 25 years international marketing experience, working with many Fortune 500 multinational brands an

was a ounding partner o Renegade, a marketing services rm.

As Asia enters a new stage in its economic development, it must address the social instability and environmentexternalities created by its breakneck rates o growth. How can the tigers and dragons o Asia make the changnecessary to become modern day, postindustrial powers? How can they make the inrastructural developments nece

sary to increase domestic consumption and quality o lie, while seeking a more sustainable approach towards expoproduction? We will explore this issue rom the perspective o the real estate and I industries, using New Songdo Cias a case study.

Cli TomasGlobal Director, Cisco Systems

As a member o Ciscos Global Enterprise Teaters management team, Mr. Tomas is respon-sible or business development or Ciscos Smart+ Connected Communities. Te goal o histeam is to change the way cities are designed, built, managed, and renewed to achieve economic,social, and environmental sustainability, enabled by intelligent networks. Prior to this role, Mr.Tomas led a $250 million global portolio delivering technology consulting services or nan-cial services organizations.

Helen NgManaging Principal, Planet Habitat

Ms. Ng is the ounder o Planet Habitat and its parent company, Domus A.D. LLC. She has also served as interimdirector o Investments to launch Christie Company/Arica Integras Holdings, a developer dedicated to buildineducation-linked housing developments. Previously, Helen was the Global Housing Portolio Manager at AcumeFund, where she oversaw investments in new town developments, mortgage nance and alternative building materiaor the base o the pyramid in India, Pakistan, and East Arica.

LC 211 11:55 AM 12:55 PM

Richard Kauman, ModeratorChairman, Levi Strauss & Co.Chie Operating Ocer, COFRA Holdings AG

Mr. Kauman is the chairman o Levi Strauss & Co and chie operating ocer o COFRA Hold-ings AG. He was previously a partner o Goldman Sachs where he was chairman o the GlobalFinancing Group, a member o the rms Partnership Committee, Commitments Committee,

and Investment Banking Division Operating Committee. During his long career, Mr. Kaumanhas had broad experience in capital markets and corporate nance.


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Future of FinanceThe Blessing and the Curse of Capitalism

Finance is a cornerstone o capitalism, and it has become an increasingly controversial topic ollowing the recent nacial crisis. While it lays the oundation or economic behavior, it also stirs public debate and policy discussion. Whsteps should governments and international organizations such as the World Bank and IMF take to avoid years lik

2007-2009? How can nancial companies reconcile risk-taking with corporate responsibility? Where are the invesment opportunities in emerging markets?

LC 102 2:50 PM 3:50 PM

John W. AllenChairman and Chie Executive Ocer, Spring Investment CorporationChairman and Chie Executive Ocer, Greater China Corporation

Mr. Allen is chairman and chie executive ocer o Greater China Corporation and has beeactively involved in Asia and China or over 30 years. He is also a trustee o the ChineCultural Foundation and member o China Investment Group LLC. He assisted in oundinAIESEC in China, Mongolia, and throughout Latin America, and has served as chairman o th

Board o AIESEC, US and AIESEC Yale.

Harry EdelsonManaging Director, Edelson echnology PartnersChairman, China Investment Group

Mr. Edelson has been named an All-Star Security Analyst by Institutional Investor magazineand was the most quoted analyst on Wall Street or a decade. Te Edelson echnology Partnerunds invested in ten early stage companies that grew to have market capitalizations o morethan $1 billion and up to $30 billion.

Mark WeiChairman, KGI Securities Group

Mr. Wei is Chairman o KGI Securities, the largest independent brokerage in aiwan. Hserves as chairman o the Financial Executives Institute (aiwan Chapter o IAFEI), directoo Financial Planning Association o aiwan (aiwan Chapter o CFP), and executive directo the aiwan Private Equity & Venture Capital Association. Prior to joining KGI Securities 2010, Mark was chairman o AIG Investments, AIG Wealth Management, and AIG GenerInsurance (Chartis) in aiwan.

Robert Shiller, ModeratorArthur M. Okun Proessor o Economics, Yale University

Proessor Shiller is the Arthur M. Okun Proessor o Economics at Yale University. His bookIrrational Exuberance is an analysis o the stock market boom since 1982. It won the Com-monund Prize, 2000, and was a New York imes non-ction bestseller. Proessor Shiller is co-ounder o Case Shiller Weiss, Inc. in Cambridge, Mass., an economics research and inormationrm, and a co-ounder o MacroMarkets LLC, which promotes securitization o unusual risks.


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Entrepreneurialism OnlineFrom College Students to Innovators

Rebecca FanninAuthor, Silicon Dragon

Ms. Fannin is the author o the well-received bookSilicon Dragon and a contributor to ForbeHer news, events, and consulting group SiliconAsia publishes a monthly e-newsletter and dvelops conerences or entrepreneurs, technologists, and investors in China, India, SingaporNew York, and Silicon Valley. A recognized authority on global trends in innovation, ventucapital, and entrepreneurship, Ms. Fannin has been eatured on Fox Business News, Sky V

Australia, and Chinas CCV.

From John Dell and Bill Gates to Mark Zuckerberg, college students have been behind some o the most creativtechnological innovations. How should students balance entrepreneurialism with education? What is the optimstrategy or a business world that is becoming increasingly complex and unpredictable? And how can students harne

the power o the Internet to apply their creative energies in the pursuit o entrepreneurial achievement?

Angela ChitkaraFounder and Chie Executive Ocer, US-India Corridor LLC

Ms. Chitkara is CEO o US India Corridor, a strategic level communications and businessdevelopment consulting practice serving international companies with India exposure.Previously, Ms. Chitkara worked as a journalist or over a decade in New York, London, Johan-nesburg, Singapore, and Mumbai . She served as a News Editor and Anchor with CNBC inIndia, reporting on global markets at the height o Indias boom between 2004-2006.

John W. AllenChairman and Chie Executive Ocer, Spring Investment CorporationChairman and Chie Executive Ocer, Greater China Corporation

Mr. Allen is chairman and chie executive ocer o Greater China Corporation and has beeactively involved in Asia and China or over 30 years. He is also a trustee o the ChineCultural Foundation and member o China Investment Group LLC. He assisted in oundinAIESEC in China, Mongolia, and throughout Latin America, and has served as chairman o thBoard o AIESEC, US and AIESEC Yale.

LC 211 2:50 PM 3:50 PM

Edmund Yeh, ModeratorAssociate Proessor o Electrical Engineering, Computer Science & Statistics, Yale University

Proessor Yeh is a guest editor o the special issue on wireless networks or Internet Mathematics.He served as the general co-chair or the Workshop on Spatial Stochastic Models or WirelessNetworks in 2010 and is also a member o the echnical Program Committees or many coner-ences and workshops. Proessor Yehs research interests are in the areas o uture internet archi-tecture, smart power grids and network design and economics.


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I.P. Rights vs. Asia Inc.Made in China, designed in Silicon Valley:

How can Asia innovate?

For developing nations in Asia, a main goal is to transer oreign technology to domestic enterprises. Although mano these countries have traditionally been negligent in the enorcement o IPR, they are gradually realizing the nece

sity o protecting IPR as a means o attracting oreign investors and innovators. But how strong is their enorcemeo IPR, and how will it become more robust? Will it be enough to protect innovators seeking to invest in Asia? Wdomestic innovators in Asia be given the same protection?

LC 102 4:00 PM 5:00 PM

Mark HeaphyChair, echnology and Outsoucing Group & Co-Chair, India Practice Group; Wigginand Dana

Mr. Heaphy helps clients structure, negotiate, and document domestic, near-shore and o

shore, commercial relationships related to outsourcing strategies and technology solutionHe requently lectures on legal topics related to outsourcing, licensing ,and privacy issues anserves as an adjunct proessor at the Quinnipiac School o Law, where he teaches computelaw and the law o cyberspace. He is a member o the American Bar Associations sectiono International Law and Practice, Intellectual Property Law, and Science and echnology.

Howard ChenPartner, K&L Gates LLP

Mr. Chens practice ocuses on representing international companies rom blue-chiptechnology clients to small, aggressive startups doing business in Asia and in the US.Mr. Chen advises his clients on intellectual property (IP) strategies, procurement, licensingnegotiation and IP litigation arising rom patent, trade secret, copyright, trademark, unaircompetition and licensing disputes. Mr. Chen also routinely advises clients on the interna-tional aspects o the technology business, including securing IP protections worldwide andestablishing joint ventures with overseas partners.


Charles Zeynel

Founder and President, ZAG International Inc.

Following a 25-year career with the ormer Union Carbide Corporation in a variety o salproduct marketing, and senior management assignments, Mr. Zeynel ounded ZAG Interntional Inc. in 2001. ZAG is a supplier o cement, clinker, and other raw materials; providstrategic marketing, sourcing and logistics services; and participates in selected investmeprojects within the global construction industry. Until 2006, he was also concurrently executvice president o Bulk Materials International, a supplier to the cement industry.

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Healthcare TomorrowHealth Economics: Defying Traditional Practice

Dr. Jishu ShiDirector o US-China Center or Animal Health, Kansas State University

Dr. Shi is an associate proessor o Veterinary Medicine at Kansas State University and, since 20director o the US-China Center or Animal Health. Te center is designed to strengthen Chineanimal health education and research and expand opportunities or Us animal health businessin the Chinese market. Te holder o ve patents, Dr. Shi ocuses on the development o novaccine technologies or animal inectious diseases.

Equal and aordable access to healthcare services is a major challenge or both the US domestic healthcare system anthose abroad. raditional healthcare delivery systems cannot meet the excess demand due to scarce resources. As a rsult, government, academic institutions, and private rms are all exploring dierent approaches to provide healthcaservices using new technologies. What are some o the most advanced technologies in healthcare I and remote hediagnostics and treatment? How are these technologies implemented, and what are some o the challenged associatwith their implementation?

Dr. Dena PuskinDirector, Federal Oce or the Advancement o elehealth, US Department o Healthand Human Services

Dr. Puskin is the director o the Federal Oce or the Advancement o elehealth. Prior to hercurrent position, Dr. Puskin served as the acting director o the Federal Oce o Rural HealthPolicy (ORHP). Dr. Puskin currently chairs the Joint Working Group on elemedicine, theFederal Interagency Committee coordinating the development o telemedicine initiativesacross the ederal government and within the Department o Health and Human Services.

Dr. Kamal JethwaniInstructor, Harvard Medical School & Lead Research Scientist, Center o Connected Hea

Dr. Jethwani currently leads the research and program evaluation initiatives at the CenterConnected Health. His research ocus on technology-based models o health delivery and ubehavior change as a tool or preventive and supportive care in a tertiary health care setting. work at the Center or Connected Health has spanned rom designing and implementing clintrials to leading eorts in predictive modeling using behavioral parameters.

LC 211 4:00 PM 5:00 PM

Lee Crawurd, ModeratorCommunications Project Coordinator, Innovations or Poverty Action

Mr. Crawurd is a project coordinator in communications at the Innovations or Povery Ac-tion. An Oxord graduate, he has worked as an economist or the Department or Work andPensions at the UK Government, an economist at the Ministry o Finance and Economic

Planning at Government o Southern Sudan, and has been an ODI Fellow at ODI FellowshipScheme.


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ransportation

Te Economic Fast rack Why the U.S. has allen behind in high-speed rail inrastructure

Te resh scent o spring caressedmy nostrils as I awoke, bright andtoo-early, or my ight home romLaGuardia Airport. Instead o book-ing an easy trip to the airport with avan service, as had most o my room-mates, I decided to trek to Queens theold-ashioned way by rail. I hastilywalked to the train station, checked

the departure board, and sprinted tothe eighth track, just in time to waitin a rail car or 30 minutes as conduc-tors angrily argued with maintenancesta about the condition o the trainsheating system. Finally, the doorsslammed, and we departed or GrandCentral Station. As the train clunkedalong at approximately hal the speedo a cantor, I pulled out a copy othe Wall Street Journaland ound anarticle on the currently stalled statuso the Obama administrations eortsto construct high-speed rail lines inthe US. Sweet congruity.

While countries in Europe andAsia have spun webs o high-speedrail between their borders, the UnitedStates, a developed nation with astrong history o investing in inra-structure, relies on a curiously poorpassenger rail system. Te reason orAmericas underdeveloped rail struc-

ture is a complex mix between highper capita GDP and the growth o theautomobile and airline industries.Te US latency in this sector o in-rastructure could have ar-reachingeconomic consequences, and unlessAmericans change their attitudetoward rail travel, the governmentwill be unable to construct a solventhigh-speed rail network.

Troughout the early 20th cen-tury, the United States stood at theoreront o high-speed rail technol-ogy. Electric streetcars began to runbetween urban areas, laying the basisor what would eventually becomemodern high-speed rail. Boomingdemand or passenger rail spurredcompanies to develop aster andmore ecient trains and railroads.Indeed, by 1905, electried railcars

were able to reach top speeds onearly 100 mph.Tis rapid development would

be short-lived, however, as govern-ment regulation began to strain railsystems. World War I played a pivotalrole in decreasing the protability opassenger rail. In an attempt to aidthe war eort, the government tem-porarily nationalized railroads underthe United States Railroad Adminis-tration. Te government scaled backmany o the luxuries oered to railpassengers in order to cut expenses.Additionally, both rates and wageswere increased in order to ease labortensions.

Te government re-privatizedrailroads in 1920. However, by thattime automobiles had begun to gainpopularity in both public and privatetransportation sectors. Eventually,airlines also proved a ormidable op-

ponent to railways. Over the nexthal-century, the US governmentwould make tremendous investmentin the latter two methods o trans-portation.

Finally, negative public opinionabout the saety o high-speed raildecreased demand and usheredwaves o government regulation intothe industry. Te Naperville, Illinois

train disaster o 1946, in which twhigh speed trains collided, killing and injuring 125, led to increaspublic concern about the saety the rail system. Additionally, taccident caused the Interstate Commerce Commission to pass regultions mandating that trains traveliabove 79 mph have expensive saeeatures installed, urther hinderithe protability o high-speed rail

America.In contrast to this history, tstory o high-speed rails develoment in Europe and Asia ollowedsignicantly dierent path. Te hiprice o gasoline, in addition to lowper capita GDP and thus less demanor personal automobiles, resultin higher demand or passenger rtravel. Additionally, governments these continents decided to diverrom the approach o the UnitStates and invest in rail to solve themass transit needs. Te causes o thparticularly high level o investmeincluded post World War II rebuiling eorts; the small size o macountries, which made highway anair travel less cost-eective; and trelative concentration o the nationpopulace.

Among the leaders in high-sperail today are China and Japa

Japans lines developed more ronecessity than any other actoMuch like in many European ntions, transportation routes betweJapanese metros aced overwhelming demand and congestion. Trelatively short distances, couplwith the act that ew citizens ownpersonal automobiles, ultimately lthe Japanese government to invest

By Dakota Meyers

8/7/2019 BSM Spring 2011


high-speed rail lines. Indeed, Japancurrently ranks third in the world interms o active high-speed rail, andthe line connecting okyo and Osakaremains the worlds most heavilyutilized rail segment.

China currently boasts the worldsmost extensive high-speed rail

network. However, its developmentollowed a much more cloudedpath. Te Chinese government acedsimilar concerns about congestion;however, in the case o China, manypotential solutions to the problemexisted. Tose opposed to urtherinvestment in the rail system arguedthat a simple restructuring o trainschedules could solve much o thenations congestion problems. On

the other hand, proponents o high-speed rail argued that high-speed railhad great potential to spur economicgrowth. Eventually the proponents ohigh-speed rail won, and the Chinesegovernment embarked on one othe worlds largest high-speed railprojects.

Eurasian nations investmentin high-speed rail will also havear-reaching economic benets.Beyond allowing citizens to moreeasily travel, the lines help alleviatecongestion on already overburdenedroadways. Tey provide access tointercity transportation or thosewho cannot aord airline travel.Additionally, trains at ull capacitytend to use energy more ecientlythan other means o transporta-tion. Tis allows or trains to playa critical role in uture eorts toconstruct a sustainable mass transit

system. Essentially, high-speed railsystems could become to Eurasiawhat the interstate system has beenor the United States an economicbackbone upon which commerce canourish. Increasing speeds o trainsallow workers to commute urther inorder to put their skills to the great-est use. Speed also makes markets orgoods and services more competitive

by putting more options within eachconsumers reach.

Because the US has no suchrail inrastructure in place, it mustcontinue to rely on its economicallyunstable airlines and inecient high-way system. Tough the Obama ad-ministration recently unveiled plans

to spend approximately $53 billionover six years on the construction ohigh-speed rail segments, the highcost and unproven protability opassenger rail has incited oppositionamongst politicians.

Utilization is a key determinanto the viability o high-speed rail inAmerica. I routes are constantlyully booked, rail lines can save timeand energy and achieve protability.

However, when they are under-used,rail lines become a veritable blackhole or subsidies. ake, or in-stance, the current state o Amtrak,Americas government-owned pas-senger rail service. A 2004 study bythe Department o ransportationconcluded that passenger rail servicereceived more government subsidiesper passenger-mile than any otherorm o transportation $186.35 perthousand miles. Tis gure comparesvery unavorably to automobiletravel, which receives no net subsi-dies when one takes into account therevenue generated by gasoline taxes.

High-speed rail systems workin Asia because o its increasinglyconcentrated populace. Tis urban-ization allows or each rail stationto service a greater number o cus-tomers. Suburbanization creates theopposite eect in America. Each rail

station services ewer people, andtrains must make more stops, de-creasing the speed, desirability, andprotability o rail.

Additionally, Asias lower per-capita GDP actually aids its economicdevelopment in the realm o masstransit. Te act that ewer peoplecan aord to purchase automobilesincreases demand or high-speed

rail travel. Tis allows schedulers more easily ll trains while still acommodating the schedules o motravelers. Te US relatively hiper-capita GDP arguably creates toption o using automobiles or pesonal transportation, and althousome roadways are clogged and

need o repair, many Americans stpreer the private, controllable natuo auto travel to the stuy, impesonal ambience o a train. Tus, rouschedulers in the US ace the choio either leaving seats unsold or aing to accommodate the schedulineeds o large numbers o passenge

Te upside o high-speed rahowever, must still give its opponenpause. Currently, no other techno

ogy has the potential to provisuch clean, ecient, and sustainabhigh-speed travel as it. Because uses electricity rather than osuels, high-speed rail could serve asbase or an environmentally riendtransportation system. Successintercity lines could provide muneeded relie to highways and alloor trucks to transport goods moeciently. Additionally, as speecontinue to increase, high-speed rcould greatly increase the mobility Americas workorce.

Tough it is unclear whethAmericans will provide suciedemand to sustain a high-speed rsystem, it is certain that such a systecould provide tremendous beneTe act that countries in Eurasalready ace sucient demand rail travel rom its citizenry will githem an economic advantage ov

the United States or years to comIndeed, Americans preerence auto and air travel may leave the Utrapped, alling behind other coutries and unable to adapt.

Dakota is a sophomore Econommajor in Branord College.

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Latin America

Inovao Brasileira How innovation is shaping the bright uture o the Brazilian economy

Te Brazilian economy, repre-sented by the rst letter in BRIC(the grouping acronym that reersto Brazil, Russia, India and China),is unmistakably on the rise. Teworlds h largest nation by bothgeographical area and population,Brazil is enjoying a period o un-precedented development. Accord-

ing to ocial estimates publishedlast month by the Central Bank,GDP growth reached 7.8 percent in2010, highlighting the resilience oits economy even in the wake o theglobal recession.

A conuence o actors is uelingthe economic expansion: a wealth onatural resources, stable governmentpolicies, a sophisticated bankingsector and a rapidly growing middle

class that now comprises hal o its190 million-strong population. Teeconomy is also beneting rom asurge in real estate and inrastruc-ture development leading up to the2014 FIFA World Cup and the 2016Summer Olympics, both o whichhave been awarded to Brazil.

In the coming decades, thisremarkable economic progresswill propel the country, currently

the eighth largest economy in theworld, into the ranks o advancednations; its economy is expected tobecome the worlds ourth largest by2040, leaprogging the economieso Japan, France, Germany and theUnited Kingdom.

Given this strong track recordand rosy outlook, one might expecta national sense o complacence.

Indeed, many Brazilian executives,optimistic about uture growth, arereportedly in a euphoric mood at themoment. Yet business and politicalleaders are recognizing that the na-

tions current economic model willneed to undergo undamental ad-justments in order to ensure Brazilscontinued growth in an increasinglycompetitive global business envi-ronment. Te missing ingredient,according to business and politicalleaders, is innovation.

Much o the economy is depen-dent on basic commodity exports,such as iron ore, soybeans, coee

and bee. Tese commodities con-tinue to serve as the base o a tre-mendously successul developmentmodel that has reached deep intothe countrys rural interior whilealso creating global corporate lead-ers: Vale, ranked the second largestmining company in the world, is thetop producer o iron ore and alsooperates nine hydroelectric plants.

Another prominent exemplar Petrobras, Brazils state-run enercompany that raised $70 billion laSeptember in the worlds biggesever share oering. Tousands

smaller companies have capitalizin recent years on rising ood pricin overseas markets, transorminBrazil into a breadbasket or agricutural products ranging rom poultto sugarcane.

Despite these successes, there isgrowing concern that the economlacks sucient innovation to helpearn the coveted stamp o advancnation. Brazil ranked 68th in t

2010 Global Innovation Index, an point drop rom the previous yeaTis lackluster ranking reects, part, weak government unding research and development: Bracurrently devotes only 0.9% o GDP to research and developmespending, compared to 1.8% Canada, 2.7% in the United Stateand 3.0% in South Korea. Brazi

By Paul Joo

Recie, an important center o Brazils burgeoning I industry

8/7/2019 BSM Spring 2011


paltry R&D spending trails behindeven other developing countries, in-cluding all three o its BRIC counter-parts, both in terms o net spendingand as a percentage o GDP.

Te ear is that this innovationdeciency could translate into long-term consequences that would limit

the growth potential o the Brazilianeconomy. Tere is no denying theeectiveness o the current model,but serving a global appetite orminerals, energy resources andagricultural commodities will notbe enough or continued economicexpansion on a sustainable scale.roublingly, Brazils ratio o basic-product to manuactured-productexports reached levels not seen since

1978, underscoring the nations de-pendence on commodity goods.

Business Sphere met with Dr.Alvaro Cyrino, Deputy Dean oEBAPE at Fundao Getlio Vargas,the nations leading higher educa-tion institution and think tank, tohear his opinion on the matter.Brazilians are a creative people,Dr. Cyrino asserts, but we are notvery innovative. Brazil, in general,

is not adept at translating creativepotential into innovation.

Much o the reason, accordingto Cyrino, is cultural. We are stillvery much a culture oriented to theormalities o government admin-istration. College graduates valuestability and social relationships asguiding principles when makingcareer decisions. Indeed, youngBrazilians overwhelmingly avor

employment opportunities at largecorporations or in public serviceover entrepreneurial risks. Cyrinostates, I we want to oster an in-novation culture, we have to start bychanging these patterns.

Te shortcomings o the nationaleducation system are a cause ormajor concern. Government eortsto improve education have been

making some strides the literacyrate has risen rom around 82% twodecades ago to 91% but illiteracyremains more prevalent in Brazilthan in most o its Latin Americanneighbors. Higher education is aurther weakness o the currenteducation system: only 13% o

Brazilians between the ages o 18and 24 are enrolled in higher educa-tion institutions, raising worriesabout the skill level o the countrysuture workorce. Exacerbating thedeciencies o the education systemare problematic social and regionaldisparities, which are masked inthese national gures.

Another challenge to innovationis the lack o institutional support.

Brazil doesnt have the right institu-tions to support entrepreneurship,Cyrino says. Tere are creativepeople with good ideas, but they lackthe means to channel their creativ-ity into a pipeline o products andservices in the market. Financingis particularly daunting in a countrywhere, despite the sophisticationo the banking sector, large-scalestartup capital has remained, until

very recently, a relatively underuti-lized mechanism.

It is not that Brazil is unamiliarwith the potential o innovation. Temost amous example is perhapsthe countrys successul ethanoleconomy, which has been hailed asthe worlds rst sustainable bio-uelprogram. Conceived as a responseto the global oil crisis o the 1970s,Brazils 30-year-old ethanol uel

program has become a policy modelor other nations. At a time whenthe governments o many advancedeconomies are seeking to subsidizenascent alternative energy sources,89% o cars sold in Brazil run on amixture o ethanol and traditionaluel, thanks to domestically devel-oped ex-uel engine technology.Due to genetic modication and

an advanced cultivation systemBrazilian sugarcane-based ethanis six times more ecient than corbased ethanol produced in the Uand price competitive with standagasoline.

While the magnitude o inovation that transormed Brazi

uel consumption has not yet beemulated by mainstream companithere are clear signs that chanis on the way. Te 123 nationinstitutes o science and over 4incubators scattered across tcountry are humming with activiin elds ranging rom cosmetics genetics. Te act that many o thestartup incubators are associatwith universities represents, in itse

a complete reversal in the mindso Brazilian higher learning instittions. Universities here are very omal institutions, explains CyrinTey were originally resistant the idea o entrepreneurship. Ovthe past several decades, howevehigher learning institutions haincreasingly provided support entrepreneurship, with incubatosuch as the lab at Fundao Getl

Vargas leading the way.A large percentage o the succes

ul projects developed in universiincubators have been in the inomation technology sector. Brazil widely overlooked as an emergintechnology hub, especially whcompared to Asian tiger econmies or ellow BRIC members Chiand India, but the booming activiin inormation technology cluste

across the country points toward tgrowing role o technology innovtion in the Brazilian economy. Ia particularly prominent sector the economy o Florianpolis, tcapital o the southern state o SanCatarina, whose ocials aspire position the city as a Silicon Vallwith beaches. Another importaI center is Porto Digital, located o

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an island o the coast o the north-eastern city o Recie. Harnessing aready pool o talent rom the FederalUniversity o Pernambuco, the PortoDigital cluster comprises small andmedium enterprises specializing indeveloping soware or export tooreign markets.

Te countrys innovation po-tential is attracting the notice omultinationals. For example, ReciesPorto Digital is home to regionaloces o corporations such as Dell,Microso and Samsung. In anotherimportant vote o condence, IBMrecently announced that Brazilwill be the location o its ninthresearch center; the rst new IBMlab in 12 years, it will also be the

companys rst research center inLatin America, reecting the centralimportance o the Brazilian market.Aer construction o the new lab iscomplete, IBM is planning to con-solidate its handul o researchers atexisting locations in So Paulo andRio de Janeiro, in addition to hiringscores o new researchers rom bothBrazil and other regions.

Following the orays o multina-

tional corporations into the countryis an inux o new money. Venturecapital is still ltering into the publicconsciousness, and the eld is cur-rently dominated by nine majorrms, but new players are revolu-tionizing the capital landscape. Bythe end o last year, nearly $30 billionin venture and private equity capitalhad been committed to Brazil, com-pared to a mere $6 billion in 2004.

While these may pale in comparisonto gures in more traditional invest-ment target countries, investorsinterested in geographic diversica-tion are increasingly looking toBrazil, and the nations traditionallyrisk-averse business community isopening its eyes to the possibilitieso harnessing the capital o investorsseeking a share o prots rom the

regions development.Tis resh mentality, backed by

a rapidly growing pool o nancingoptions, is ueling a wave o innova-tion, and not just in the inormationtechnology sector; even traditionalindustries have been transormed bynew ideas. Most notably, the 365%

expansion o the agricultural sectorover the past decade is largely due tothe eorts o EMBRAPA, the Brazil-ian Agricultural Research Corpora-tion, which utilized innovativetechnology to help armers convertvast cerrado savanna in the states oGois and Minas Gerais into someo the worlds more ertile armland.

A new initiative in another com-modity industry aims to increase the

productivity o orests, an especiallyrelevant issue in a country tryingto balance economic developmentwith environmental preservation.Financed by international partners,the ambitious project is creating asystem that enlists the cooperationo tree growers and landownersin exchange or a greater share oprots. Many o Brazils pulp andpaper companies are already indus-

try leaders, largely thanks to naturalcompetitive advantages a eucalyp-tus tree here can grow to maturityin just seven years, compared to 15years or similar trees harvested bythe industry in the northern hemi-sphere and the hope is that, byencouraging a more equitable dis-tribution o gains, these companieswill be able to maximize eciencyin a nancially and environmentally

sustainable manner.Tese examples o successul in-

novation in traditional industries aresignicant because, as even the mostoptimistic orecasters understand,Brazil will not become a high-techhub overnight. A commonly citedobstacle is that the nation lacks anecosystem that encourages risk tak-ing and creative thinking, due, in

part, to the act that the economwas closed until a couple decadago, and there was little incentior product innovation. When tcountry did begin to open up trade, skyrocketing interest ratdiverted corporate priorities awrom meaningul innovation, wi

the exception o a ew pioneers.In some ways, the continu

lack o high-tech innovation is tproduct o the handsome prothat are available in more traditionindustries. Never beore have Brazian coee, soybeans, bee and papproducts been in such high demanthe incentives in these industries atremendously enticing or jobseeers and investors alike. As a resu

the majority o the best new ideasuch as novel business moderemain conned to the agriculturand mineral commodity corportions.

Many native businessmen viethis dual-track role o innovatioas a national asset rather than weakness. Te long-term goal is push the countrys exports up tvalue chain, but this does not r

quire abandoning the industries thhave brought the nation to wheit stands today. Indeed, there isgrowing conviction that Brazil ccreate its own developmental modby leveraging its natural competitiadvantages and maximizing returin traditional industries while layinthe groundwork or a orward-looing economy based on homegrowinnovation. And i the current

small but growing role o innovtion in the national economy is ansign o what is to come, the uturebright or the Brazilian model.

Paul is a junior Cognitive Scienand International Studies major Berkeley College.

8/7/2019 BSM Spring 2011


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Political Economy

Outsourced in America Te growth and transormation o the overseas outsourcing industry

In the all o 2010, NBC beganbroadcasting Outsourced, a comedywhere the American Midwest meetsthe exotic East in a hilarious cultureclash. In this show, American oddDempsy is sent to run his companysIndian call center, the locus o notonly ubiquitous oce politics, butalso cultural misunderstandings. O

course, televisions ascination withthe clash o culture and civilizationis not new, but this storylines subjectmatter is quite unusual: outsourcingis rarely approached outside o newsbroadcasts and rarely is seen as odderor humor. Indeed, with the UnitedStates unemployment rate hoveringaround 10%, outsourcing has onceagain become a major buzzword.

Tese days, shipping jobs over-seas is a mainstay o economicdiscussions. In the inormation tech-nology (I) industry alone, Indias Iexports have exploded, as reporterDan Rather notes in an investigationo Indian-American trade deals, to$50 billion rom $6 billion over thelast two years. However, the Under-secretary o Commerce or Inter-national rade Francisco J. Sanchezcontinued to express condence inAmerican companies commitment

to their end o these trade deals tocreate American-based jobs as well.

Do the broadcast o the showOutsourced and UndersecretarySanchezs expression o condenceindicate a positive shi or theUnited States in the outsourcing oAmerican jobs, or is it acceptance othis now-entrenched practice in oursociety? Perhaps a broad investiga-

tion into the status o the outsourcingindustry in todays economy will shedsome light on this still controversialissue in American society and whereOutsourced ts in this puzzle.

Te greatest attraction to out-sourcing any job rom line manu-acturing and order processing to Iand legal research is labor arbitrage.Tis eect has ollowed the relax-ation o international trade barriers

and signies the movement o jobsto nations where labor and the costso doing business are signicantlylower. However, in recent years, theeect o labor arbitrage has decreasedsignicantly due to ination in manyother countries. Tus, companies canno longer apply the same strategiesand methodologies as they have inthe past when deciding to move orexpand overseas operations.

Instead, as a recent BusinessWeekarticle notes, the new idea takinghold is transormational outsourc-ing, the idea that outsourcingneeds to be about more than justthe bottom line now, a term thatconnotes positive change or all par-ties. As part o this line o thought,outsourcing should consider broadcorporate growth, maximizing therole o American sta, and perhapseven creating additional supporting

jobs in the US. Both small companiesand intimidating multinationals arein act utilizing this idea to maximizeeciency and customer service:small companies believe that or thespeed and cost, the level o passionand commitment oshore is higherthan those in-house, while largecompanies oen want to steer theirbest domestic workers toward con-

stant, high-quality innovation.However, a recent study by Du

Universitys Center or InternationBusiness Education and Researtogether with Te Conerence Boaound that average cost savinachieved by moving jobs oshohas declined over the past ve yeaTough partly attributable to intion, the study ound that the compnies surveyed were weighed down

hidden costs o outsourcing, suas lack o eciency. Indeed, goinback to the idea o transormationoutsourcing, the companies thwere most successul in the CIBEsurvey were those that had employa corporate-wide strategy to guioshore decisions.

In terms o production, exporrom low-cost countries dropp$800 billion at the height o tnancial crisis (rom $3.8 trillion $3 trillion). According to a BostoConsulting Group report, the lack recovery rom these levels indicatthat companies today do accouor the total costs o outsourcinNear-sourcing is the latest trenin production, where companies amoving production toward LatAmerica. David Spooner, a ormer Utrade negotiator, touts that throuCAFA (Central America Free ra

Agreement), the average piece clothing imported to the States cotains 70% American-made yarn anabric. Yet this gure remains inheently problematic or many peopthe article o clothing is still made non-Americans. Corporate Amerimay be revamping their processes bthis idea o cost advantages continuto hold precedence over many oth

By Jennier Barrows

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perhaps more patriotic, consider-ations. An investigation o the I andother more white-color industrieswill conrm this view. However,these perspectives are complicatedby a tension between componentso transormational outsourcing andthe overarching desire to compete

with costs.An Outsourcing Viability Index

by PI, Inc., an I consultancy,recently noted that based on sixmeasures including inrastructure,technology, and education the AsiaPacic region dominated the top 10out o 51 countries. As one wouldexpect, India is the powerhouse othis movement. IBM, or example,has more people working in India

than in the United States. Indeed,India has roughly 2 million peopleemployed in outsourced I and busi-ness process (e.g. order processinglike that in Outsourced). Tesetwo industrys exports are expectedto grow by 18.7% to $59 billion thisyear. O note, however, is the act thatlast year, the Philippines earned $5.7billion over Indias $5.5 billion in callcenter revenues, demonstrating theincreasingly competitive interna-tional stage or outsourcing.

Strangely, while many in the Statesonly associate painul experienceswith these call centers and I supportdesks, in act many Indian compa-nies are adopting practices to ensuresmoother processes and reduce notonly the misunderstandings betweenthe customer and the employee,but also the inter-oce clashes thatare humorously eatured on Out-

sourced. In the second episode oOutsourced or example, we seeom Dempsy attempt to completeemployee reviews as he is aced withring one employee. Indeed, Indiancompanies are adopting Westernmanagement ideas such as leadershiptraining, 360 degree eedback, andeven Sig Sigma as integral elementso their business practices.

Arguably an element o overallcorporate growth, the integration oWestern practices has also dovetailedwith the integration o Indian work-ers into the American physical workspace. A sort o reverse outsourcing,American companies are now hiringoreign nationals to do work in the

States. Strangely, less than a third othe companies in the CIBER surveystated that outsourcing innovationservices was a result o a lack oqualied domestic workers. Tecontradictions o this industry areunderlined by the example o Inosys.In 2010, the company wrote in its Se-curities and Exchange Commissionling that the discontinuation o theUnited States H-1B and L-1 visa pro-

grams, which allow Indian nationalsto work in the United States, wouldpose a signicant risk to its businessmodel.

Companies in India o Ameri-can or Indian origins are highlycognizant o the negative perceptionstheir location and growing promi-nence have in the American psyche.Last August, Senator Chuck Schumerwent so ar as to call Inosys one othe largest India I companies withlocations in 33 countries a chopshop, dealing a rhetorical blow tothe perormance strength o Indiancompanies. o counter these eel-ings, the US India Business Council(USIBC) suggested that i IndianI companies created jobs in theUnited States or Americans (canjobs outsourced to India actuallybe outsourcedback to the UnitedStates?), negative American thought

could begin to dissipate. It is unclearwhen this pushback strategy willbe implemented i ever, but theramications o this suggestion areinteresting to contemplate.

Te USIBC argues that the US,still plagued by high unemployment,would welcome the creation o thou-sands o new jobs. At a time when theUS has lost roughly 250,000 I jobs

over the last two years, Americagreatly desire the chance to woagain. Just how eective this inititive will be against growing senments o protectionism is dicuto ascertain, considering the stronpatriotic emotions tied to this movment. However, it is clear that t

growing dominance o India anChina and the Philippines, or thmatter in white-color proessionwork means increasing competitioor educated Americans.

Perhaps, as om Kim, a transpotation researcher at Goldman Sacin Hong Kong, states, discussioabout jobs moving back to the UnitStates are unreasonably overhypeGiven the current trends in the ou

sourcing industry, India, China, anthe rest o Asia will only continue attract more multinational rms they nd new ways to cut costs anadd value.

Te rapid growth o demand India or outsourced jobs is clein a recent story accounting a pilproject in a high-security prisonear Hyderabad, a business proceoutsourcing hub in India, in whiprisoners are being trained to woin an on-site call center. Almostraight out o a television serial, thdevelopment underlines the prestio outsourced jobs in India, whewhite-color proessional jobs cgarner $9,000 a year.

Tus, its dicult to understanthe place that Outsourced has anwill have in American minds. Whmet with positive reviews in Indand bought or a ull season on NB

the show does come at a pivotal timin American politics. It may be thcomedy is the best way to relieve tstress.

Jennier is a junior History major Davenport College.

8/7/2019 BSM Spring 2011


Finance

Warren Buett, who has callednancial derivatives weapons omass destructions, singled out thecredit deault swap as a ticking timebomb. Leading European politi-cians such as Nikolas Sarkozy and

Angela Merkel have blamed nakedcredit deault swaps that is, swapspurchased by investors not holdingthe underlying security as a rootcause o the Greek economic col-lapse in the summer o 2010. In therun-up to the Greek collapse, GreekPrime Minister George Papandreouscathingly noted how Greece hadbecome the latest target o un-principled speculators. Billionaire

nancier and speculator GeorgeSoros has himsel criticized specula-tors or using credit deault swaps,calling them vehicles or brazenbear raids that heighten volatil-ity throughout the global nancialsystem. Critics o the credit deaultswap have pointed to how the in-strument accelerated the collapses oBear Stearns and Lehman Brothersand necessitated an approximately

$62.5 billion bailout or the insur-ance giant, American InternationalGroup (AIG).

In the light o such vitrioliccriticism o the instrument, erriDuhon, who created the rst BroadIndex Securitized rust Oering(BISRO), a proto-credit deaultswap, as a 25-year old M.I..graduate or J.P. Morgan in 1997, re-

sponded indignantly, Sadly, theyvebeen viliedIts like saying its theguns ault when someone gets shot.Indeed, Duhon raises the salientquestion o whether credit deaultswaps pose an intrinsic danger to thenancial system. While the reputa-tion o credit deault swaps has been

tarnished with a broad brush, thisarticle will ocus on sovereign creditdeault swaps purchased by debtinvestors to guard against sovereignrisk (the risk o a country deaultingon its obligations).

ool or Efcient Price Discovery?A recent report prepared by ana-

lysts at Citigroup compared creditdeault swaps to mirrors which canaccurately portray the conditiono the underlying security, betterinorming an investors decisionmaking process. Tese advantagesbecome particularly clear whencontrasted to the expert-based as-

sessment o credit ratings. Credratings are quickly rendered oudated by market movements. addition, agencies suer rom whis known as an agency problemthat is, a conict o interest robeing paid or their services anproviding independent, objecti

credit assessment. In contrast, treexive, market-based measuro credit deault swaps oer markparticipants real time and unbiassovereign credit risk assessmenthat can help investors.

However, price discovery is na one-way process. While markparticipants investment decisioare indeed shaped by credit deauswap prices, their decisions in tu

the prices. George Soros has dscribed this interaction as reexivia two-way eedback mechanism which reality helps shape the particpants thinking and the participanthinking helps shape reality in unending process[which] inteprets social events as a never-endihistorical process, not as an equilirium situation.

Tis inherent reexivity o t

credit deault swap allows it to odistinct benets. Most signicantthe ecient price discovery mechnism o a credit deault swap allowinvestors a more judicious valuatioo sovereign debt. Tis helps redunancial instability because invetors can invest more closely to therisk and reward appetite.

However, that sovereign cred

By Monish Shah

Credit Deault Swaps:A icking ime Bomb? An analysis o the impact o reexivity on credit deault swaps

While market par-

ticipants investmentdecisions are indeedshaped by creditdeault swap prices,their decisions in turnshape the prices.

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deault swaps can be traded in realtime is a double-edged sword. Te

eciency in price discovery whichmakes the credit deault swapbenecial to nancial markets onlyoperates in an ideal scenario. Moredisconcertingly, the reexivity othe credit deault swap causes sig-nicant nancial instability. Justas alling sovereign credit deaultswap spreads indicate a decreasingcredit risk, rising sovereign creditdeault swap spreads ring alarm

bells on increased sovereign creditrisk. Advocates o the credit deaultswap argue that the instrument hasbecome an expedient lightning rodor politicians and the media as thebearer o bad news about underly-ing sovereign debt.

Yet, is the reexivity process ocredit deault swap actually accuratein its assessment o underlyingcredit? Aer all, the market is not

made up o perectly rational actorswho respond and inorm the marketprice objectively. I stock prices aresubject to wild, irrational swings dueto animal spirits among investors,why should the credit deault swapbe exempt? Tis property makesthe credit deault swap all the moreunstable to the market.

Irrationality o Animal SpiritsSubject to an arbitrary process o

reexivity, animal spirits can causecredit deault swaps to reveal alsepositives rom irrational markethysteria. Tis volatility o creditdeault swap movements cannot beexplained merely through a unda-

mental analysis o sovereign debt,but must involve a close study omacroeconomic and scal variableslike levels o debt and decit.

A Financial imes Alphavillenote entitled Its Not Just theEconomy Stupid recently reached aconclusion on the importance o be-havioral actors like risk aversion incredit deault swap spreads, statingthat when markets move, the Pav-

lovian reaction o economists is tolook or a undamental explanation.We tried to explain the behavior(sic) o spreads only by undamentalvariables. We used scal variables[and] macroeconomic dataTeresults, rankly speaking, are appall-ing. In act, the economists oundcompelling evidence o a regimeshi that is, a statistically signi-cant risk aversion when they used

data rom the latest Eurozone crisis.Tus, credit deault swap spreads aremore than just passive reections oeconomic conditions, but rather arereections o market participantspersonal biases.

Te real-time reexivity o creditdeault swaps would give investorsthe condence that they would beable to time an exit rom a troubledsovereign. Yet, with many investors

simultaneously seeking to exit atroubled sovereign, credit deaultswaps signicantly ampliy the dis-tressed sovereign credit risk signal.Tus, in what is a classic prisonersdilemma situation, what is good orthe individual when done alone,need not be good or the marketwhen done in unison. Te herd-like

behavior negates individual actioand causes a sel-ullling contgion.

A rising credit deault swspread would be a sign or an invetor to sell the underlying debt. Yselling begets selling, sparking mass sello in the market. Wh

the stampede o the herd towarthe exit door is highly dangeroon its own, adding bear raider(speculators who look to prot rodistressed debt) to the mix exacebates the instability caused by trelationship between reexivity anhuman behavior.

Te Speculation o Naked CredDeault Swaps

Bear raiders identiy distressdebt and purchase the associatcredit deault swap without owninthe underlying debt hence tterm naked credit deault swaSince the credit deault swap untions as insurance or investors, tdemand or it increases in times market distress. Tus, the nakcredit deault swap creates a morhazard or speculators to spark

run on the underlying security.By shorting the underlying sove

eign debt or even the countrys curency, speculators can prot roshort-selling. But, a run on tunderlying sovereign debt causan increased demand and price sovereign credit deault swaps. Tuspeculators can enjoy the upside a credit deault swap by holdingor a short time beore selling it

debt holders seeking a hedging tooHence, author Daniel Gross hlikened the purchase o a credit dault swap to that o a casino chipMany people buying credit deauswaps or a country dont expect collect the insurance; they expect sell the insurance policy to sombody else. For investors, sovereig

8/7/2019 BSM Spring 2011


deault swaps are not buy-and-holdinsurance policies. Tey are a ormo casino chip he states.

Te Greek Finance Ministersimilarly accused unprincipledspeculators o making billionsevery day by betting on a Greek de-ault. Hedge unds have commonly

been singled out as unprincipledspeculators. Paul Krugman too haspithily observed that hedge undsdont hedge. Hedge unds counterthis criticism, arguing that they playa crucial role as sellers o much-needed sovereign deault insuranceat a time o heightened concernabout the underlying economy.Contrary to common perception,hedge unds oen go long. Michael

Ampden-urner, an analyst atCitigroup, reports that credit deaultswap spreads on Greece would havebeen even higher without hedgeunds acting as willing sellers tobanks seeking insurance or theirexposure to Greek sovereign debt.While this deense soens thecriticism o hedge unds as shortsellers o credit deault swaps, it isimportant to remember that hedge

unds originate and distribute creditdeault swaps. According to a reportby Bank o America, hedge undsaccount or 31% o all credit deaultswap issuances, including sovereigncredit deault swaps.

Tus, while reexivity is a two-way process between the sellerand purchaser o the credit deaultswap, it is not merely a zero-sumspeculative bet. Rather, the eectsripple through the economy as thesellers o naked credit deault swapslike hedge unds pass on the risk to

other entities. Tis creates a web oopaque connections throughout thesystem that can spark internationalcontagion. o adapt John Keyneswords, the markets can stay irratio-nal longer than a sovereign can staysolvent.

International ContagionMichael Lewis and David Ear-

horn have compared the practice o

buying naked credit deault swapsto buying re insurance on yourneighbors house. Despite the mali-cious implication o this description,there are good reasons or investorsto purchase naked sovereign creditdeault swaps. More importantly,the reexivity o the credit deaultswap allows it to wreck havoc evenat low volumes relative to the under-lying sovereign debt. Richard Portes

has likened the impact a low volumeo sovereign credit deault swapscan have to George Soros amous$10 billion wager against the Brit-ish pound in 1992. Tis was a mereraction o the approximately $100billion which made up daily oreignexchange trading volume in thepound. Yet, the symbolism o Sorosaction was signicant enough tocreate a selling renzy, even though

the actual amount o the bet wassmall.

Te danger o a renzy caused bysmall changes is particularly acutein todays age o global reporting,high requency trading, and globalcapital markets. Mark-to-marketaccounting magnies the impact oany bad news on the underlying sov-

ereign debt. Indeed, Robert Shilland George Akerlo have writtabout the importance o storiein shaping the mood o the maket. Credit deault swaps are noregularly reported by the nancpress and have entered the lexicoo most market participants. Tu

these market participants are highsensitive to any widening spreads credit deault swaps. Rising creddeault swap spreads are enough serve as a sign o a souring marksentiment and cause a massive shin investor condence. Moreovehigh requency credit deault swindex trading methods have alreabeen developed that capitalize ospreads rom instantaneous mark

uctuations. Such improved nacial technology platorms can bedouble-edged sword: the reexiity o sovereign credit deault swacan cause small economic, politicor psychological ripples that rapidimpact the larger market.

ConclusionUltimately, credit deault swa

are not inherently benecial

dangerous. Rather, the reexivo the credit deault swap makesa reection o our own collectimoods and they will only prove useul or dangerous to internationnancial markets as we let thebe. It is unsurprising then that tuncertainties introduced by the rexivity o credit deault swaps aposing a big headache or nancregulators.

Monish is a junior Economics majin Morse College.

Te eects ripple

through the economyas the sellers o nakedcredit deault swapslike hedge unds passon the risk to otherentities.

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Finance

China and the American Capitalist Growing trends in international nance and their risks

In the last decade an increase inthe number o oreign companiestrading on American exchanges hasyielded a strong eld o opportunitiesto invest in Chinese corporations.Both microcap startups and recentlyprivatized companies that once weremajor government enterprises arenow traded publicly in the United

States. However, what many amateurinvestors ail to realize is the shakyoundation on which many Chinesecompanies begin trading on Westernsoil. Tough many lucrative oppor-tunities with exponential revenuegrowth exist in China, a startlingproportion o the nations companiesbegan to trade in the United Statesthrough sketchy reverse mergers,bypassing the traditional IPO (initialpublic oering) and the regulationsthat come with it. At the same time,many other Chinese companies havebeen exposed as raudulent, theirnancial statements and tax lingsuncovering suspect operations withexaggerated valuations.

A reverse merger occurs when aoreign company, oen Chinese, osmall or micro market capitalization,merges with the shell o a ailingAmerican corporation that already

is being traded publicly on a USexchange. Tis process allows or acompany to simpliy the IPO processother companies go through to betraded on the NYSE or Nasdaq ex-changes, oering a legitimate path toseeking public capital rom overseasinvestors. In a CNBC article entitled,Chinese Firms Using Back Doorto US Exchanges, Herb Greenberg

estimates that 70 Chinese companieshave used a reverse merger approachto trade their stock on the Nasdaqalone. He has ound that two dozenmore have used the process to list onthe AMEX and another dozen or theNYSE. In total, $30 billion in marketvalue is being traded through thisirregular process.

Even larger Chinese companieshave taken advantage o the process,

which can be completed in justweeks. Whats the big deal? Reversemergers are legal, aer all. For start-ers regulations by the SEC werelax up until a ew years ago in thisarena; and without the backing o alarge investment bank that usuallycatalyze IPOs, trading volumes o areverse merger company are oenslim, ailing to pick up traction orAmerican investors. Further, theseshell companies still carry the stigmao being ailed companies evenaer being newly acquired. Teseactors, and the act that companiesattempting the reverse merger routetypically are valued at no more than$100 million, suggest the allure oemerging companies out o China.

A new variation o the reversemerger has emerged in recent years,known as the Form 10 approach.Tis involves the creation o a shell

company in the US that had neverexisted as a unctioning enterprise.Instead, its ull purpose is to easethe transition into American tradingand bypass the IPO process. A Form10 shell allows a Chinese companyto enter American exchanges with aclean slate, but does not protect theuninormed investor rom the risksassociated with microcap investing

in Asian stocks.Moving beyond the rever

merger approach oen utilized Chinese microcap companies is tmore well-known approach o listia oreign corporation on Americmarkets through an American Dpositary Receipt (ADR). An ADRa certicate representing a oreicompany as shares on a US exchandistributed through domes

nancial instiutions. raded in Ucurrency, an ADR allows or oreicompanies to gain transparency ancredibility in the eyes o Americinvestors who value the prestige o istitutions trading on the big domesexchanges. Tough an ADR allowan investor-riendly approach oreign companies, its value rises analls due to the health o the compain question, and the economic vitaity o the nation in which it resides.should be noted that as the economturmoil enveloped the world, Chipowered through, its real GDP growing an impressive 10% rom 2009 2010. Yet now a growing ear romany amiliar with Chinese markesuggest a property bubble leadinto an American-style market crain the nation. Whether or not thproves true, the idea has lead manto be critical o the rush to Chine

equities.In response to the growing d

mand by American and Europeinvestors to understand the strengo Chinese companies trading America, an index was developwith the same goal as that o the DoJones Industrial Average: to measuthe daily uctuations o the markTe dierence is that the Halter US

By Evan Beck

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China Index has a specic target, itsquantitative value reective o thechanges in price o US-listed Chinesecompanies valued at over $50 mil-lion. As would be expected the HalterIndex surpasses the DJIA, S&P 500,and Nasdaq indices in daily volatil-ity. Te Halter Index has seen gains

o 20% in the last 52 weeks slightlymore than that o the DJIA and lessthan the NASDAQ. Interestingly, thecorrelation between the Halter Indexand U.S. indices strengthens; suggest-ing strong investor aith in domesticChinese investments. As China con-tinues to grow and dominate oreignbusiness news, the Halter USX ChinaIndex oers a new level o amiliar-ity to the amateur and proessional

investor alike.ight capital controls ensure thatthe vast pools o domestic capitalallow strong equity nancing op-portunities domestically as well. Inact, the Shanghai Stock Exchangeis the h largest in the world witha market capitalization approach-ing US $3 trillion. Te emergingShenzhen Stock Exchange is amongthe top een in the world in termso market capitalization, impressiveconsidering it was ounded justover two decades ago. Domesticexchanges are growing powerhouseswith billions o shares trading everyweek. Many Chinese companies havecapitalized on dual listings, allowingtheir shares to be traded across conti-nents, propelling the prole o manyChinese corporations.

Even though Chinese exchangescontrol a noteworthy amount o

world capital, China is notorious ora loose regulatory environment withcompanies known to hire raudulentauditors keeping multiple nanciallings to evade proper tax codes. AJanuary 2011 New Yorker (Dont En-ter Te Dragon) chronicles the risksassociated with the rush to Chinesesmall caps. James Surowiecki writeso RINO International (RINO), a

maker o eco-riendly equipment,which spent much o 2009 on topo Investors Business Dailys 100list. Soon aer, RINO was orcedinto admitting in an SEC ling thattwo o its manuacturing contractsnever existed and had been recentlydelisted rom the Nasdaq or ailureto disclose nancial inormation.Currently RINO trades more than90% below its peak.

A handul o other Chinese smallcaps have been accused o udgingrevenue and prot numbers lead-ing to a shaky climate among mucho the nations American-tradedcompanies. China Sky One Medical(CSKI) is one o Chinas most notori-ous American-traded companies.Any online search o the companywill yield a disturbing array o articlesrelating to the companys shoddy

business practices. In 2009 the SECbegan an investigation into Sky One,soon aer revenue orecasts or theyear were cut and high prole shortsellers began attacking the stock.oday the company is still traded onthe Nasdaq exchange, though at araction o its 52-week high o $18.In the months since the onslaughtrom short sellers, the company has

counted the arguments against business, but the damage to its creibility has already been done.

One may believe the lesson learnis to not trust Chinese equities, bthat would be an incorrect conclsion given the lucrative opportunitithat exist in all emerging markeWith last years GDP valued at US trillion, Chinas economy surpassJapans, becoming the second largein the world. By some estimates will be less than 30 years until tUnited States economy is surpassby China. For these reasons, ignoing investment opportunities the Far East would be a mistake, there are sure to be companies thwill grow into giants in the comiyears. When investing in stocks, is always important to do researand be skeptical. When it comes

China these rules hold true, just tohigher degree. It may hold true thin China, the more risk one endurmay mean more rewards in years come. Only time will tell.

Evan is a reshman in BranoCollege.

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Finance

Reining in Micronance oo much o a good thing?

India, home to a quarter o theworlds poor but also one o thehottest economies, has witnessedan explosion in the activities omicronance institutions (MFI).Te industry has been growing atan astronomical rate: Indias micro-lending has expanded at an annualaverage rate o 62% over the past ve

years in terms o number o custom-ers and by 88% in terms o credit,according to Micro-Credit RatingsInternational Ltd., an India-basedrating company or the industry.While some are ecstatic about theindustrys growth, which they be-lieve oers a promising path out opoverty or millions, many othersare worried by these gures, andperhaps rightly so.

Much o this astounding growthcan be attributed to the push thatmicronance has received duringthe last two decades rom or-protsocial enterprises as well as initia-tives introduced by the government.Te rapid growth o the industry canbe traced back to venture capitalists,private equity rms and commercialbanks that saw an opportunity tomake money while serving a social

need. Te microcredit bubble wasurther inated by governmentrules that mandated lenders tokeep pumping out microloans. Forexample, New Delhis regulationsrequired banks to devote 40% othe money they lent to a categoryo borrowers to go to rural outts,and micronance was a convenientmeans to ulll this obligation.

But such predatory lending with-out looking at the borrowers abilityto pay back the loan is rightening.Tis concern is echoed in the wordso D. S. K. Rao, the Asia organizeror the Microcredit Summit Cam-paign: In [MFIs] anxiety to expandvery ast, they are pushing loans.Tey are not careul in vetting. TeMFIs do not require their clients toprovide collateral or even outline

their business ideas to lenders. Inact, this rapid growth has deterredlenders rom keeping regular tabs onborrowers who are then le to theirown means. In India in 2006, therewas only one staer per 439 borrow-ers according to the MicronanaceInormation Exchange in Washing-ton, a statistic that ared poorly com-pared to the corresponding statisticsin Bangladesh and Aghanistan,

where the ratios were 1:131 and1:54, respectively. Tese numberspointed toward growing negligencein the industry, which was perhapsexpanding aster than it should havebeen. As a representative rom theAll India Democratic Womens As-sociation recently lamented, manyborrowers do not know what theyare getting into. Lenders oen handover the money without taking the

time to educate borrowers, whoremain unaware that there are stipenalties or deaulting on the loans.

What is even more worrisomeis the vicious cycle o debt thatmicronance is creating. Many bor-rowers apply or microloans withoutcomplete knowledge o the systemand the purpose o these loans and,sometimes, do not start businesses

with the money they borrow brather use it to pay or urgent epenses like childrens school ees anmedical expenses. In eect, much the huge surge in terms o numband magnitude o loans $1billion in 2006 as compared to million in 1996 that the industhas witnessed is oen being abusas handouts or consumption raththan as seed money or enterpri

Tis practice drives some o theborrowers to borrow in turn roother sources to repay these loanTey are vulnerable to alling inthe clutch o moneylenders whknow they can charge atrociointerest rates, ueling a cycle o dethat quickly spirals out o control.

Some o these debtors, unable repay their mounting debts, resort suicide. Te increasingly commo

reports o suicide among borrowers, coupled with public anger ovabuses in the micronance indust MFIs were allegedly using orto ensure loan repayment orclegislators in the state o AndhPradesh to delineate the ways which MFIs could lend and collemoney.

Andhra Pradesh is the backboo Indias micronance industr

more than one in every three micrloans in the nation is issued in thstate. Consequently, the pubuproar and the governments stereaction in the state have since sethe micronance industry into scramble, raising questions abothe uture o the industry.

Some politicians in the state haegged on borrowers to cease repa

By Nabila Chitalwala

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ment o their loans, claiming that themicronance industry has becomeno better than the widely despisedvillage moneylenders it was intendedto replace. Vasant Kumar, the statesMinister or Rural Development,claims that these institutes are notlooking at sustainability or ensuringthe money is going to income-generating activities. He argues thattheir sole aim is protability, and

that they are using coercive methodsto collect their money. Backed bytheir political leaders, multitudes oborrowers in the state have deaultedon their payments and it is estimatedthat repayment o loans amountingto nearly $2 billion has ceased. Teoutlook or the industry is dismaland many ear that it could ace col-lapse, at least in this region.

Te perception that these MFIs

are earning outsize prots at the ex-pense o the poor may have stemmedrom the inux o the private sectorinto the industry and the emergenceo many or-prot MFIs. Te catalystor this reaction may have been theinitial public oering o shares oSKS Micronance, Indias largestor-prot moneylender. Te com-pany raised more than $350 million

on the stock exchange and has beenseeing its revenue and prots growby 100% in recent years. In act, SKSChairman Vikram Akula sold sharesworth about $13 million last year,ueling claims that these companiesare unairly proteering on the backso the poor.

In response to such

bsm spring 2011

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