May 28, 2014
Henry Olsen on Ronald Reagan on Entrepreneurship
Posted by Gordon Smith

My law school classmate Henry Olsen has another great column in National Review, this time addressing the current political talk regarding the virtues of entrepreneurship is out of kilter Ronald Reagan's vision of entrepreneurship.

Reagan almost always referred to job creation as something we all did, not something that was the province of the elite few. His speeches did not emphasize, as Romney’s did or as Senator Ted Cruz’s still do, the role of the entrepreneur in creating jobs. He celebrated the effort, thrift, and ingenuity of the American worker, not the American boss.... For Reagan, the entrepreneur was simply another type of citizen, another average Joe. He or she is not greater than us, someone upon whom we depend. He IS us, and our efforts in working are as noble and important as his in creating.


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October 23, 2012
Chilecon Valley: a Startup Community Ferments in Chile
Posted by Erik Gerding

The latest edition of The Economist has a fascinating article on “Chilecon Valley” that discusses the emergence of a startup community in Chile. The article focuses on a unique program of Startup Chile (a new Chilean governmental body) that gives grants to entrepreneurs in the United States and elsewhere to move to Chile for several months as they work on building their company and developing their technology. The grant recipients are then expected to network with, speak to, and mentor Chilean entrepreneurs.

The article touches on how law can foster or hinder the growth of a startup community, including by liberalizing immigration laws and allowing failed ventures to get a fresh start in bankruptcy.

Chile is making considerable efforts to diversify its economy beyond extractive industries like mining and agriculture. My spouse is co-organizing a fantastic three-day conference in Santiago from November 28 to December 1st that will focus on social entrepreneurship, sustainability, and innovation. The conference includes a fantastic line-up of speakers, including a keynote address by Al Gore, a pitch competition for social entrepreneurship startup companies, and some awesome music, including Devendra Banhart and Denver’s own Devotchka. Several panels will analyze the contribution of law to developing a entrepreneurial ecosystem in Chile.

You can check out my wife’s newly launched blog and website on the Chilean startup community here.

Permalink | Conferences| Economic Development| Entrepreneurs| Entrepreneurship| Family| Globalization/Trade| Innovation| Investing| Social Entrepreneurship| Venture Capital | Comments (0) | TrackBack (0) | Bookmark

August 14, 2012
Does The Mittelstand Even Exist?
Posted by David Zaring

The Times has a not that newsy profile of the Mittelstand, today, Germany's vaunted SME sector, and one that counts for 60 percent of its employment.  The big reveal is that the Mittelstand likes the euro, though that calculation is largely on the basis of interviews at one obscure (every Mittelstand company is obscure, that's rather the point) shut-off valve manufacturer.

If you hang out at business schools, the Mittelstand is a useful corrective to everything you think you're supposed to know about finance.  German companies eschew debt, we are told, rely on banks instead of capital markets for funding, and retain their employees at all costs.  Basically the opposite of the private equity playbook.  And yet ... look at the awesome German economy!  It has implications for corporate law, too, given that Mittelstand firms are likely to be closely held, with representation for workers and banks if it isn't just a family thing.  Maybe that's what Delaware ought to be offering!

But I think this obsession with the Mittelstand may be branding more than anything else. Take that 60% employment number.  In the US, though, small businesses account for half, and 65% of all new jobs.  And some Mittelstand firms probably count as large businesses in the American definition (500 employees is the cutoff).  Nor is Germany radically more industrialized than the US, though that's what the Mittelstand is supposed to be.  28% of the country's employees are in manufacturing.  The we-just-do-service United States proportion?  22%

Wiser heads than mine accept the Mittelstand as different - the interest in SME-usable research is an excellent way to fund a project in not just German, but European universities more generally.  But surely some perspective is in order.  It's easy to overstate modest differences, and while I'll be happy to conclude that the German model well and truly is unique, I'd like to see a few more differences between that approach and ours before doing so.

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May 02, 2012
Lawyers as Transaction Cost Engineers in Medieval Germany
Posted by Erik Gerding

Here is a highly productive way for business law professors to procrastinate from grading exams:

The National Bureau of Economic Research just circulated a new version of a paper that provides a medieval complement to the law & finance literature and to Gilson's lawyer as transaction cost engineer idea.  The paper by Davide Cantoni and Noam Yuchtman presents evidence that the training of commercial lawyers by new universities contributed to the expansion of economic activity in medieval Germany.  Here is the abstract:

We present new data documenting medieval Europe's "Commercial Revolution'' using information on the establishment of markets in Germany. We use these data to test whether medieval universities played a causal role in expanding economic activity, examining the foundation of Germany's first universities after 1386 following the Papal Schism. We find that the trend rate of market establishment breaks upward in 1386 and that this break is greatest where the distance to a university shrank most. There is no differential pre-1386 trend associated with the reduction in distance to a university, and there is no break in trend in 1386 where university proximity did not change. These results are not affected by excluding cities close to universities or cities belonging to territories that included universities. Universities provided training in newly-rediscovered Roman and Canon law; students with legal training served in positions that reduced the uncertainty of trade in medieval Europe. We argue that training in the law, and the consequent development of legal and administrative institutions, was an important channel linking universities and greater economic activity.

A very interesting read.

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October 14, 2011
Lions, Tigers and Cars: Detroit on the Rebound?
Posted by Lisa Fairfax

It seems like it is a pretty good year for Detroit.  At least comparatively speaking.  In 2008, Detroit didn't appear to be able to catch a break.  Who can forget the outrage generated by the CEOs of the Big Three Detroit car companies when they flew to DC on private jets to ask Congress for billions of dollars in bailout funds?  The outrage notwithstanding, it was relatively clear that the Detroit car companies were in severe distress.  In 2008 Ford experienced its worst year ever, reporting some $14.6 billion in losses, yet seeking to remain afloat without federal aid.  And it seemed like Detroit sports were going the way of their auto industry.  In 2008, the Detroit Lions made NFL history with their perfectly winless 0-16 record.  In baseball news, even though so were saying they could win the World Series, the Detroit Tigers finished last in the AL Central and with one of the worst records in the league.  And in basketball news, the Detroit Pistons ended the season with a losing record after being swept in the first round of the playoffs.  So the sports woes and the corporate woes seemed to be piling on.

Which is why (even as a Red Sox and Patriots fan), I will admit to rooting for Detroit these days, as it seems to be making a dramatic climb back.  Indeed, while Detroit's auto industry is not yet out of the woods, there are signs that the auto industry is experiencing a recovery, with companies reporting increases in sales and profits as well as increases in worker benefits and plant investments.  And the sports teams appear to be experiencing a serious comeback.  The Detroit Lions are 5-0 for the first time since 1956.  And after beating the Yankees in game 5 of the ALDS, the Detroit Tigers beat the Rangers yesterday in the AL playoffs, keeping their World Series hopes alive though they are down 3-2. I have found myself pulling for them.  Partly because the optimism about Detroit sports' teams seems to impact optimism about the city and its economy.  In that regard, it certainly feels like all the industries are seeking to rebound together, which could mean that the city, its auto industry, and its economy could be looking at happier times--even if they cannot manage to bring home any titles.  Game 6 is today though. . .so Go Tigers!

Oops--looks like Game 6 is tomorrow. So one more day to wait it out.

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September 30, 2011
Assessing DC's Bag Tax
Posted by Lisa Fairfax

When it was enacted, I blogged about DC's bag tax law which went into effect in January of 2010 and charges customers five cents for each disposable bag they take at checkout.  After well over a year, several studies have emerged assessing the law's impact, with some conflicting results--perhaps reflecting the conflicts inherent in such a law.

On the one hand, at least one study suggests that the law is having a negative impact on DC's economy and jobs in the area.  According to the study, the law causes people to purchase fewer items and avoid shopping in DC, leading to a drop in sales and a corresponding drop in jobs.  The study also points out that the law has not generated the amount of revenue proponents projected, indicating that the revenue collected under the law will be at least $1 million less than expected.  To be sure, this revenue shortfall highlights a potential contradiction of the law--to the extent it successfully encourages reduction in bag use, one should expect a corresponding reduction in any revenues associated with that use.

Advocates of the law appear to insist that the law is a win-win for DC’s economy and environmental efforts.  First, such advocates question these negative studies not only because they fail to pinpoint any actual job loss, but also because they do not seem to account for other studies in which most business owners report that the law has either had no impact or a positive impact on their business.  Proponents also point out that business owners receive one cent out of the five cents collected under the law.  Second, advocates note that the law has led to significant reduction in bag use.  Hence, one study found that after the law's enactment, customers used 3.3 billion bags in one month, compared to an estimated 22.5 billion being used prior to the law taking effect.  Estimates of the overall reduction in bag use range from 50% to 80%.  And this reduction has an impact on bags found in the Anacostia River.  Hence, one cleanup agency reported a 50% drop in the number of bags found in the river, suggesting that the law is having its desired environmental impact of helping cleanup efforts at the river. 

Since the law's enactment I certainly have found myself using less disposable bags and more reusable bags.  There are also many times when I am buying a small number of items where I simply will not use a bag, and this is true both in DC and in places where there is no bag tax law.  So the law has changed my behavior and I was interested to know if it was having its desired impact--but perhaps that depends on your perspective about the desired impact the law was aimed at having.


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June 23, 2010
Still Fuming Over May Kristof Column: Moonshine or the Kids?
Posted by Christine Hurt

So, I've been traveling a lot the last month, and I tend to read the paper on the plane and think "I need to remember to blog about that."  As I have nothing to add to current debates over futbol or Generals Gone Rolling Stone, I thought I would go back to an editorial in the May 23 NYT that still has me upset.

Nicholas Kristof titles his op-ed about African parents making good economic choices for their kids as "Moonshine or the Kids?"  So, already you know where this is headed -- ignorant people drink "moonshine," so this must be about ignorant people.  It's not "Pinot Noir or the Kids?" or even "Heineken or the Kids?"

Kristof recently went to the African Congo.  There he saw families that were extremely poor whose children did not go to school because of the $2.50 monthly fee and did not have $6 malaria nets.  But, he noticed the parents in these families had cell phones ($10 month for both) and that fathers still drank alcohol, sometimes to the tune of $12 a month.  He then makes the following sweeping statement about "the ugly secret of global poverty, one rarely acknowledged":

It's that if the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children's prospects would be transformed. Much suffering is caused not only by low incomes, but also by shortsighted private spending decisions by heads of households."

I have a news flash for Mr. Kristof: African heads of households are not alone here.  As my dad used to say when I would ask why high school kids I knew had really nice cars:  "Anyone can make a car payment."  I guess the analog now is "Anyone can make a cell phone payment."  Let's think about Mr. Kristof's specific educational trade-off in terms of life in the U.S.

I have not been to the Congo, but I have been to Malawi, which is even poorer.  Malawi is an agrarian society, where most people are subsistence farmers.  There are some skilled professions, and of course some white-collar jobs in the cities.  Most people in the poor areas make $1 a day.  (The man in the Congo sells stools he makes for $1, so let's say he makes $1 a day also.)  In the United States, (according to the Census Bureau for 2008), the mean income is $51,233.  Assuming a five-day work week, 52 weeks a year, that's about $200/day.  So, the Congolese man needs $2.50 a month to send a child to school, which might be the equivalent of $500/month for the same U.S. man.  In Malawi, primary school is free, but secondary school is not.

In the U.S., public elementary education is free, but college education is not.  In our information society, college education is arguably as important as a high school education in an agrarian society.  How hard would we have to look to find a family in the U.S. who would say they couldn't afford $5,000 a year to send a child to college but smoked, drank alcohol, had cable, or had a cell phone?  In New York, additional taxes are going to send the cost of one pack of cigarettes to $9-11, making a pack-a-day habit a $4000/year habit.  Would Kristof really have to go to Africa before he found a parent who smoked, but didn't start a 529 plan?  Would he feel as bad for the American kid who couldn't go to college or who graduated with a large student debt burden as he does for the African child?

In the U.S., we have a lot more things to waste money on besides "wine, cigarettes and prostitutes."  I'm sure Kristof could come to my house and start pointing to Netflix, satellite TV, cell phone plans, organic milk and even a NYT subscription and chastise me if I said I couldn't afford something for my children.

Kristof is right that some of the vagaries of deep poverty can be alleviated by microbanking, which allows the unbanked to put cash out-of-sight and out-of-mind before temptations to spend come along, and also by focusing aid efforts on women, who tend to be savers, or at least "children first" in their spending.  But the one thing that I realized when I was in Africa talking to microborrowers is that all wage-earners are the same:  we are all tempted to use our wages, however small or large, on non-necessities.  Particularly when necessities seem large ($75 a year to send three kids to primary school) and the luxury seems small ($1 for a night drinking with buddies).

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December 09, 2009
Cobell and the Mighty Judge
Posted by David Zaring

The resolution of the Indian Trust litigation made the front page of the Times, and I can't say I'm surprised.  The government doesn't usually pay $3.4 billion to anyone, in damages at least, and this case involved the holding of two secretaries of the interior in contempt.  That's rare too.  But there was nothing like Cobell.  As AAG Tom Perrelli said in announcing the tentative deal, "This case involves allegations of breach of trust that literally go back to the nineteenth century and has taken 13 years, through seven full trials and 192 trial days and ten rounds at the Court of Appeals, to reach this point."  Here's the AG on the settlement, and the president released a statement too.

Left unsaid was how many of those trips to the court of appeals led to reversal of the trial judge, and, eventually, reassignment of the case out of his court.  The case demonstrated how powerful a determined district court judge could be; I suspect that few expected at the beginning of the case that it would end up being worth billions, but that is what happened, and I assume the repeated cudgelling of Justice and the Department of the Interior in court contributed to that number. 

The last time I heralded an end to Cobell, it was over a year ago, and looked like it would be worth $455 million:

it took decades, the prevention of the use of email by the Department of the Interior for a matter of months, ten appeals to the DC Circuit, the removal of the case from a very angry trial judge, but finally, despite plaintiffs' best efforts, a court has issued a damages determination.  $455 million.  Kinda a lot, but the plaintiffs turned down $7 billion not long ago.  They wanted $27 billion. Cobell isn't a very businessy case, but to many DC litigants, it was, until today, what plaintiffs dreamed about.  Endless discovery, lots of sanctions requests, many of which were granted, the opportunity to stop a government agency dead in its tracks, and maybe a rich settlement in the future....

We will see if this settlement sticks.  I've written about this sort of management by litigation here and here, if you're interested in that sort of thing.

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September 30, 2009
Microfinance in Malawi
Posted by Christine Hurt

Hello!  I am back from Malawi, and my head is still spinning.  After spending a week or so in a country where 2% of residents have running water, I have to say that I doubt I'll look at most of our luxuries the same.  I'm sure those of you who have traveled in developing countries have already experienced this strange re-entry, but I'm processing. . . .

Anyway, for two days in Malawi my group shadowed employees from Opportunity International in an effort to understand its microfinance operations "on the ground."  This experience was very beneficial in beginning to understand why microfinance can work and why it sometimes doesn't.  The operations that we observed begin and end with monitoring.  As far as underwriting criteria go, the one thing that gets the loan officers comfortable with the borrower is monitoring.  This is a country where few borrowers have access to paper, and no one I saw had electricity in their house, so no one had an in-home computer.  Never mind the Internet.  Documentation on business revenues, cost, and profits is probably nonexistent before the first loan.  So, loans begin very small -- about $100-150.  The timeline to repay is short -- a month or two.  The interest rate is not nominal -- 2.5% a month.  If the first loan is repaid, then the borrower may get a second loan.  There are no refinancings of unpaid loans.  And, borrowers must have an "exit plan" -- a plan to build up savings so as to quit borrowing at some point.  To get there, borrowers are required to deposit weekly into a security account with their trust group (more about that in a minute) and into a savings account.  Borrowers are also taught how to keep business records and calculate profits.


But wait, there's more.  The loan officers are titled "Transformation Officers," and this is no joke.  To borrower from Opportunity International, borrowers must attend Transformation Meetings.  I attended one (in Chichewa, a language I do not speak), and it was like attending church.  The officer gave a sermon about reinvesting one's profits into one's business.  Two analogies that stuck out -- Opportunity International was like your friends helping you jump start a car with a bad starter.  They arent' going to push you your entire journey, just at the beginning.  Another analogy about reinvesting profits involved a farmer eating his seedlings.  These meetings are monthly.  In addition, each borrower is part of a "trust group" from her/his village.  Trust groups are generally 7-10 people, who guarantee each other's loans.  Each trust group is instructed to write a "constitution," which is basically a partnership agreement detailing what to do with defaulters.  Because citizens of Malawi feel deep ties to their villages, these trust groups are powerful forces.  Defaulting and having fellow villagers pay your debt would create grave reputational consequences.  Once a borrower has 5 or 6 successful borrowings, they may "graduate" and become an individual borrower.


So, we visited two trust group meetings and one transformation meeting.  We also visited the Limbe branch of Opportunity Bank and visited several clients in the Blantyre market.  Although brochures tend to depict colorful pictures of borrowers starting schools or selling fresh fruits and vegetables, the clients we saw in the two days eked out grittier livings.  The selling of secondhand clothes was a popular business (these are clothes that we have donated to Goodwill once or twice and have made their way to Africa in bales, which are sold to dealers).  So was the sale of potatoes, bananas, "freezes" (popsicles), cooking oil, dried fish and "time" (cell phone minutes on scratch-off cards).  The places of business may be a stand outside a house, a stand by the side of the road, or in a market.  That being said, these loans had changed people's lives, enabling them to buy their goods wholesale instead of retail, open up multiple stands, hire employees.  Life is hard in Malawi for business people -- there seems to be very little shipping of goods as we know it.  Resellers travel for hours on buses or in vans ("minibuses) to South Africa or Mozambique for goods.  (We brought medical supplies in our suitcases to the Mulanje Mission Hospital because shipping is so unreliable.)  There is no refrigeration for storage.


Opportunity International also provides the great service of banking.  For the villages that we visited, there are no banks.  So, Opportunity Bank has a mobile bank (like a Brinks armored car) that goes to each village once a week.  (The week we were in the Mulanje district, Monday was a holiday in honor of the last day of Ramadan, and people were very upset that the mobile bank hadn't come!)  This allows people to save each week and to also make payments on their loans.  These businesses are cash businesses.  I saw no checks in Malawi.  A few places (our hotel, etc.) would take credit cards, but the fee was as high as 10%.  So, people get cash every day and have no place to put it.  At one trust meeting, a female client urged Opportunity Bank to open a physical building in Mulanje (they plan to) because, as she put it, she is tempted to misuse her profits when she has to wait a week to deposit them.  At the same trust meeting, a male client challenged Opportunity's policy of requiring savings account deposits during the term of the loan.  If he was getting loans to grow his business to provide for his family, then shouldn't he be able to use the profits for things in his house?  The answer from the trust officer was simple:  Sure.  After you repay your loan, you can use profits for whatever you want. 

There have been reports about a possible microfinance "bubble" -- private equity firms coming in, doing "no document" loans, refinacing microloans, borrowers with huge microdebt and no business to generate profits.  There is more competition in the microfinance industry.  The borrower who wanted to spend his profits made clear that other microfinance outfits were offering loans with no such strings.  The more sound way to run a microfinance organization in developing countries seems to be the Opportunity International way -- transforming the borrower, training the borrower, monitoring the borrower.  OI also employed Malawians, who were familiar with the villages and the marketplaces.

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September 12, 2009
Securities Law Impediments to Entrepreneurship
Posted by Darian Ibrahim

My research has focused on how sophisticated entrepreneurial parties – including angel investors, venture capitalists, venture lenders, and entrepreneurs – structure their relations, and how the corporate, securities, and commercial laws respond to their unique needs. In my venture debt paper, I discuss how lender liability and equitable subordination rules shape venture lender practices. In this post, I’ll focus on the securities laws.

First, there’s the exit structure of venture capital (with credit to Gordon for an excellent paper of the same name). In the past, hot IPOs allowed VCs to return big gains to their fund investors. In this recent public policy proposal (click on the Apr. 29, ’09 doc), the National Venture Capital Association laments that there were only six IPOs total in the U.S. in 2008. The securities laws aren’t helping the situation. As Larry Ribstein and others have observed, the costs of going public thanks to Sarbanes-Oxley have dampened the IPO market, and there’s a legal minefield we teach in the securities course known as the gun-jumping rules that makes the IPO process far more cumbersome and error-prone than the process for seasoned public offerings. Sure, a start-up needs to provide more disclosure than Microsoft, but it’s not like no one has vetted these companies. They have been subject to rigorous and repeat scrutiny from (venture) capital markets from their inception. Why are the gun-jumping rules so complex?

Second, long before exit, private placement rules and broker-dealer laws might be impeding optimal levels of funding from angel investors, the precursor to venture capital. In my last paper, Financing the Next Silicon Valley, I explored both the ban on general solicitations in private placements and the reach of the broker-dealer laws to see whether angels had reason to fear the application of these laws to their activities. I concluded that there is a plausible case that the letter of these laws, if not the spirit, are indeed violated by routine angel group practices. First, when entrepreneurs approach angels (and VCs) without a “preexisting relationship,” as they do whenever they send a business plan cold, there appears to be a general solicitation. This leads to a host of potentially bad outcomes including recission rights, dissuading follow-on VC financing, and delaying an IPO. Second, when individual angels take the lead on a start-up’s due diligence for their group and receive extra stock in the start-up as compensation, they arguably fit within the definition of a broker-dealer. I can’t imagine that the broker-dealer laws were meant to apply to this situation, and granted the SEC hasn't enforced either of the laws I mention (to my knowledge), but the cloud of uncertainty they hang over angel group practice certainly isn’t enticing more angel investments, at least according to my sources.

Bottom line: with our traditional economic engines like Wall Street finance and the auto industry in crisis, we need start-ups more than ever, and there won't be start-ups without angels and VCs. Market forces have already hit these investors hard; the securities laws shouldn’t exacerbate the problem. The SEC and Congress should re-examine these laws and ease up a bit to help keep our entrepreneurial culture going strong.

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May 30, 2009
200 years that changed the world
Posted by Gordon Smith

This is a fascinating presentation, which I found on Althouse:

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August 29, 2008
The Economic Power of the Red Sox?
Posted by Lisa Fairfax

The New York Times has a story about Sarasota, Florida's efforts to get the Red Sox to relocate their spring training operations to Sarasota.  And not really because of any deep loyalty to the Red Sox, but rather because Sarasota officials believe that such a relocation will significantly boost their economy.   As a result, officials have waged an all-out effort to lure the team.

Here's where I admit that I am a Red Sox fan, and I suppose I realized that many Red Sox fans tend to be serious about following and traveling with their team.  But it never occurred to me that a town--other than Boston of course--would seek to build its economic plans around the team.   Yet according to the New York Times article, Sarasota officials think that the team would boost tourism, encourage the growth of businesses, and maybe even increase real estate prices in the area.  Moreover, the New York Times article indicated that a study done for Sarasota suggested that the Red Sox would generate $46.5 million a year in economic activity.  So perhaps focusing on the team's relocation is not such a bad idea. 

To be sure, some Sarasota residents seem skeptical about building their economic stimulus plan around a professional baseball team.  And interestingly, yesterday hosts of a sports talk show were discussing the problem of low attendance at the Tampa Bay Ray's stadium--despite Tampa Bay's strong standings.  Their discussion indicated that there were a number of reasons for the low attendance such as the stadium's location, the slumping economy, ticket prices, and the possibility that the retiree community in Florida may simply be more likely to watch baseball games on TV than attend them in a stadium.  Their discussion, however, also revealed that economic revitalization is not a guarantee.  Though it could be a surer bet for a team like the Red Sox with a fan base that is both strong and willing to travel.  Of course it is not clear that Sarasota's efforts will produce results.  But even if it does not, their efforts certainly demonstrate the potentially significant economic impact that a sports team can have. 

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June 10, 2008
The Impact of Terrorism on World Trade (part 2)
Posted by Marjorie Florestal
After four years of silence, last week Abdul Qadeer Khan, the father of Pakistan’s atomic bomb, gave his first interview since being placed under house arrest. A now unrepentant Khan repudiates the televised tearful confession he made back in 2004 in which he admitted to smuggling nuclear equipment and technology in shipping containers to such states as to Libya, Iran and North Korea. The resurrection of Abdul Qadeer Khan from obscurity raises anew the question of how safe is the world's trade supply chain--and specifically shipping containers--against a determined terrorist?
In my last post, I introduced the Container Security Initiative--U.S. Customs' response to the threat that a shipping container could be used by terrorists to transport a nuclear bomb to the United States. CSI is meant to "extend [the United States'] zone of security outward," by stationing U.S. Customs agents in ports all over the world (with consent of the host) where they can work with officials to identify suspect containers and inspect them before they ever arrive on U.S. shores. Opting to implement the program in three stages, Customs initially excluded from CSI membership all but the top twenty "megaports" —those ports that send the largest volume of container traffic to the United States. In Phase II of the project, ports of political or strategic significance can join, provided they meet certain criteria. Only in Phase III will ports that require technical assistance and capacity building—those ports in developing countries—be considered for CSI membership. The net result was that for years, only European and a few Asian ports were CSI-certified. Only recently have ports in Africa (South Africa was the first), the Caribbean and Latin America been added to the program
Membership in CSI comes with significant benefits. The idea is that containers arriving from CSI ports are deemed "safe" and ordinarily will not be subject to additional inspection in the United States. They receive "head of the line" privileges. Moreover, if the unthinkable happened and the nation's seaports were closed because of a terrorist threat, CSI-containers would again receive preferential treatment once normal business resumed.
The problem with CSI first and foremost is that the U.S. government itself acknowledges the nuke-in-the-box scenario, around which CSI is designed, is unlikely to occur. A report by the Government Accountability Office found "the likelihood of containers being used to move WMDs to the United States is low." Given that reality, it seems difficult to justify a measure that so significantly changes the trading system to the detriment of developing countries. By delaying admission of developing countries in the program until the last stage, Customs has created disincentives for businesses to source their supply from those countries. For a company, the risk of sourcing goods from a country without a CSI-certified port may be too great given the potential for such goods to stagnate at a U.S. border awaiting inspection (even a single day’s delay at Customs adds almost 1% to the cost of goods).
In a much longer piece on this question, I argue CSI violates World Trade Organization rules because it provides a benefit to some members and not other, which is contrary to the most-favored-nation requirement of GATT Article I. Although GATT Article XXI provides a general exception for national security reasons, I argue the national security exception must be read in light of a "development dimension." In other words, even as rich countries take measures to respond to terrorism and other security concerns, they must still consider the impact such measures are likely to have on developing countries.
The truth is, we cannot ensure our security without ensuring the security of others. It is far better to create a system where we raise world standards on security without relegating developing countries once again to the periphery.
I want to thank the Conglomerate community for its warm hospitality.  If you are interested in reading more about trade, you can view my comments every Tuesday on  In addition, I recently launched my own all-trade-all-the-time website to talk about free trade related issues in a balanced, smart and fair way.  Check it out at
(Cross posted at

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June 03, 2008
The Impact of Terrorism on World Trade
Posted by Marjorie Florestal

I want to thank David and Gordon for asking me to be a guest blogger for the next few weeks. I look forward to getting to know the Conglomerate community.

My post for this week could easily have been entitled "How the Shipping Container Changed the World." You probably have never given much thought to shipping containers, but you really should. Those narrow, windowless 40 x 8 feet steel structures, ubiquitous in port cities, revolutionized business. In fact, it would not be too much of a stretch to say that without shipping containers globalization would not have been possible. How? Before Macolm McLean invented the shipping container in the 1950s, goods were individually and manually loaded onto a ship piece by piece in "break bulk," an expensive process that often took days to complete and subjected goods to theft or breakage. Worse yet, when they arrived at their destination port, the process had to begin all over again. The shipping container allowed goods to be packed at the place of production; later, the same container would be transported by rail or truck to a seaport where it would be hoisted by crane onto a ship and delivered to the ultimate consumer.

McLean’s invention did for maritime shipping what Henry Ford’s assembly line did for the automobile industry—making the system faster, more efficient and cost effective. Businesses could now cheaply export (and import) computers, bicycles, clothing, toys, and all manner of goods. And that, in part, led to the globalization explosion. Today, over 90 % of world trade in goods moves by container, but that’s not all it brings.

Only one month after the September 11 attacks, the shipping container was transformed from a link in the trade supply chain to a possible means of exporting terrorism. On October 26, 2001, Italian officials intercepted Rizik Amid Farid, an Egyptian national and reputed Al-Qaeda member, in a container bound for Canada. Farid carried with him a Canadian passport, along with several airport security passes, and an aircraft mechanic certificate that allowed him entry into sensitive areas in New York’s John F. Kennedy airport, as well as Newark International, Los Angeles International and Chicago-O’Hare. Unfortunately, this was not the first high-profile example of people using shipping containers to advance potentially dangerous ends. In 2004, Abdul Qadeer Khan, the father of Pakistan’s atomic bomb, confessed to smuggling nuclear equipment and technology to Libya, Iran and North Korea in a smuggling network that spanned 15 years. Khan purportedly shipped all of his nuclear materials inside containers.

If a shipping container could house an Al Qaeda operative and nuclear paraphernalia, could it also hold a "dirty bomb"? Could a terrorist stow a nuclear device in a container, ship it to one of the nation’s busiest ports, and then detonate that device by remote control upon arrival? The "nuke-in-a-box" scenario, which would have seemed far-fetched before September 11, now drives U.S. container security policy.

In 2002, U.S. Customs adopted The Container Security Initiative ("CSI"), a program designed to "extend [the United States'] zone of security outward," by stationing U.S. Customs agents in ports all over the world (with consent of the host) where they can work with officials to identify suspect containers and inspect them before they ever arrive on U.S. shores. CSI has been called a "hidden revolution," because it has quietly but radically altered the way international maritime trade is conducted. In the process, it has transformed the world trade system creating winners and losers.

Next week, I want to explore who gains and who loses under the new CSI system. For a more detailed version of this post (and to preview next week’s arguments!) please visit my website.

Cross posted at

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January 10, 2008
The $2500 Car
Posted by Christine Hurt

I'm not sure what is more ironic -- that the car industry is now focused on making smaller rather than bigger vehicles or that as developed countries ponder how to get cars off the road, developing countires are trying to get more cars on the road.  India's Tata Motors Ltd. is getting a lot of press about its plans to sell its "Nano" car later this year for $2500.  This price tag will allow many more middle-class Indians to be able to afford a new, entry-level automobile.  I'm ashamed to say that my first kneejerk response to this news was, "But the last thing we need is for everyone to have a car."

Sure, as long as I already have a car!

I've always heard that conservation is a luxury of developed countries, and I guess that is true.  Obviously, the costs of automobiles given current technology are high -- environmental costs, fuel dependence, but I think we've forgotten what the benefits of automobiles are.  Cars allow the unemployed to look for work in a far larger geographical area than before, and even allow the unemployed to move to other areas to find work.  Being able to drive to work as opposed to walking or riding a bicycle reduces commuting time (and laundry time) and creates more free time to be with family and children.  Sure, it's easy for us to say that we should choose to ride our Trek bikes in nice, safe bike lanes to work for the environment and our own health, but that ignores the reality of most "unplugged" commutes in the developing world.  Cars allow people to visit family, have vacations and take children to school. 

No, the planet can probably not support six billion cars, but I still think this development should be applauded.

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