Business Sphere Magazine | Winter 2010

Holding Up the Invisible HandThe Intersection of Business

and Public Policy

The World Cup in 2010 | The Pittsburgh G20 Summit | Special: Healthcare Tomorrow Feature

Winter 2010

Prostitution in China (p. 8)By Adam Bao

Health IT Adoption (p. 20)By Brian De

FeaturingExploring Songdo (p.24)

By Christopher Lee

Business Sphere Magazine | Winter 20102 B

[Winter 2010. Volume I, Issue I]

In this inaugural issue of Business Sphere Magazine, I proudly present to you a publication produced by Yale College students that addresses the complex-ity of business as it relates to a wide variety of popular news. Business Sphere Magazine aims to serve as a platform for increasing awareness of the far-rang-ing implications of business in social, economic, and political arenas.

In this first issue we provide some perspectives on how public policy can have vast influence on business, ranging from finance to the World Cup in South Africa, to a variety of issues in the hotly discussed area of health care in the United States. In creating a popular business magazine, we hope to provide unique student perspectives on current pressing issues.

The Editorial, Design, and Operations teams have come a long way in produc-ing this first issue, and I want to thank them for their tireless efforts especially towards the end of the production cycle. Special thanks goes to my brother Sanjay, who has provided much of the artistic and technical inspiration for Business Sphere Magazine. We hope for continued success and expansion in 2010!

From the Editor

Brian De, Editor-In-Chief

Editor-In-ChiefBrian De

Editorial DirectorsPaul Joo

Monish Shah

Managing EditorDominic Insogna

Content EditorTravis Gidado

Design DirectorJames Murphy

Layout Editor-In-ChiefJohn Good

Graphics EditorJamar Bromley

Associate Layout EditorNico Barawid

Operations DirectorBing Han

Publishing DirectorConnie Leong

Business ManagerAndy DeWitt

Distribution ManagerLindsey Raymond

Administrative EditorsJames Zhang

Vivek Raman

This magazine is published by Yale College students. Yale University is not responsible for its contents. The opinions expressed by the contributers to BSM do not necessar-ily reflect those of its staff or its advertis-ers. The design and content of this maga-zine are copyright of BSM and may not be reprinted without express written consent.

From the Yale College Business Society

The Yale College Business Society was founded to address the need for a sub-stantive and holistic business education for future leaders at Yale. We quickly recognized the value of a publication dedicated to fostering a comprehensive understanding of business dynamics.

In early 2009, we launched Business Sphere Magazine with the goal of forging a link between students at Yale and the business world. By exploring global trends through a unique lens, the magazine aims to shed light on enterprise as a powerful driver for universal development.

On behalf of YBS, I would like to thank Brian and the BSM team for working tirelessly over the past semester on the inaugural issue. The magazine fills a crucial niche here on Yale’s campus and I look forward to the long-term suc-cess of Business Sphere Magazine.

James Zhang, YBS President

Business Sphere Magazine • PO Box 200118 • New Haven, CT [email protected] • www.BusinessSphere.org

Winter 2010 | Business Sphere Magazine 3B

Holding Up the Invisible HandContents

46

128

2320

181614

2427

Spheres of Businessby James Zhang

Infographic:Healthcare Tomorrow

Ireland: The Celtic Tiger Disaster?by John Good

The Pittsburgh G20 Summitby Dominic Insogna

Feature: Prostitution in Chinaby Adam Bao

The World Cup in Africaby James Zhang

The Healthcare Debateby Vikram Jairam

Opinion: Tort Reformby Christopher Sweeney

Feature: Health IT Adoptionby Brian De

Feature: Songdoby Christopher Lee

Fed Chairman Ben Bernankeby Lindsey Raymond

28 Financial Booms and Bustsby Vivek Raman

30 Interview: Rustomjee Navrozeby Siddhant Jhunjhunwala


[SpheresOfBusiness]

CanadaExport demand may return to positive terri-tory as commodity prices stabilize and U.S. economic growth recovers. Trade policy may focus on diversifying export markets to de-veloping nations. GDP Growth: 2.1%GDP: $1.478 bnGDP/capita: $43,450

BrazilThrifty economic management by the ruling Workers’ Party has helped Brazil avoid the worst blows of the recession and growth will resume in 2010.

GDP Growth: 5.8%GDP: $1.669 bnGDP/capita: $8,480

VenezuelaDespite a gradual global economic recovery, Venezuela will remain mired in recession. With limited government revenues, Hugo Chavez is reaching the fiscal limit for his am-bitious government stimulus plan.

GDP Growth: -3.4%GDP: $333 bnGDP/capita: $11,660

GermanyAfter being battered by the recession, Ger-many should see economic growth return in 2010. However, the recovery will be tepid as government support of the labor and car markets phases out.

GDP Growth 2.5%GDP: $3.196 bnGDP/capita: $38,520

Compiled by James Zhang

Information courtesy of The Economist and Goldman Sachs Corporation. Sources available upon request.


[SpheresOfBusiness]

Source: Getty Images

Looking ahead to 2010

RussiaRussia was hit harder than most by plum-meting oil prices during the recession, but the economy may rebound due to the na-tion’s large stimulus package, low interest rates, and rallying oil prices

GDP Growth: 4.5%GDP $1.414 bnGDP/capita: $10,030

AustraliaAustralia has been one of the few coun-tries to avoid the recession in 2009 due to successful fiscal and monetary policies. Growth in 2010 may be spurred by stronger business investment and exports to China.


China China will have to ward off the threats of inflation, growing asset bubbles in shares and real estate, and a bevy of bad loans, all of which have been exacerbated by the economic stimulus.


IndiaIndia has grown through the global down-turn due to a resilient domestic market and low dependence on exports. A growing fiscal deficit clouds an otherwise optimistic outlook for India.

GDP Growth: 8.2%GDP $1.468 bnGDP/capita: $1,240


“

International Perspectives

The World Cup in Africa

On July 11th, 2010, football’s (soc-cer for Americans) World Cup – arguably the world’s premier sport-ing event after the Olympics– will kick off for the first time ever in an African country. South Africa will play host to the 19th FIFA World Cup, a month-long tournament featuring the top 32 national teams from around the globe. While South Africa’s economy will receive a sizable direct boost from hosting the 2010 World Cup, a successful tournament will have an even larger impact on the nation and the conti-nent’s image abroad.

The World Cup is a prime example of the commoditization of sport. Because of marquee teams such as Brazil, Netherlands, and Spain in addition to the hyped matchup of

England vs. the US, the South Afri-can government projects that over 450,000 international visitors will make the trip to their nation. FIFA, football’s world governing body, is

set to cash in on the global popular-ity of the World Cup by signing a reported $2.8 billion in broadcast-ing rights deals, a figure greater than the broadcast deals for the last two Cups combined. ABC/ESPN forked over $100 million for the rights to broadcast in English in the US while Univision paid $350 mil-lion for the same rights in Spanish.

In preparation for the tournament, South Africa has invested $2.2 bil-lion in building nine new stadiums across the country and billions of dollars more in upgrades for its transportation infrastructure. Such improvements have generated a reported 415,000 jobs, a substan-tial boost in a country with almost a quarter of its workers unem-ployed. Further, the government has promised $225 million worth of World Cup contracts to local small

By James Zhang

Projections show that the World Cup will

provide the South African econo-my with a net boost of

$7.2 billion while generating a

windfall $2.7 billion in tax income from the

government.

Source: www.fifa.com

South Africa needs to get it right in 2010


and middle-sized businesses. Grant Thornton, a global consulting firm, projected that the World Cup would provide the South African economy with a net boost of $7.2 billion and while generating a windfall of $2.7 billion in tax income for the gov-ernment.

Although South Africa was unable to avoid the collateral damage of the recent global financial crisis and dipped into recession for the first time in 17 years, the nation is better positioned than most because of the World Cup. While other national governments scrambled to imple-ment stimulus packages to boost domestic spending, South Africa was already investing heavily into modernizing its own infrastruc-ture. The government hopes that the structural improvements will not only boost the local economy, but also make South Africa more attractive in the long term for both investors and tourists.

After South Africa barely lost to Germany in the bidding process for the 2006 World Cup, FIFA implemented the controversial and short-lived policy to rotate World Cup host nations among the vari-ous regional conferences, beginning with Africa. Critics questioned the ability of any African country in undertaking such a tremendous logistical challenge and when FIFA awarded South Africa the 2010 World Cup on May 15, 2004, inter-national doubt overshadowed the nation’s jubilance. With South Af-rica’s high crime rate, substandard transportation and accommoda-tion infrastructure, and oft-delayed stadium construction, rumors circulated that FIFA was preparing to move the cup elsewhere.

Five years later, the relocation ru-mors came to naught as the nation hosted the Confederations Cup, a two-week tournament dress re-hearsal held the summer before the World Cup. A riveting final featur-ing a 3-2 win by perennial favorite Brazil over the upstart Americans culminated a reasonably well run event. Besides half-full stadiums and minor logistical kinks, the only public relations controversy was the alleged robbery of hotel rooms of the Egyptian national team. Event organizers were eventually vindi-cated when it was revealed by South African authorities that the players had actually been shortchanged

by prostitutes they had solicited to celebrate a win.

Despite the significant strides made in the 10 years since the country’s first democratic elections and 15 years since the end of Apartheid, South Africans continue to struggle against negative perceptions. With foreign direct investment in South Africa, Africa’s largest economy, only a fraction of what other emerg-ing market countries receive, South Africans suggest that the ignorance, paternalism, and prejudice of Westerners create an unfairly biased view of their nation.

Organizers hope that the indi-rect impact of hosting the world’s biggest sport event barring the Olympics will help change foreign attitudes and unlock opportunities for Africa and South Africa. With the World Cup galvanizing infra-structure development, poverty alleviation, and black economic empowerment, South Africa hopes to leverage its role as Africa’s hub for energy, aid, transportation, communication, and investment to lead Africa out of the dregs of the international order.

A successful World Cup will go a long way in building Africa’s self-confidence and enhancing its in-ternational profile. However, a cup marred by violence would tarnish reputations and perpetuate the mar-ginalization of a continent and its people. Either way, all eyes will be on South Africa as the world’s most popular sport comes to Africa.

James Zhang is a junior in Berkeley College.


Prostitution in China

After Mao Zedong took control in 1949, the Community Party of China led a series of campaigns to eliminate vices such as prostitu-tion, drug use, and gambling. The government effort was zealous in its revolutionary fervor, and by the 1970s, prostitution was almost entirely eliminated. However, this

lull in salacious activity would only last until the end of the Cultural Revolution. Deng Xiaoping’s “Open Door Policy” in 1978 paved the way for economic growth and also the revival of prostitution and other vic-es. Currently, prostitution in China has proliferated to a sizable industry that represents a significant portion of China’s service sector and GDP output. Unfortunately, the rise of

prostitution has also been associ-ated with an increase in sexually transmitted diseases, as well as organized crime, violence, and gov-ernment corruption. Undoubtedly, prostitution constitutes a major problem for the Chinese govern-ment and its population. Efforts towards resolution should focus on the very roots of the problem and lean towards control rather than

By Adam Bao

Adam Bao explores an entrenched socioeconomic phenomenon that developed after the Cultural Revolution

Feature

“


Only 15% to 30% of female sex workers

use condoms...

elimination, as the latter option seems to be nearly impossible. The number of sex workers in China is estimated to be upwards of ten million. There are seven tiers of female prostitutes, ranging from those who serve as consorts to influential businessmen in the first tier to street hookers and brothel maids in the last tier. Of those situ-ated in the middle tiers, most work in karaoke houses, bars, night-clubs, restaurants, teahouses, and other entertainment venues. Their services involve chatting, drink-ing, and dancing with their clients, and consequently, these women are referred to as “sanpei xiaojie”, or “la-dies of the three accompaniments.” While the “sanpei xiaojie” usually limit themselves to legal services, they will also engage in sexual inter-course if the client is willing, and if the price is right. While these girls are widely regarded as prostitutes, their legal professions give them legitimacy that protects them from the law.

Perhaps most visible of the tiers in-clude the “falangmei”, or “hairdress-ing salon sisters,” a brand of prosti-tutes that offer clandestine sex while working in massage parlors, beauty salons, health and fitness centers. While visiting relatives in Shanghai this past summer, I encountered some of these “falangmei.” Le-gitimate businesses like hair salons, spas and massage centers during the daytime swiftly transform them-selves as dusk settles and exhibit “salon sisters” that are prostitutes. With the proliferation of prostitu-tion in China, rampant increase in STDs is increasingly a cause for concern. According to the Ameri-can Sexually Transmitted Diseases Association, up to 10% of female sex workers (FSW) in China are

HIV positive, an alarming rate con-sidering the number of males that serve as their patrons. About 6.4% of men from ages 20 to 64 have engaged in illegal sex, and of these men, many have multiple partners. Consequently, there is great poten-tial for STDs to spread. There are several reasons for the increasing rates of STDs in recent years. First, many prostitutes are poorly educated, and consequently unfamiliar with the implications of unprotected sex. Only 15% to 30% of female sex workers use condoms, and according to a national survey of sexual behavior 46.9% of males acknowledged regular condom use during encounters with FSWs. Such statistics reveal the high likelihood of prostitutes passing on STDs, or even clients infecting the prostitutes themselves. Further-more, prostitutes are usually not in a position to refuse cliental sex, even if the client refuses to wear a condom. FSWs must choose be-tween money and the possible risks of pregnancy, STDs, and HIV. More often than not, they undertake the risk for financial gain.

The problems that prostitution raises center on two issues: the im-morality inherent in prostitution and its role in the spread of STDs. Past Chinese efforts have focused on penalizing those involved in prostitution, including 15 days of administrative detention or civil fines of 5000 RMB. Finally, in 1991, the government passed a decision that strictly forbade the selling and buying of sex, and later that same year the “Decision on the Severe Punishment of Criminals Who Abduct and Traffic in or Kidnap Women and Children.” Such mea-sures effectively made prostitution

Source: www.newamericamedia.com

International Perspectives


existence of prostitution in certain business premises and even tip off suspected prostitutes against police raids. In one case, a deputy direc-tor of the Labor Bureau of Tianjin Municipal Government was ar-rested for allegedly spending more than $66,000 of public funds on prostitutes in night clubs and hotels. At other times, Chinese officials are often “reluctant or afraid to detain and arrest overseas patrons in fear of scaring away tourists, investors, businessmen.” Consequently, the police force selectively arrests those that appear to be locals. Further-more, in order not to besmirch the government, most arrests seem to have little connection with the government initiated and state con-trolled work units.

Furthermore, prostitution is so deeply entrenched because it em-powers women, allowing them to gain a sense of independence and material power that they would otherwise be unable to attain. Generally, women tend to earn less than men due to occupational dis-crimination in China. For example, service-oriented occupations, such as in hotels, nightclubs, restau-rants, and bars employ many more women than men. Women resort to prostitution as a lucrative alterna-tive.

Viewed in economic terms, pros-titution has become an important industry that represents a signifi-cant portion of China’s GDP. Ac-cording to a study made by Niklas Dougherty, China may have ten million or more prostitutes. If every prostitute makes about two hundred yuan on average each day, then the daily turn-around is about two bil-lion yuan, or seven hundred billion yuan a year. This represents about

illegal, and criminal penalties in-creased to a minimum of ten years in prison and/or criminal fines of up to 10,000 RMB. Recently, with focus on the prevalence of STDs in China, the government also requires offenders arrested for prostitution and patronization to undergo man-datory testing for sexually transmit-ted diseases.

Despite its efforts, China has been unable to curb, let alone eliminate the problem of prostitution. Al-though prostitution is now illegal in China, government officials and law enforcers are often corrupt and hin-der the fulfillment of law. Because interpersonal relationships are so important in Chinese society, cor-rupt officials sometimes ignore the

Source: www.newamericamedia.com


5% of China’s GDP in 2004, which Dougherty maintains is a “conserva-tive estimate.” This raises serious economic implications. The income made through prostitution, al-though untaxed, is transferred back into the economy with personal consumption and by the multiplier effect, which eventually increases GDP. Consequently, prostitution provides social benefits for desti-tute girls while benefitting China’s economy; as a result, authorities have strong incentives to leave pros-titution as it is.

Consequently, due to the underly-ing factors of prostitution, includ-ing the raw, human desire for sex, complete eradication is improbable. More radical approach needs to be

a taken to stem the problem. The Chinese government must take a multidimensional approach towards regulating prostitution that focuses on improvement of the female employment situation, elimination of state corruption, and preventa-tive measures to curb STD spread. The Chinese government should seek to implement a compensation system of sorts that creates job op-portunities and gives aid to those that require it. It should promote sexual education, perhaps as early as in grade schools, since prostitutes tend to hail from rural backgrounds without any sort of high education.

There needs to be constant sur-veillance within the government levels. Laws are only as strong as

those who enforce it, and a contin-ued negligent approach will result in powerless laws that are eas-ily ignored by prostitution rings. Instead of increasing the severity of punishment for those accused of prostitution, laws should be passed that punish those who are found guilty of corruption. Women who choose prostitution have no other choice but to sell their bodies and accept the implications and associ-ated stigma. Government officials are well off enough that they need not turn to illegal actions in order to improve their well-being. Greed is the root of corruption that facili-tates prostitution in China.

Adam Bao is a sophomore in Trumbull College.

Writing • Editing • Business • Layout & Design • Research

Interested in being part of a fast-growing, motivated group of students dedicated to publishing a high-quality popular business magazine?

Positions for Spring 2010 now available! Visit www.BusinessSphere.org or contact [email protected] for more information.


Business News

The Pittsburgh G20 Summit

The last summit of the Group of Twenty Finance Ministers and Cen-tral Bank Governors, colloquially known as the G20, took place this past September in Pittsburgh, PA. The meeting, the third in a series of ongoing summits held to discuss and devise a response to the financial recession, addressed global eco-nomic issues ranging from massive financial stimulus to bank regulation to climate control. But what exactly have leaders of the world’s most powerful economies actually man-aged to accomplish in their three major summits?

Founded in 1999, the group held its first G20 Summit in Washing-ton, D.C. in November 2008. In response to the ongoing financial shock of 2007, French Prime Min-ister Nicholas Sarkozy and British Prime Minister Gordon Brown took the initiative in pressuring President George W. Bush to hold a meeting in Washington. Mustering the influ-ence and intellect of the leaders of the world’s largest economies, the G20 set out to “enhance our coop-eration and work together to restore global growth and achieve needed reforms in the world’s financial systems.” Major achievements of the Washington summit included com-ing to an international consensus on the origins of the financial crisis and agreeing on measures to be taken

to stem the crisis. More specifically, the G20 pledged reform and tighter regulation of financial markets, emphasized international coopera-tion, and called for a larger active role of the International Monetary Fund and the World Bank in spear-heading the international economic recovery efforts, especially in poorer countries. The Washington summit was generally regarded as a success, garnering the praise of President Barack Obama as “a historical meet-ing,” and also earning the media nickname “Bretton Woods II.” While the Washington summit was in-deed a monumental and essential step down the road towards global economic recovery, it was a call for change that would have to wait to be acted upon.

The G20 could hardly hope to solve the world’s economic problems in a single summit, especially with the transition of presidential power that was taking place in the United States at the time. But riding the wave of optimism that followed the Wash-ington Conference and the message of “Hope” that that accompanied the inauguration of Barack Obama, the group reconvened in London in 2009 to follow up their progress and to keep pushing the global economic recovery effort. The G20 countries were determined to resolve the three main goals proposed in Washington: coordinate international economic policy, reform the global financial system, and reform international fi-nancial institutions such as the IMF. Finally in London, the seeds that

By Dominic Insogna

The leaders of Group of Twenty nations with the largest economies con-vened in Pittsburgh to discuss steps to solve the economic crisis

Source: www.kremlin.ru


to that point was for from over, and that financial stimulus could not be withdrawn until economies were more stable.

Through the coordinated efforts of the G20, the current international economic landscape is unrecogniz-able compared to that of the era before the financial collapse of 2007, for better or worse. Critics accuse the G20 of impotency and not go-ing far enough in their reform and recovery efforts. Many label the G20 as just another acronym in the alphabet soup of ineffective inter-national economic organizations. But the G20 summits, at least so far, have ultimately been a success -- a success in the broad sense that they have accomplished what they initially set out to do: prevent global financial collapse, or at least reduce its scale. The world was indeed dealt a crippling blow in 2007, and is still feeling the staggering repercussions. However, as GDPs rise, unemploy-ment wanes, and the economy slowly speeds back up, it is clear that the world has avoided the worst of what could have been a crisis on par with the Great Depression in scale. Nonetheless it is inherently easier to destroy than to create, and the frag-ile state of the recovering economy, along with any progress made at the G20 summits, can be easily shattered if caution is not taken. The economic leaders of the world must keep both their successes and failures in mind as they prepare for the next summit in Canada this June. They must keep a watchful eye on what they have accomplished, and strive towards de-cisive and cooperative action to see the global economic recovery all the way through.

Dominic Insogna is a sophomore in Berkeley College.

the G20 had planted in Washing-ton began to sprout as tangible and satisfying agreements were made, including a pledge of $1.1 trillion in coordinated global economic stimu-lus and enhanced regulations on the financial system. Disagreements and tensions between leaders were high in London, with French President Sarkozy at one point threatening to walk out of the conference if tighter

regulations were not imposed on the world financial system and bankers’ astronomical bonuses, which re-warded much the risky behavior that helped initially derail the financial system. But ultimately the leaders overcame their bickering and proved that they could work together towards a common goal, conclud-ing the London summit with some results to show for it.

In November 2009, the most recent summit was held in Pittsburgh. While not many novel decisions were made, the G20 leaders built on the progress made in London, more definitively tightening finan-cial regulation and granting more power to international organizations such as the IMF and the Financial Stability Board. The most unex-pected move was the decision to replace the G8 with the G20 as the main international caretaker of the world’s economy. While this decision popularly decentralized responsibil-ity in orchestrating global economic recovery, it also ensured deeper po-litical divides and larger bureaucracy within the movement. The group concluded the Pittsburgh summit by agreeing that that the work up

“The G20 countries were determined to

resolve the three main goals proposed in

Washington: coordi-nate international eco-nomic policy, reform the global financial system, and reform

international financial institutions such as the

IMF.

Source: www.g20pittsburghsummit.org/


Financial Analysis

Ireland: The Celtic Tiger Disaster?

Over the past two decades, Ireland has been transformed into a dy-namic, high-tech economy with one of Europe’s highest per-capita GDPs. A well-educated, English-speaking population combined with favorable tax policies attracted multinational firms who have es-tablished research and development facilities in the country. Ireland was dubbed the “Celtic Tiger” because of its rapid growth.

The Celtic Tiger Comes Alive

Climbing out of an economic mo-rass of low living standards, high unemployment, and high emigra-tion, Ireland used “a combination of sensible policies and pragmatism,” according to the Heritage Founda-tion. The core of these measures “was a belief in economic openness to global markets, low tax rates, and investment in education.”

In direct contrast to the “economic nationalism” that characterized their immediate post-indepen-dence, in the 1950s, Ireland’s official policy moved to more integration with global markets. The Heritage Foundation analysis continues by saying by “1956, to spur business development, tax relief on profits from export sales from Ireland was offered for the first time. In 1958, all controls on foreign ownership of

businesses were lifted.” The country also lowered its import tariffs, and by 1973, had joined both the Gen-eral Agreement on Tariffs and Trade (succeeded by the World Trade Organization), and the European Economic Community (now the European Union). These new mem-berships helped lifted Irish confi-dence and sense of its own status.

These new low taxes and aggressive attraction of foreign direct invest-ment (by the Irish Industrial Devel-opment Authority) brought over-seas companies that took advantage of abundant, English-speaking, and low-cost labor. In addition, gov-ernment expenditures expanded

While initially criticized, the auster-ity measures eventually gained a consensus for eliminating the deep budget crisis. A pact with labor, dubbed the Program for National Recovery, helped to break the infla-tionary spiral by lowering income taxes and increasing take-home pay without inflationary wage increases. Thus, by the 1990s, Ireland was on a path of sensible economic manage-ment, and took advantage of the global expansion that decade with policies that encouraged competi-tion and the attraction of highly-skilled labor that could be inter-national in focus. After 1987, Irish growth averaged 6.5% per year.

Defanging the Tiger: Ireland in Crisis

However, it seems that this fiscal model of low taxes and aggressive industrial attraction needs contin-ued high growth and increasing asset prices to succeed. With real estate and other asset values sky-high, the carefully crafted model was precarious; when they started to decline in value in 2007, GDP and public finances followed. In January 2008, RGE Monitor (by Nouriel Roubini) published “Is Ire-land At Risk of a Financial Crisis?” It pointed out that housing and equity prices had declined precipi-tously, and growth was done from a heady 5.3% in 2006 to about 2.8%. In addition, the current account balance went from even in 2003

By John Good

rapidly as spending on education and social services increased. How-ever, high spending and domestic demand, combined with an increas-ing population, pushed inflation to an average of 13.6% a year between 1971-1980. Inflation continued into the 1980s, and unemployment was growing as foreign investment was not producing enough jobs to offset failing domestic firms. Between 1980 and 1986, total public debt reached 120% of GNP as annual budget deficits were over 10%.

When Fianna Fail, the opposition party, won the election in 1987, it embarked on a program of severe cuts across all government expen-ditures, including social services.

Ireland, once a booming market, is now one of the hardest hit by the international financial crisis


to a deficit of 5% of GDP by 2007. Still, it pointed out that Ireland’s declining public debt (down to only 35% of GDP in 2007) and relatively strong fiscal position should help it weather the storm, even if the country couldn’t do much, being in the Eurozone.

But by June 2009, BBC was report-ing that Standard and Poors was cutting its rating on Irish sover-eign debt – for the second time in the year. It was quoted as saying “the fiscal costs to the government of supporting the Irish banking system will be significantly higher than what we had expected.” This referred to the seven billion euros it had to provide to its two biggest banks, which, for a country the size of Ireland (4 million people and $270 billion GDP), a huge amount.The combination of these measures, increasing social welfare payments for the unemployed, and decreased tax revenue of all kinds has made for a budget deficit of 9.5% of GDP, the highest in the EU and much higher than the EU target of 3%.

So what happened? How did the equation fall apart so rapidly?

Of course, the unexpected sever-ity of the global downturn – much more than even Roubini predicted in January 2008, was a large part of it. But Ireland also was fiscally balanced and paying down its debt when everything was great. After nearly collapsing in the 1980s, it relied on strong growth and rising foreign investment (attracted by its low taxes) to make the overall equation work. Its Celtic Tiger years as testament, the equation was miraculously successful as long as asset prices kept rising. This down-turn showed how unsustainable that

formula is in bad times.

In July, Morgan Stanley published various scenarios that looked at how sustainable Ireland’s public finances would be going forward. It says that, “currently planned poli-cies, if maintained indefinitely, are sufficient to maintain a bounded debt/GDP ratio in both the short and long run regardless of asset re-covery. Net indebtedness as a share of GDP peaks at around 107% in 2012 before declining.”

Fiscal Responses

Back in April, facing the balloon-ing deficit, the Irish government came up with an emergency budget that both increases taxes and cuts spending (notably different than the late 1980s reaction of cutting both taxes and spending). In April, pres-sured by the EU (the EU finance ministers had given Ireland a 2013 deadline to get back to a 3% deficit), the government raised a number of taxes and introduced new ones, at the same time cutting social spending. Rates on a previously introduced income levy doubled, taxes on cigarettes were raised by 25 cents, and on diesel by 5 cents a liter. On the spending side, the early childcare subsidy will be abolished by 2010, and an allowance for young jobseekers was cut in half. Furthermore, the government an-nounced it would create an asset management agency that would buy up 90 bn euros of bad loans from Irish banks, or about 44% of the economy (GDP). In the US, that would translate to buying about $6 trillion of bad debt.

In June, in another report on the heels of the (second) S&P down-

grade, Irish economist Ronan Lyons looked at where tax revenues have fallen the most, and they might be made up most easily. He looked at the 12 bn euro gap between the 47 bn collected in 2007 and the expect-ed 35 bn for 2008. The smallest gap is in the income tax, less than a bil-lion euro, whereas shortfalls in taxes dealing with international trade and commerce – the corporate tax and customs and excise taxes – are much greater. He therefore argues that raising Ireland’s much praised corporate tax rate – from 12.5% to 15% - makes sense, as is the in-troduction of a property tax. For doubters, he points out that even if public expenditures were cut by 10 bn euros, Ireland needs to raise taxes by 12 bn to get back to even. That looks unlikely anytime soon.

Ireland built its economy on the conservative ideals of low taxes and free markets, and became very wealthy doing so. The only English-speaking country that uses the Euro, it was – and probably still is – a natural location of Ameri-can companies to put operations focused on serving the continen-tal European market. However, the Irish government faces tough choices because of this model, with debt holders, the European Central Bank, and ratings agencies telling it to get its fiscal house in order, but with the corporate community and many Irish themselves urging them to keep business taxes low, its tax policies having been crystallized in the minds of the public as the force behind its stunning rise.

John Good is a senior in Timothy Dwight College

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For approximately 100 years, presidential administrations in the United States have tried to pass meaningful health care reform mea-sures. It is difficult to ignore the 46+ million uninsured people in the United States and the fact that National Health Expenditures (NHE) make up over 18% of total GDP. Horror stories persist about how individuals are denied cover-age in the private market after losing their jobs, how people are denied coverage for common preexisting conditions such as acne and hay fever, and how skyrocketing premiums have forced millions into medical bankruptcy. Many questions remain unanswered, and many of them boil down to a central, normative ques-tion that no one has the answer to: Is medical care a right or a luxury?

We invite you to explore health care as it evolves over the coming weeks and months. Please visit www.healthcaretomorrow.net for more information about our symposium sched-uled to take place in early April.

TimelineAugust 1912 – President Theodore Roosevelt campaigns on the Progressive Party ticket ad-vocating national health insurance. He suggests that we emulate Germany’s system, which in-cluded old-age pensions and health insurance. He was defeated by Woodrow Wilson.

1929 – Baylor Hospital in Dallas, TX creates a pre-paid program for a local teaching union, a model widely considered to be the first example of health insurance.

1938 – Popularity of pre-paid insurance model increases. Insurance companies advertise “three cents a day for hospital care” but exclude the unemployed and those over 66 years of age.

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A Brief Synopsis of Health Care Reform in the United States

Healthcare Tomorrow

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July 1965 – President Lyndon B. Johnson signs into law the creation of Medicare and Medic-aid, extending government health insurance to all citizens 65 and over, as well as the poor, blind, and disabled.

December 1973 – President Richard M. Nixon signs the Health Maintenance Organization Act, setting aside $375 million to finance demonstration projects of H.M.Os, a type of managed care organization that provides health coverage through a contract with doctors, hos-pitals, and other health care providers.

1993 – President Bill Clinton unveils a plan that would provide universal coverage based on managed competition, in which private insurances compete in a regulated market. This ultimately fails due to fierce partisan politics and lobbying from interest groups.

July 14, 2009 - House Democrats introduce legislation called “America’s Affordable Health Choices Act” which promises to expand health coverage, reign in the costs of Medicare, and increase taxes for the wealthy.

July 15, 2009 – The Senate Health, Education, Labor, and Pensions Committee creates a bill requiring Americans to obtain health insurance and establishing a new government insurance plan, the “public option.”

October 29, 2009 – The House unveils a stag-gering 1990 page bill that would cost $1.05 trillion over the next 10 years and provide increased coverage to 36 million people. On November 7, the bill passes in the House in a final vote of 220-215.

November 18, 2009 – The Senate introduces its own Health bill that would cost $848 billion over the next 10 years and extend coverage to 31 million Americans. It would, however, re-duce projected budget deficits by $130 million over this same decade.

December 21, 2009 – The Senate bill is finally voted upon and, unlike the House bill, contains no provision for a public insurance option. In-stead, it plans to extend coverage by regulating the insurance market and industry rules.

Compiled by Vikram Jairam


Healthcare Tomorrow

The Healthcare Debate

There is no doubt that the issue of healthcare reform figured promi-nently in the 2008 Presidential election. It served as a harbinger for the role this issue would play in 2009. For more than half a century, politicians, leaders, and activists have attempted to spark debate that would ultimately shape the direc-tion of our nation’s healthcare sys-tem. Unfortunately, the healthcare system in place is unsustainable and costs have spiraled out of control and consumed a significant portion of the United States federal budget. The current figures are staggering - the United States spends 16% of its GDP on healthcare, more than any other industrialized nation. In 2007, an estimated $2.26 trillion was spent on health care in the U.S., result-ing in a per capita expenditure of $7,439. In turn, what are we receiv-ing from this tremendous monetary investment? The number of unin-sured in America is a whopping 47 million. The World Health Orga-nization ranks the U.S. health care system 37th in the world, right next to Slovenia. Furthermore, 62% of all personal bankruptcies in America list healthcare costs as a significant contributing factor. Finally, the Congressional Budget Office (CBO) argued that at its current rate, Medi-care spending will soon consume the entire federal budget. Economi-cally speaking, we are not yielding a strong return on investment by any standard. Given these startling

figures, it seems imperative that there must be some type of health-care reform; the real issue is how it should be achieved. The two main schools of thought in today’s debate are those favoring government-based versus free market reforms. This article will examine the various proposals set forth by proponents of each idea as well as the current healthcare reform bills being de-bated on the Senate floor.

Government-Based ReformsMany people believe the govern-ment should play a larger role in ensuring that its citizens have access to adequate healthcare and insur-ance, with an emphasis on coverage for all. There are two proposals that have been laid out to achieve this goal: first is a single-payer system and the second is the widely popular public option, supported by Presi-dent Barack Obama and other left-leaning politicians.

Single-Payer SystemA single-payer system is a service in which a public agency, usually the government, is responsible for financing the healthcare costs of a nation, resulting in the univer-sal coverage of all citizens. Many Americans support a socialized single-payer model akin to that of Canada, or the United King-dom, whose healthcare systems are ranked 30th and 18th, respectively, by the WHO. The current Medicare system that guarantees coverage to America’s seniors is a single-payer

system. Medicare’s beneficiaries generally enjoy the service, but at its current rate, the program’s costs are estimated to bankrupt the federal trust fund within this century. One single-payer proposal has been set forth in Congress by representative John Conyers Jr. D-MI, which mir-rors the United Kingdom’s health-care system. This will be financed through taxes, which economist Paul Krugman estimates would eliminate the large administrative costs associated with private health insurance. However, this proposal has not been met with much sup-port. With America’s general aver-sion to government involvement, single-payer options have never been widely popular; the idea is that individuals should have the option to choose to utilize public or private healthcare services.

Public OptionInstead, the public option has en-joyed much greater appeal as well as political relevance in the nation’s healthcare debate. The public option is a public health insurance plan that would be offered by the U.S. government to compete with similar private insurance plans in a health insurance market place. This plan would be restricted to people not insured through either Medicare or an employer-based scheme. The public option would compete with private insurers, which would create downward pressure to lower prices (i.e. premiums, deductibles, etc). Many economists argue that certain

By Vikram Jairam

A short summary of the proposals currently being debated in Congress


insurance companies hold mo-nopolies in local markets and have no existing competition. Especially during today’s recession, where thousands of people lose their jobs, and subsequently their health benefits daily, the idea of a public insurance option that does not deny coverage based on a wide array of conditions has garnered much ap-peal. President Barack Obama has touted the public option through much of the healthcare debate, claiming “it could provide a good deal for consumers, and would also keep pressure on private insurers to keep their policies affordable and treat their customers better.” Those criticizing the public option claim it is unfair for private insurance companies to compete with a large government behemoth, and that the public option will slowly drive pri-vate insurers out of business. They fear this would gradually lead to the emergence of a single-payer system. Market-Based ReformsOn the other side of the argument, many believe universal health-care with expanded coverage and reduced costs can be achieved through market-based reforms. They distrust the inefficiency and bureaucracy of the government and instead place their faith in the abil-ity of market forces to drive prices down. There are two market-based proposals I would like to examine: first is consumer-directed health care, and the other is a proposal cre-ated by Senator Ron Wyden D-OR, the Healthy Americans Act, a bill endorsed by both parties as well as prominent publications, including The Economist.

Consumer Directed Health CareConsumer Directed Health Care (CDHC) is a health insurance

program that allows members to pay for routine services directly through Health Savings Accounts while paying a high insurance deductible for catastrophic medi-cal expenses. In short, consumers would pay directly for the bulk of their medical expenses with their own money, as opposed to insur-ance companies. Under full insur-ance schemes, consumers may not feel the entire monetary weight of each medical procedure and thus, may have a tendency to overutilize medical services, a common ex-planation for the high cost of care. In theory, competing CDHC plans would stimulate competition and introduce free-market variables that would drive the price of services down. However, there are two main criticisms of CDHC. First, crit-ics believe consumers that are less wealthy will avoid needed health-care since they will be paying out of their own pocket. Furthermore, patients with chronic diseases who will have to make several visits to a physician will be adversely affected, especially under a high-deductible plan. The second criticism is that CDHC would only work under full pricing transparency – that is, if patients are fully informed about the prices of health services and can make an informed decision when purchasing various options. Cur-rently, the insurance model masks the true cost of health care services from patients, leading to a situation where we have no healthcare pricing information. A transition to CDHC would require this paradigm shift in how health services are advertised. Healthy Americans ActThe Healthy Americans Act (HAA) is a bill that promises to provide universal healthcare through both private and public schemes. The

main provision of the Healthy Americans Act is that citizens would be allowed to opt out of their employer-provided health insur-ance, and instead would be given money to shop around for other insurance plans. The HAA also employs the idea of the individual mandate – that citizens who are fi-nancially able must purchase health insurance, which, in theory, diversi-fies the risk pool, increases cover-age, and lowers costs. The guarantee to consumers of insurance coverage means they cannot be rejected for preexisting conditions and be left without insurance. The CBO scored the HAA as revenue neutral. Thus, while CDHC proponents would like to minimize the role of insur-ance, the HAA proposed by Wyden heavily regulates the existing health insurance market. However, critics lament this bill would signal the end of the employer-based insurance, which has been an integral part of our healthcare system since World War II. Thus, Wyden’s bill may be seen as too radical to gain popular appeal.

Comparison of Current Congressio-nal BillsIt is now interesting to examine the current bills proposed in both chambers of Congress, the House and Senate. The House healthcare bill was approved on November 7th by a vote of 220-215. The Senate unveiled a bill on November 18th that they debated the week of No-vember 30th. If legislation is indeed passed, this would hopefully signal the end of the healthcare ordeal that has gripped the nation for over a decade, and the beginning of afford-able healthcare for all Americans.

Vikram Jairam is a senior in Morse College.


Health Information Technology

Medical records have evolved from their earliest forms, as kept by Hip-pocrates in the fifth century BC, and they have taken on increasingly complex information with tremen-dous amounts of data, differential access for personnel in a clinical practice, and stricter privacy regula-tions governing patient information.

Medical records have moved beyond being mere databases of information and now include capabilities such as digitized administrative data man-agement, clinical/patient data man-agement through electronic health records (EHR), clinical decision sup-port systems (CDSS), computer phy-sician order entry (CPOE), among many others. With the advent of this

diverse set of capabilities, streamlin-ing and standardizing information flows, and creating interoperable sys-tems have also come to be important considerations for data management. As such, the broader term Health In-formation Technology (HIT) is used to describe the comprehensive man-agement of medical information and

By Brian De

Rethinking benefits that flow to providers is necessary before health IT systems are widely adopted by physicians and hospitals

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its secure exchange between health care consumers and providers.

Though political leaders differ substantially on issues surrounding health care reform, there is relative agreement that HIT implementation can lower costs and improve qual-ity of health care through a variety of mechanisms including decreased medication errors, improved primary and secondary preventive care, and decreased utilization of care. To the healthcare system as a whole, it is ex-pected that National Health Expendi-tures (NHE) are likely to increase by around $14 billion over the next five years as a result of widespread HIT implementation. However, HIT will help reduce NHE in the long-term – as much as $88 billion in ten years. Despite this, it is widely thought that the benefits from HIT implementa-tion flow mainly to insurance compa-nies and consumers of health care.

There are also several market fail-ures in HIT, including a fragmented industry, a difficult-to-demonstrate return on investment, and a first-mover disadvantage, among many others. Ultimately, there is asym-metric risk and reward for HIT adoption – providers pay for the HIT solutions but may only experience 11 percent of the net potential gains. As a result, this creates an incentives problem – physicians and hospitals choose to adopt HIT technologies in lesser quantities than they would if they realized the benefits. A sound implementation plan will seek to increase the readily apparent benefits for potential adopters of HIT through a variety of mechanisms – the most obvious being a monetary subsidy given to those who adopt or a pen-alty given to those who fail to adopt. Three different ways to do this are proposed below.

Promote integration through DHHS certificationThe Department of Health and Hu-man Services (DHHS) will certify HIT solutions to meet the “mean-ingful use” criteria put forth for by the American Recovery and Rein-vestment Act of 2009. The existing adoption evidence seems to indicate that the flow of benefits to physicians must increase for physicians to be properly incentivized to adopt, and it has been shown also that benefits that flow to physicians are also passed on to their patients in the form of better quality care. Thus, one possible solution is to redefine “meaningful use” criteria to include benefits that flow to physicians instead of merely considering health outcomes. While it is true that ultimately the goal of HIT is to improve delivery of health care, the adoption barrier needs to be considered in the short-term as well.

“Advanced HIT” components that increase the flow of benefits to physicians, such as Computer Physi-cian Order Entry, Clinical Decision Support Systems, and others are not entirely well-implemented into

complete HIT solutions despite their documented benefits to quality and costs. It may be in the best interest of the DHHS to encourage integra-tion of advanced HIT functionality into the meaningful use criteria as it becomes more explicitly defined over the next several years. This could be accomplished through financial incentives given to developers to inte-grate advanced capabilities into their solutions, or merely by requiring certain capabilities for certification. Other ways to consider the physician in meaningful use criteria should also be kept in mind, so that physicians themselves – the potential adopters of such technologies – feel that HIT use is indeed meaningful. Such solutions will increase physician utility and the marginal benefits of adoption, lead-ing to increased willingness-to-pay and quantities of HIT adopted.

Create a private sector nonprofit to oversee standardsThe importance of standards in the HIT adoption problem cannot be understated – namely, physicians are much more willing to adopt HIT solutions if they feel that their


systems can be used in conjunction with other systems so as to streamline workflows and avoid re-adoption of expensive technologies in the future. This would be result in an increase in efficiency and profits over time. The assurance of interoperable, standard-ized HIT solutions would induce a increase in flow of benefits to physi-cians, thus leading to more adoption and higher willingness-to-pay for the expensive HIT systems.

In light of the problems presented with standardization, one solu-tion proposed is to create a neutral, nonprofit organization in the private sector with the authority to manage all aspects of health data standards. Work on standards would be coor-dinated at this level, and standards would be developed as a single, integrated effort governed by process rules. Governance could be provided with a permanent staff at the top lev-els of leadership (e.g. director, deputy director, etc.) appointed by the Of-fice of the National Coordinator of Health Information Technology. This setup would represent the different US Standards-Development Orga-nizations (SDOs), check that they adhere to the scope of their work, and include all other stakeholders in the development of standards.

The operating budget could be a combination of membership dues, revenue from services, and govern-ment funding. Previous evidence in other markets, such as the de-velopment of barcodes and coding for grocery stores, or the develop-ment of IEEE wireless standards for computerized devices seems to suggest that the private sector needs to fuel development of standards, and this solution effectively manages

the government’s role in creating a private sector entity. The process of appointing staff to the nonprofit also allows for the possibility of involving clinical expertise in the development of standards.

Increase training and detailingIf the problem with HIT adoption is in part psychological, measures to increase physician perception of the benefits of HIT may be just as use-ful as features that bring about true increases in benefits to physicians. Additionally, more positive physi-cian perceptions would also lead to higher perceived efficiency, profits, and patient welfare, thus increasing physician utility. Thus, as a solution, it may be in the best interest of the Office of the National Coordinator of HIT to use the $2 billion in discre-tionary spending allocated by the ARRA of 2009 (“for affiliated grants and loans”) in part to inform physi-cians about the current capabilities of HIT, its integration, and its rapidly improving state over the next sev-eral years. This can be accomplished through a variety of methods, includ-ing subsidies to vendors for physician detailing, or by creating and/or subsi-dizing training courses for physicians at all levels to become more aware of HIT, its uses, and its benefits.

Rapidly changing HIT solutions need to be met with rapidly disseminated information through the above solu-tions so that physicians are aware of the true benefits of HIT. David Brail-er, former Coordinator of HIT, argues that aggressive adoption will lead to better quality products and lower costs, and subsequently more adop-tion. Part of solving this HIT adop-tion problem seems to be inertial, so if the government can sufficiently

catalyze adoption, perhaps this would lead to the desired improvements in health care delivery after all.

The role of governmentThe bulk of the literature suggests two possible roles for government, in-cluding providing financial incentives for HIT adoption, and the creation of standards. While financial incen-tives are definitely necessary in the short term for physician adoption, government should also have the role of helping to involve all stakehold-ers in the HIT adoption process so as to reduce barriers to adoption. This can be accomplished through physician-benefit oriented reforms. As for the creation of standards, the bulk of evidence seems to suggest that government involvement should be limited; it appears that the private sector needs to fuel development of standards, and the proposed creation of a nonprofit to drive standards de-velopment addresses this concern. A key role of government will be to dis-seminate information as HIT rapidly changes, and the proposed spending on supporting physician detailing and developing training programs at all levels of a physician’s development.

The medical industry faces a myriad of reforms; hopefully, Health Infor-mation Technology implementation will progress smoothly and reduce costs for providers, insurance compa-nies, and consumers alike.

Brian S. De is a senior in Berkeley College.

Note: This article contains material derived from Professor Howard Forman’s ECON467 seminar. Further reading and references available upon request.

Healthcare Tomorrow


Healthcare Tomorrow

Opinion: Tort Reform and Cost Reduction

Medical malpractice tort litigation reform is currently a hot political topic in the United States because of the implications reform could have on health care costs. The law in America dictates that tort litigation requires those responsible for harm-ing or injuring others to compensate the affected party, often in the form of large cash payments. More spe-cifically, tort litigation allows pa-tients who have been misdiagnosed or improperly treated to file a suit against their doctors in order to seek compensation not only for lost wages while in the hospital, but also for things that are much more difficult to define, such as pain and suffering.

Although some states have paved the way for reform by capping the maxi-mum amount of money that can be paid out for a malpractice suit, many states have yet to do so, which occa-sionally results in multi-million dol-lar settlements. These suits affect the entire medical system by driving up costs and adversely affecting doctors’ behavior out of fear of such lawsuits. As Americans, we have a clear need for tort litigation reform as a means of driving down medical expenses and protecting the doctors that do so much for our everyday health.The amount of money paid out for malpractice lawsuits in the United States is staggering. In 2007, the actuarial consulting firm Towers Perrin gathered data on medical malpractice tort litigation and found that costs and payments exceeded

$30.4 billion for that year alone. 52% of awards made exceeded $1 mil-lion, with the average award coming out to roughly $4.7 million. These numbers are all the more staggering when one considers that, according to a report made in 1999 by the Insti-tute of Medicine, roughly one out of one hundred hospitalizations led to serious injury. Of that relatively small number of cases, only 4-7% of those injured filed suits. These numbers indicate that the huge litigation costs and compensation payments are stemming from lawsuits made by a select few people.

Even though the aforementioned numbers might already seem outra-geous, they do not even scratch the surface of the costs that come from malpractice lawsuits. Many doctors engage in what is called “defensive medicine,” or the practice of ordering expensive and potentially unneces-sary tests/examinations in order to hedge against the possibility that a patient has serious health issues. The Pacific Research Institute estimates that doctors spend $200 billion per year on defensive medicine practices, a number which dwarfs the costs of malpractice litigation. Upon a closer look, a 2007 study by the Massa-chusetts Medical Society found that a staggering 48% of Massachusetts doctors surveyed admitted that they changed some of their daily practices in order to avoid lawsuits! Not only are these adverse changes extremely expensive, they are also unneces-sary in many cases. It is a sad state of affairs when doctors, who work to

maintain our good health, feel obli-gated to protect themselves from the people they are trying to help; clearly, something must be done.

Unfortunately, there is no “silver bul-let” solution that will fix every prob-lem and reduce costs. However, there are a few small steps that should be taken to help move the process in the right direction. One action involves instituting a set of universal caps for malpractice awards based on the type of injury suffered. This standardized system would be a fair way to deter-mine how much should be awarded and also help differentiate among different types of malpractice cases while providing some protection to the medical community by limiting liability. These standards could be es-tablished by a board of medical pro-fessionals and lawyers, which would remove many steps from the costly litigation process by classifying cases based on relevant facts and histori-cal precedents before they ever make it to court. Additionally, by limiting the medical community’s liability, it could eliminate a large portion of the costs associated with defensive medi-cine practices. If a doctor or practice knows that it will only be liable up to a certain predetermined amount, the standardized payout caps could create an incentive for doctors to run tests that might be unnecessary at a less frequent rate, resulting in fewer costs for all.

Chris Sweeney is a senior in Berkeley College.

By Chris Sweeney

Current medical malpractice tort litigation obstructs reform


Songdo: Master Planned City

How does one build a modern “city upon a hill”? Develop it with “smart” buildings that monitor their own energy use? Beautify it with parks, bike trails and ocean-fed ca-nals? Install a city-wide data network that accepts a single smart-card house key for a subway ride, movie rental, parking meter and more?

Welcome to Songdo City, an entire

master-planned city currently under construction 40 miles west of Seoul.South Korea is not just playing Sim City on a hill of mud. Songdo City is one of South Korea’s latest and most important ventures to increase foreign direct investment in the country. Gale International, a U.S. real estate firm, and Posco, a Korean steelmaker, are the main backers of its development. Built on a 1,500 acre man-made island off the coast of Incheon, the city has been des-

ignated by the South Korean gov-ernment as a Free Economic Zone. With a hefty price tag of $35 billion, it comes with state-of-the-art facili-ties built with cutting edge technolo-gy and top-notch cultural amenities, next to architectural features mod-eled after New York’s Central Park and Venetian canals.

Touted as the largest development project undertaken by the private sector in world history, the complet-

By Christopher Lee

In an effort to increase foreign direct investment, South Korea is plan-ning a multi-billion dollar city with with all the latest technology

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ed city is expected to have 9,000 new homes and 50 million sq. ft. of office space. Gale International estimates that the city will eventually house 65,000 residents and employ 300,000 workers. A top priority is making Songdo a lush, “walkable” city; 40% of the land has been allocated for “green space.” If all goes according to plan, Songdo will be environmen-tally green as well. With a pneumatic garbage disposal pipeline, extensive rain collecting irrigation system and fuel cell-powered buses, the entire city is being built to meet the U.S. Green Building Council’s LEED certifications.

Through subsidies, tax incentives and loosened regulations, Songdo has drawn nearly $60 billion in finance and investment during the past six years. This money has been put to use on a variety of novel projects, which include a centrally located 100-acre park boasting a mile-long canal filled with 85,500 tons of purified seawater. Aside from conserving freshwater, the canal will also allow for a water taxi system run by solar-powered boats.

But that’s not all. Developers also hope to make Songdo avant-garde in data networking. Data network giant Cisco will commit $2 billion over the next 3-5 years to coordinate transportation, security, healthcare and other municipal services within a strategic common network –a con-cept known as the “Ubiquitous City” (U-City). By establishing its Global Center for Intelligent Urbanization in Songdo’s signature Northeast Asia Trade Tower (NEATT), Cisco will also provide the tools necessary to construct intelligent buildings that will monitor their own energy use and employee resource-consump-tion data. Cisco’s chief globalization officer Wim Elfrink has touted this

as a globally replicable model for future “Smart+Connected” Commu-nities based on Songdo. In his words to Forbes, “It’s an adjacent business we expect a lot from.”

Though many of the projects will not be completed until about 2015, current developments are already placing Songdo in the limelight. Against tough competition, Songdo succeeded in becoming one of the top candidates for the G-20 sum-mit in November 2010. According to Incheon FEZ Commissioner Lee Heon-Seok, “[Songdo] would be able to accommodate 700,000 people with 512,000 locals in its 230 multi-story buildings with up to 40 floors.” Convensia, the architecturally inno-vative convention center, itself holds up to 10,000 people and provides parking for 5,000 cars.

Songdo’s housing market has met similar success so far. In May, an estimated 45,000 visitors converged on Songdo in a single weekend to examine five new apartment com-

plexes. In 2006, the first 2,600 apart-ments opened for purchase were oversubscribed eightfold. In spite of the current global market con-traction, Songdo will bring another 1,000 units to the market this year.

Despite the superior quality and popularity of the development, the project as a whole has met several obstacles along the way. One major issue has been the mixed-use of retail, commercial and residential space in the new buildings. The top thirty floors of the NEATT were originally intended for residential use. Construction of the tower was temporarily halted in July of this year, when revisions in the govern-ment’s regulations on condominium sales caused Morgan Stanley, Kook-min, and Woori banks to pull out due to fears of decreasing profitabil-ity. Gale deliberated with govern-ment officials to secure all necessary permits to complete construction, which is now slated for summer 2010.

Source: www.prweb.com


Business News

Another issue surfaced regarding enrollment in Songdo’s Interna-tional School. Hoping to attract more foreign families into the city, the government set a quota limit on the number of Korean students who could attend the school. Although the school was designed to accom-modate 2,100 students, only 30% were allowed to be Korean. As of February this year, only 50 of the 744 foreigners registered in Songdo were still of school age. Insufficient enroll-ment delayed the opening of the school, which is currently on hold due to concerns from the Korean Ministry of Education regarding the reputation of the school operator, Vancouver International Primary and Secondary School.

Beyond its city limits, Songdo faces additional challenges from neigh-boring competitors. In a statement to Reuters, Samsung Economic Research Institute fellow Soojong Kwak voiced concern over the fact that the rapid development of South Korea’s six FEZs ran the danger of “overheated competition”. The Incheon, Yellow Sea, Busan-Jinhae, Saemangeum-Gunsan, and Gwang-yang FEZs are all marketing their high-tech and logistical capacity to become a business hub for northeast Asia. According to Kwak, “The ad-vantage from local arbitrage against China is close to zero,” and the South Korean zones will face stiff competi-tion from their rivals in China. As of yet, however, Songdo con-tinues to draw new converts. In January 2009, the national govern-ment changed the law so that with a minimum investment of $30 million, foreign manufacturers in the FEZs could receive full exemption from all

taxes for up to five years, and an ad-ditional two years of half-exemption. In October, the government opened the Incheon Bridge to cut travel time from Incheon International Airport to ten minutes. According to Berna Biotech CFO Mark Slijpen, both the city’s proximity to the airport and the tax exemptions within its FEZ played a key role in Berna’s decision to commit $30 million earlier this year. Meanwhile, the Gyeonggi Provin-cial Government is planning the construction of a 90-mile Great Train Xpress (GTX) rail line in and around Seoul, Incheon and Songdo. Expected to cut travel time between the cities by at least half, the GTX will hopefully expedite business and communication between Songdo and the Seoul metropolis. The total cost of this project is estimated to be roughly $12 billion. Some skeptics fear that Songdo may follow the fate of previously master-planned cities such as Canberra and Brasilia, and end up as an “urban theme park.” Others are skeptical about the effectiveness of the FEZs in improving South Korea’s econo-my. According to Reuters, several analysts voiced concerns regard-ing the absence of more expansive reform of barriers to foreign own-ership in Korea beyond the FEZs. Randall Jones, head of the Japan and Korea desk at the Organization for Economic Cooperation and Devel-opment, emphasizes that the FEZs should not “distract policymakers from these more important priori-ties.” Will Songdo be able to sustain its current and projected growth? Will

the national government success-fully continue its efforts to make Songdo FEZ more marketable to the global business community? Developers at Gale certainly hope so. Although Gale CEO John B. Hynes might not plan on seeing a return on the firm’s investments for the next couple years, he and others at Gale believe that Songdo will attract more residents as it lures more corporations to create new jobs. Professor Jongryn Mo of Seoul’s Yonsei University notes that the national government is already “in a big bind, and can’t pull out of the project.” In terms of long-term financial sustainability, it may also be in the city’s best interest to diversify its economy by attracting a range of manufacturers and service provid-ers that will increase stability as well as profitability. Songdo could improve its economic stability by securing investment from a num-ber of industrial firms with less elastic demand for labor. Songdo would also increase its chances of success by studying the real estate market from a long-term perspec-tive. Considering examples such as San Francisco’s experience with plummeting real estate prices and surplus office space in the global market contraction of the 1970s, developers might also want to exer-cise caution when determining the fine line between demand driven by speculation and long-term de-mand in the market.

Christopher Lee is a sophomore in Branford College.


Business News

Federal Reserve Chairman Ben Bernanke

As Chairman of the Federal Reserve, Ben Bernanke may have one of the highest-pressure jobs in the world. On the other hand, Bernanke may be the best prepared Federal Reserve Chairman in history. Bernanke, born December 13, 1953, displayed flashes of brilliance as a student in South Carolina. At age eleven, Bernanke won the South Carolina State Spelling Bee. Class valedictorian in high school, Ber-nanke chose to continue his educa-tion at Harvard University. Bernan-ke graduated from Harvard in 1975 summa cum laude with a B.A. in economics and he later received his Ph.D. in economics from MIT with a thesis entitled “Long-Term Com-mitments, Dynamic Optimization, and the Business Cycle.”

Bernanke then went on to teach at Stanford’s Graduate School of Business and New York University, before settling down at Princeton, where he obtained tenure and served as chair of the Economics Depart-ment from 1996 to 2002. A former editor of the American Economic Review, Bernanke also wrote four textbooks on economics during his time at Princeton and is among the 50 most published economists in the world. A member of the Board of Governors of the Federal Reserve System from 2002 to 2005, Bernanke was appointed Alan Greenspan’s successor in February 2006.

Bernanke’s academic expertise is particularly pertinent in the current economic crisis. He wrote exten-sively on the causes of the Great Depression, arguing that financial disruptions during the early 1930s reduced the availability of credit, depressing aggregate demand. Bernanke’s “financial accelerator” theory, which explains how slight economic downturns are worsened by lending restrictions, strengthens his argument about the importance of credit availability during depres-sions. Bernanke’s interest in credit led to the idea of a “savings glut,” or that a worldwide oversupply of savings finances the current US ac-count deficit and keeps interest rates low. Today, Bernanke is primarily identified by his stance on inflation. Bernanke was recently criticized by the media for being soft on inflation after saying, “People know that infla-tion erodes the real value of the gov-ernment’s debt, and therefore, that it is in the interest of the government to create some inflation.” In the same 2002 speech, Bernanke stated the government can always avoid defla-tion by issuing more money, earning him the nickname “Helicopter Ben.”

Under Bernanke, the Federal Re-serve has engaged in some of the most controversial monetary and fis-cal policy measures in recent memo-ry. On September 7, 2008, Bernanke was involved in the seizure of Fannie Mae and Freddie Mac, committing up to $100 bn to each corporation in order to backstop any capital

shortfalls. Just 7 days later, Bank of America’s purchase of Merrill Lynch for $50 bn was overshadowed by the decision of Bernanke and then Secretary of the Treasury Henry Paulson to let financial services in-dustry giant Lehman Brothers fold. On September 16, 2008, an $85 bn loan was extended to rescue Ameri-can International Group (AIG). The loan was heavily scrutinized because AIG was an insurance company, not a bank, and therefore not under the jurisdiction of Bernanke. The Fed also introduced a temporary pro-gram of low-cost overnight loans to investment banks, poured almost $300 bn into global credit markets, announced a program to buy up companies’ unsecured debt, and attempted to shore up confidence in money market mutual funds. Although inflation will be one of the most important concerns moving forward as the Federal Reserve be-gins to unwind its stimulus package, Bernanke’s response to the financial crisis has been generally approved of by economists and led to his reap-pointment as Federal Reserve Chair-man by President Obama.

Bernanke’s most difficult tasks lie ahead. Given his drive towards aca-demic success, it is unsurprising to see that Bernanke is fully committed to doing whatever it takes to steer America out of the recession.

Lindsey Raymond is a sophomore in Timothy Dwight College.

By Lindsey Raymond

From Spelling Bee Champ to Savior of the Economy


Business News

Financial Booms and Busts

The world has recently seen some of the most extraordinary financial events in over half a century. We have witnessed the largest corpo-rate bankruptcy of all times in the form of Lehman Brothers. We have seen the United States government, reputed for its promotion of free-market, cowboy-style capitalism, bail out several financial institutions like Bear Stearns and insurance and mortgage giants such as AIG, Fannie Mae, and Freddie Mac, in an unprecedented series of actions that the growing number of critics are dubbing as socialism. Indeed, we are going through what seems like the mother of all bubble-and-bust cycles, and the entire world is convinced that the financial and corporate landscape of the United States will change forever. Some are even saying that the days of US dominance are over, and that it will never recover to the level of pros-perity it, as a nation, had achieved before the disastrous credit crunch.

This worldview is unfounded, unre-alistic, and simply untrue. To sub-stantiate such a contrarian claim, this article will analyze common catalysts that have driven virtually every historical bubble-and-bust cy-cle. It will then relate these catalysts to the current crisis, proving that this crisis is simply another boom

tal Management’s downfall in the Asian crisis. Easy availability of money and credit was blatantly present in the Gilded Age bubble that preceded the Great Depres-sion. The credit crisis of 2008 is no different. Let us briefly examine the major catalysts and their specific role in the current crisis.

One is the easy availability of money and credit and excessive amounts of borrowing and lending: the underlying housing boom that gained momentum in the early part of this decade encouraged those who previously did not own homes to jump on the bandwagon of real estate speculation. This required borrowers to take out massive loans, and lenders were all too happy to comply and write as many loans as possible to boost short-term profits.

Huge levels of leverage were a recipe for disaster. Bear Stearns and Lehman Brothers were leveraged 30:1, meaning they borrowed $30 for each dollar that they had. This seems foolish, but leverage is a feed-back loop: if one firm takes on le-verage and makes additional profit, other firms need to do the same or they lose their competitive edge and subsequently market share.

Financial innovation created the il-lusion that risk was eliminated. The creation of securitization to spread

By Vivek Ramanand bust cycle; just as the U.S. has recovered from previous crises, it will recover this time as well. Final-ly, the article will end with a discus-sion on how current governmental, public, and private policy will shape the future of the United States and global financial landscape.

Time and again throughout history, we have seen common phenomena occur that help bubbles grow. These catalysts include: feedback loops fu-elled by human overconfidence and greed, easy availability of money and credit, excessive amounts of borrowing and lending, huge levels of leverage that are always justifiable at the time, financial innovation to create the illusion that risk has disappeared, governmental policy decisions that fuel the bubble and a believable story that sounds absurd in hindsight but is universally ac-cepted at the time.

Scholars of all financial crises, rang-ing from the Dutch tulip mania to the Great Depression to the spec-tacular bubble economy of Japan in the 1990s and its ensuing bust, will attest to these common factors manifesting themselves to cre-ate speculative bubbles. The tulip mania was fuelled by the believ-able story that tulip prices would rise forever. Excessive leverage was a symptom of Long Term Capi-

The credit crunch of 2008 and beyond


risk to thousands of counterparties coupled with the invention of intri-cate financial products like collat-eralized debt obligations (CDOs) and even collateralized debt obliga-tions of an existing basket of CDOs (CDO squared) eliminated risk via hedging mathematically and theoretically, but in reality, the in-ability to price these products and to assess the complex risks arising from their arrival in the financial marketplace created a false sense of financial invincibility.

Governmental policy decisions helped create the bubble. The Bush administration undertook the am-bitious task of creating a “home-ownership society” in which every American that wanted a home could own it. Therefore, by subsi-dizing and incentivizing home pur-chases rather than home rentals, the government itself fueled the housing bubble that culminated in the catastrophic bust. Virtually every American, whether the layman from Main Street or a banker on Wall Street or even the “maestro,” the deified Alan Greens-pan himself, believed that home

prices in the United States would never go down. There has never been, and likely never will be, any asset on the market whose price will never go down. However, Wall Street’s bets, borrowers’ mortgages, and the whole subprime market itself were all based on the then-believable assumption that home prices would never decline.

This bubble-and-bust cycle has all the same attributes of historical cycles. The government and the Federal Reserve have responded appropriately, with huge monetary injections akin to pumping steroids into the financial system, and the United States will recover despite all the naysayers’ cries of doom and destruction. As Michael Lewis states in his book, Panic: The Story of Modern Financial Insanity, “How many times does the end of the world as we know it need to arrive before we realize that it’s not the end of the world as we know it?”

This brings us to the final point of this article: a brief speculation of the future, of how the landscape of the financial sector and corporate America will change in the after-math of this undeniably destructive credit crunch. As noted earlier, the Federal Reserve has admirably in-jected liquidity into a financial sys-tem that had suffered the equivalent of a heart attack, thereby preventing a complete global financial melt-down. Such strong, quick action was absolutely necessary and helped avoid another Great Depression. Moreover, the Federal Reserve, having learned from mistakes made during the Depression, has the tools to prevent rapid hyperinflation by restricting the money supply and preventing the unfathomable

amount of liquidity from reaching the consumer market. Therefore, the risk the United States runs is not that of an inflationary scare, or even necessarily of following Japan’s fate into a prolonged state of deflation and low growth. Instead, the main risk the U.S. runs is that of an echo bubble forming as a result of the government’s current poli-cies. Indeed, 2009 has shown us a massive recovery in stocks as well as commodities, bonds, and basically all paper and hard asset markets. These have been largely fuelled by the unprecedented zero percent interest rate set by the Federal Reserve, which will likely have un-intended consequences in precipi-tating another bubble. If another bubble starts forming, the world will quickly forget about the current credit crisis and volumes of pro-posed legislation that would help solidify the financial system, such as regulating derivatives like CDSs and CDOs and imposing stronger capital requirements and leverage limits, will likely not be passed into law. Just as the low interest rates from the tech bubble contributed to an even bigger housing bubble, we need to prepare for the Fed’s even stronger reaction to the credit crisis forming a super-bubble that could come even closer to wiping out the global financial system.

Vivek Raman is an accelerated junior in Davenport College.

“By subsidizing and incentivizing home

purchases rather than home rentals, the gov-ernment itself fueled the housing bubble

that culminated in the catastrophic bust.


International Perspective

Make Way for the Indian Juggernaut

Business Sphere Magazine (BSM): Mr. Navroze, how would you describe India’s role in the global automobile sector?

Rustomjee Navroze (RN): It’s been revolutionary. As any business student would tell you, the previ-ous few decades have seen the Asian tiger economies of Korea and Japan invade and successfully conquer niche automobile markets in the developed world. 2009 has undoubtedly been the year of India, and we at Tata Motors believe that the time has come for India to lead as the vanguard of an automobile revolution. The automo-bile sector in Asia is still very much in its growth phase; the Indian market grew by an astounding 10% overall during the year. And we need to cater to these huge emerging markets with very different needs—the 1-lakh ($2,145) Tata Nano car is such an example. Not only has the response in this niche sector of small vehicles been far greater than anticipated, but the excitement has actually translated into very large pre-booking orders for the Nano.

BSM: But surely for a company with as global a vision as Tata Motors, positioning well on the internation-al market will be important too.

RN: Absolutely. I feel a tremendous milestone was achieved this year with the acquisition of Ford Motor’s Jaguar and Land Rover. Economically,

it is a huge achievement for Indian companies to be participating in such high-stakes transactions. Politically, there now exists tremendous good-will between Ford and Tata. And emotionally, of course, it remains a matter of huge pride and prestige that cars that are synonymous with luxury now sit gleaming in showrooms in Mumbai through an Indian firm—in all aspects, this has been a giant leap for Tata. The fact that India remains relatively buffered from the current economic crisis spewing in the USA and the UK has definitely made it a desirable investment sink. While there was a significant drying up of liquidity felt in this sector as well during the current economic environ-ment, investment flows into India still reached a record level of 20% at 120,000 crores ($25 bn).

BSM: Looking at Asia’s past and future trends concerning the four-wheel automobile industry, what are your immediate thoughts?

RN: Looking into India’s past history within this business sector, it does seem unfortunate that large-scale and hugely beneficial projects like the Tata Nano still find a political span-ner in the works sometimes—while India is flourishing commercially, our government needs to be updated and steer the country rather than act as a deadweight on the shoulders of young India. Having said that, the measures taken by them to curtail the economic

crisis have definitely been partially successful, a consequence that formed the crucial groundwork for the suc-cess of Tata this year, along with many other Indian companies. It is also important to observe the growing role of public-private partnerships in Indian development: from the fields of energy and electricity to those of infrastructure, private companies stepping in to provide competitive services have become an essential part of the business landscape, provid-ing an excellent example of how the public and private sectors of India can reinforce each other. This same vision for an India that forms a shin-ing beacon of efficiency is what we at Tata cherish. Looking at Asia as a whole is formidable; the sheer human capital in terms of labour and exper-tise, when combined with the rate at which Western technology is being imported and absorbed, is explosive. Historically, there have always been two superpowers competing against each other on the globe. But that plot is about to change and transform into a one-hero game, and that sole player will be Asia. It is so fascinating to see the immense potential that is brewing within the countries of this region. The West should be analyzing the combined power of the Asian nations and the consequences Asian growth will soon have on the power balance of the globe.

Siddhant Jhunjhunwala is a sophomore in Pierson College

By Siddhant Jhunjhunwala

Rustomjee Navroze, of Tata Motors India, uncovers the powerful ambition steering India’s automobile industry

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Business Sphere Magazine | Winter 2010