Page 1

THE

BROWN EDITION

ON THE COVER

INVESTING IN RI FOR 250 YEARS

by Matthew Janigian Brown’s commitment to improving the local Rhode Island economy is as old as our University Hall. p6

INTERVIEW WITH KEVIN ROOSE

by Maria Jose Herrera Young Money author & Brown alumnus shadowed eight recent graduates for 3 years as they began their journey in the post-crash finance industry. p8

PROVIDENCE: A STARTUP ECOSYSTEM

by Julia Verbrugge There is an air of optimism in Providence regarding the future of the growing Providence startup community. p14


Intercollegiate Finance Journal Contents

“With Brown’s help, Rhode Island has become, perhaps unexpectedly, a thriving destination for entrepreneurs.” p6

Photo Credit: Arjun Narayen

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“A Goldman Sachs worker told me that at the height of the Occupy Wall Street protests, he started telling strangers he was a consultant instead of a finance guy.”

“[Managing your own business] shows you that at the end of college, you really don’t need an employer...it’s really empowering.”

“Samuel Slater actually stole the factory plans and machine designs he later used to produce textiles in Rhode Island from Britain.”

p8

p16

p20


Intercollegiate Finance Journal May 2014 The IFJ Team 4 Team Page 5 How to Join the IFJ Brown University 6 Investing in Rhode Island for 250 Years Brown’s commitment to improving the local economy is as old as our University Hall Matthew Janigian

8 Interview with Young Money Author & Brown Alumnus Kevin Roose Maria Jose Herrera On the cover... Investing in Rhode Island for 250 Years Throughout its 250 years as a bastion of higher education and scholarship, Brown University has benefited enormously from the state that has not only housed it, but also contributed resources and assistance to the institution. In return, Rhode Island has felt the positive effects of Brown’s presence throughout this time too, as the University has provided investment, entrepreneurship, and the great gift of its graduates to the surrounding state.

The IFJ Online

9 Bills, Bills, Bills How Brown spends almost $1 billion for FY 2014 - 2015 Kaden Lee

10 Brown’s First Startup The story of how Brown’s namesake made his wealth Michael Golz

12 A Business Model with Brown Flair Brown Market Shares Camila McHugh

13 So You Want To Change The World? Crowdfunding may bring you one step closer to improving the world Lauren Sukin

Rhode Island 14 Providence A startup ecosystem? Julia Verbrugge

16 Interview with Brown ‘16’s Cliff Weitzman Founder of BoardBrake Tiffany Chang

18 Race for Rhode Island’s Governor An election split six ways Caroline Vexler

World 20 Intellectual Property and Economic Development A Chinese model that mimics the West in more ways than one Christopher Dederick

22 Currency Wars - Beggar Thy Neighbor Federal Reserve Chairman & Brown alumnus Janet Yellen may need to consider the effect of tapering policy on emerging markets Christopher Dederick

24 El Bloqueo - The Cuban Embargo Is it time the US said adios to this Cold War artifact? Thomas Pesce

www.theifj.com The Blog Uber: Taking on the Taxi Industry in Style Shiying Luo Automating Your Financial Life Patrick Rosanelli Career of the Week: Investment Banking Masahiro Nakanishi Archives Principles of College Savings: Amazon Prime The International Monetary Fund Cheap-On-Investing: 5 Affordable Stocks for College Students Contact Us Email: team@theifj.com Facebook: facebook.com/theifj1 Twitter: @the_ifj

Volume I Issue V

Photo Credit: Yuki Davis

“Serving the collegiate community with news and knowledge on finance, economics, and business topics, all at your fingertips!”

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The IFJ Team May 2014 EXECUTIVE BOARD

Alex Drechsler – Co-President Brice Gumpel – Co-President Max Deutsch – Co-Head of Business Matthew Ostrow – Co-Head of Business Steven Adler – Head of Content Alexandra Nuttbrown – Head of Style Stephanie Hennings – Head of Layout & Design Felicia Iyamu – Head of Distribution Michele Narbonne – Head of Recruitment Lauren Tsai – Head of Operations Yuta Inumaru – Head of Web & Social Media Emily Law – Creative Founder

EDITORIAL BOARD

Steven Adler – Head of Content Alon Galor – Markets & Investing Alex Lloyd George – Markets & Investing Thomas Pesce – Political Economy Eric Han – Political Economy Carter Johnson – Business & Startups Siavash Naderi – Business & Startups Christian Ackmann – Personal Finance Sarah Park – Personal Finance Andrea Wistuba Behrens – Careers & Internships Claire Su – Careers & Internships Caroline Vexler – Interviews & Other Content

BUSINESS TEAM

Max Deutsch – Co-Head of Business Matthew Ostrow – Co-Head of Business Lauren Tsai – Head of Operations Amanda Beaudoin, Christine Blandhol, Paul Cichocki, Sara Hartse, Christopher Heo, Quinn Herrera, Yuta Inumaru, Madelyn Metz, Amy Yao Meng, Connor Lynch, Arielle Schacter, Pranav Sharma, Destin Sisemore, Wenjie Zheng

BLOG TEAM

Julia Verbrugge – Blog Editor Paul Cichocki, Maria Jose Herrera, Eric Hu, Shiying Luo, Masahiro Nakanishi, Angelo Nakos, Patrick Rosanelli

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SENIOR STAFF WRITERS

Jasmine Bala, Tiffany Chang, Christopher Dederick, Miguel Ferreira, Michael Golz, Matthew Janigian, Kaden Lee, Ebony McCaskill, Camila McHugh, Tung Nguyen, Ana Rosenstein, Radhika Singhal, Elizabeth Studlick, Lauren Sukin, Angela Marie Bernadette Teng, Julia Verbrugge, Caroline Vexler, Amanda Yao

STAFF WRITERS

Alexander Behnke, Shreya Bhargava, Rachel Binder, Frances Chen, Noah Elbot, Perry Feldman, Miguel Ferreira, Alexandra Garcia, Kristina Hu, Nathan Johnson, Joanne Low, Lehm Maguire, Giuliano Marostica, Thee Meensuk, Wesley Meyer, Alisa Owens, Kiera Peltz, Christian Petroske, Ignacio Perez-Pozuelo, Graham Rotenberg, Jordan Schochet, Kelsey Sherman, Kjetil Stiansen, Carolyn Stichnoth, Mark Valdez, Jonathan Vu, Carolyn Westphal, Jonathan White, Samantha Wong

LAYOUT & DESIGN TEAM

Stephanie Hennings – Head of Layout & Design Chandelle Heffner – Head of Graphic Design Madeleine Johnson – Head Illustrator Charlie Benson, Israel Carrete, Linda Navon Chetrit, Quinn Herrera, Jie Hao Kwa, Kaden Lee, Shiying Luo, Kimberly Meilun, Amy Yao Meng, Nicholas Pucel, Lorraine Salim, Mili Sanwalka, Claire Su, Sirena Turner, Kayla Tyrrell

WEB & SOCIAL MEDIA TEAM

Yuta Inumaru – Head of Web & Social Media Sara Hartse – Head of Technology Michelle Watt – Head of Social Media Karthik Harihar Reddy Battula, Chien Teng Chia, Jenna Chuck, Sara Hartse, An Truong, Amanda Yao, Raymond Zeng, Wenjie Zheng, Joshua Wang

COPY EDITORS

Maria Jose Hererra, Nathan Johnson, Lisa Opdycke, Duncan Weinstein, Francesca Whitehead

FACT CHECKERS

Eric Hu, Arielle Schacter, Scott Schubert, Ella Warshauer, Francesca Whitehead


For more information, check out the “Get Involved� tab on theifj.com! Submit to our next edition, become a general body member, or join one of our sub-teams: blog, business development, web, social media, and design. If you have any questions, please contact team@theifj.com or alex_drechsler@brown.edu.


Brown University Intercollegiate Finance Journal

Brown’s main green, 1850s

INVESTING IN RHODE ISLAND

FOR 250 YEARS by Matthew Janigian

Brown’s commitment to improving the local economy is as old as our University Hall. Only a state like Rhode Island could produce a school like Brown University. Founded in 1636 by Roger Williams after his banishment from the Massachusetts Bay Colony, Rhode Island quickly distinguished itself as the most liberal of the original thirteen colonies. Now, nearly 400 years later, Rhode Island is continuing to evolve into one of the most progressive states in the nation and Providence into a vibrant capital city. Since its founding in 1764, Brown 6

University has invested in the surrounding Rhode Island community and, perhaps unsurprisingly, Brown’s contributions to Rhode Island have had a lasting impact on the state’s development. Educational Investment The greatest investment that Brown makes in the Rhode Island community is the same one that it has been making for the past 250 years: education. In Brown’s earliest days, the University’s

founders were active in negotiating political treaties during the American Revolution. This is especially impressive considering that the school was barely over a decade old at the time. In the present day, Brown continues to contribute to the revival and revitalization of Providence through its endless pursuit of liberal education. Entrepreneurial Impact A more recent success story in Brown’s


Interview with Kevin Roose ‘08 on Young Money, 8

A business model with Brown flair, 12

How Brown spends almost $1 billion for FY 2014 - 2015

So you want to change the world?, 13

The story of how Brown’s namesake made his wealth, 10

relationship with Rhode Island is Brown’s involvement with the Rhode Island entrepreneurship scene. Brown has supported the Rhode Island Center for Innovation and Entrepreneurship (RICIE) in order to stimulate entrepreneurship in Rhode Island. Because of the efforts of Brown University and its members, the entrepreneurship scene in Rhode Island has grown drastically. Betaspring, the startup accelerator in Providence, was recently ranked by South by Southwest as the 11th best startup accelerator in the nation. That is a pretty impressive feat, especially considering the strong competition among startup accelerators. With Brown’s help, Rhode Island has become, perhaps unexpectedly, a thriving destination for entrepreneurs.

Island entrepreneurship scene, but also to the Rhode Island economy in general. Over the last five years, Brown alumni, faculty, and students have founded 25 Rhode Island-based companies. Fur-

Brown University May 2014 local Rhode Island farms is not only helping to reduce waste and promote sustainable farming, but is stimulating the Rhode Island economy. A Unique Culture Ultimately, Brown’s greatest contribution to the Rhode Island community might very well be the culture it inspires. Brown distinguishes itself from other institutions of higher learning in that its members genuinely believe that a liberal education and open-minded culture are the best ways to develop future leaders. As a result, Brown has supported and accelerated the growth of College Hill and the greater Rhode Island community. It is fitting that Brown’s campus has no definite boundaries. Indeed, between Brown’s main campus and the Warren Alpert Medical School, the University spans from the East Side of Providence to the Jewelry District downtown. Brown’s students are not isolated from the Providence community, rather they are integrated into it. Two hundred and fifty years later, it makes sense that a state like Rhode Island would be home to a school like Brown University - both are liberal and intimate. Over the 250 years that Brown has existed, numerous members of the Brown community have gone on to make significant contributions to the Rhode Island community, past and present. Many, like Federal Reserve Chairperson Janet Yellen ‘67 and World Bank President Jim Yong Kim ‘82, even play influential roles on the national and global scales. Brown has been investing in its community for 250 years and in doing so, it has helped create one of the most vibrant, albeit often overlooked, areas in the nation.

“With Brown’s help, Rhode Island has become, perhaps unexpectedly, a thriving destination for entrepreneurs.”

A Focus on Liberal Learning Nearly all the Ivy League universities and many other top-tier schools have pre-professional programs that train students for one particular career path. Brown, however, maintains a broader educational approach. The closest thing to a pre-professional concentration is the Business, Entrepreneurship, and Organization (BEO) concentration. BEO distinguishes itself from more traditional pre-professional programs in that it promotes a liberal approach to business, emphasizing interdisciplinarity. This fits with Brown’s original charter, which does not emphasize pre-professional focus. Brown keeps all avenues of education open to its students and encourages them to develop varied, holistic perspectives. By allowing and encouraging students to approach problems with a creative, entrepreneurial mindset, Brown has contributed not only to the Rhode

thermore, Brown’s partnership with the Rhode Island School of Design (RISD) has allowed students from both schools to interact with each other and share their ideas and expertise. One of the most notable products of the collaboration between RISD and Brown is The Box Office, a sustainable office building made out of recycled shipping containers. This project was made possible by Brown’s partnerships with both RISD and RICIE. The Box Office is also an example of Brown’s investment in sustainability in Rhode Island. Brown’s pursuit of green initiatives has led to its being rated as one of the most sustainable schools in the country. While Brown still has work to do, it is clear that the University is taking an active role in sustainable development. Walking along Waterman Street, one can witness the ongoing construction of the Building for Environmental Research and Teaching, Brown’s newest, sustainable building. Additionally, Brown has drastically cut its greenhouse gas emissions since 2007 and continues to do so. Furthermore, Brown’s Sustainable Food Initiative and its partnership with

Illustration by Madeleine Johnson 7


Interview with Kevin Roose ‘09 by Maria Jose Herrera In Young Money, Kevin Roose (B ’09), shadowed eight recent college graduates for three years as they began their journey in the post-crash finance industry. Hailing from prestigious firms like Goldman Sachs, these eight young workers bore the full brunt of the finance industry experience—and Kevin Roose was there to document it. The book, according to Roose, is “an inside look at how the crisis really, truly changed Wall Street, starting with its youngest members.” In the book you talk to some higher-ups, but they’re not the Young Money on which you focus. Why did you choose to write about new bankers on Wall Street and not the old ones? There are thousands of books about old bankers. I was curious to hear from the young ones – the people whose views and ambitions are still being shaped. And I was especially curious what it was like to be young on Wall Street after the crash of 2008, and whether the financial crisis changed the initiation process for young recruits.

Do you think that there’s an innate difference between older Wall Street workers and those like the eight recent grads you talked to? I do. The eight young bankers I followed were much less a part of the Wall Street machine than their elders. They had more doubts, more skepticism about their work, more beef with the system as a whole. They were a lot more interesting to talk to, frankly.

Why is it that so many ambitious students flock to Wall Street? If it’s as grueling as is depicted in your book, what’s the draw? You know, it’s weird. I thought, when I started the book, that money was the big draw. But I think that for a lot of college students, it’s more about getting structure and a place to go after graduation. Wall Street is excellent at recruiting – they make it incredibly easy to do a résumé drop, go to an info session, and lock up a job by the fall of your senior year. And the result is that a lot of students end up going to Wall Street as a result of their anxiety – because they don’t know what else to do. It’s not always the money.

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How did your eight “subjects” change over the two years you talked to them? Well, they all got really good at Excel, but more than that, I think they’d tell you that they became a lot more transactional. They started to look at the world in a different way, and they weren’t as happy or imaginative. The culture of Wall Street – the cynical brusqueness of the trading floor Have you kept in contact with any of them? If so, – rubbed off are they still in finance? on them. I’ve kept in touch with all of

them. About half of the eight are still in finance, and half have gone on to other industries.

What’s the most shocking thing any of the eight subjects said to you? I remember one guy, a Goldman Sachs worker, telling me that at the height of the Occupy Wall Street protests, he started telling strangers he was a consultant instead of a finance guy. That would not have happened in 2007, or at probably any other point in the history of finance. Working at Goldman used to be the sexiest thing you could do!

Since a lot of our readers are interested in the field, what would your advice be to kids who want to go into finance? If you really need the money, or if you really want to be a financier – like, if you care deeply about collar trades or syndicated loans or some other nerdy finance thing – then go for it. If not, it’s a pretty miserable way to spend your first years of adulthood. There are lots of other options – be bold!


BILLS, BILLS, BILLS

by Kaden Lee

How Brown spends almost $1 billion in FY 2014 - 2015

Money coming in... PER DAY

PER MONTH

PER DAY

...and money going out

THE UNDERGRADUATE RESOURCES COMMITTEE RECOMMENDS AN UNDERGRAD FINANCIAL AID BUDGET OF ABOUT $104.1 MILLION THIS IS AN ESTIMATED PACKAGE OF $38,785 PER STUDENT RECEIVING FINANCIAL AID

The annual cost of keeping the condition of Brown’s campus at status quo is around $50 million

THE BUDGET FOR STUDENT WAGES IS SET TO INCREASE BY:

2.7%

For a student working 10 hours a week, this equates to an additional $50 in earnings over the course of an academic year.

A TOTAL OF $644,000 IS BEING DEVOTED TO IMPROVING CAMPUS SAFETY 9


Brown University

BROWN’S FIRST

STARTUP The story of how Brown’s namesake made his wealth.

by Michael Golz There was a time when Brown University went by a different name, when the historical visages of the campus were a far cry from the sprawl of what we see today. The charter of this “College in the English Colony of Rhode Island and Providence Plantations” had over 60 signatories, including the three Brown family brothers: John, Nicholas, and Moses. While much of the discussion about the Brown family today centers around Nicholas Brown’s involvement with the slave trade, often overlooked were the family’s efforts to improve the University and root its establishment in its current Providence locale. Small Beginnings In fact, much of the wealth invested in the University during its early years came from Nicholas Brown’s son, Nicholas Brown Jr., a graduate of the class of 1786. Inspired by his family’s deep ties with the school and by the university’s alluring atmosphere, he donated $5,000 to school. It was a gift that would result in the renaming of the school to Brown University. That $5,000 only represented a beginning, just one allotment of the over $150,000 (equivalent to $2 million today) Brown donated to the University over the course of his life. This, of course, begs a question: where did the money come from? Surprisingly enough, and unlike many of his contemporaries, Brown’s donations were not associated with the profits of the slave trade. Although he eventually inherited a partnership in his father’s firm, Brown and Benson, Nicholas Jr.’s ultimate success came outside the family business. Working for the family business, Brown Jr. acquired business acumen of his own, developing what was to be the foundation for a future empire. With the help of Thomas Ives, who had married into the Brown family, Nicholas founded

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Brown’s campus in the 1870s

“Unlike many other merchant firms, Brown and Ives did not need to participate in the Triangle Trade to bolster its revenues.”

his own company, creating Brown’s first startup: “Brown and Ives,” in 1796. Brown and Ives found great success as a trading company, particularly in relation to many of its early 19th century peers. Ives, who had extensive background in accounting and financials, mainly concerned himself with the financial structure and record keeping of the company; Brown took responsibility for the trades and logistics of ship

preparation, often leaving Providence to embark on voyages with his vessels, or at the very least overseeing their progress in the harbor. Brown and Ives and the Java Trade Unlike many other merchant firms, Brown and Ives did not need to participate in the Triangle Trade to bolster its revenues. The key to the company’s success was rather found in its exploitation


Brown University

Nicholas Brown, Jr.

Nicholas Brown handwriting book

of the Napoleonic Wars in Europe. European distress benefited the firm twofold: while the European armadas were otherwise occupied, Brown and Ives consolidated its trading relationships in the Far East, specifically in the ports of Batavia (what is now the northern part of the Indonesian city of Jakarta) and Canton (the only port in China during the Qing Dynasty open to foreign trade). With the risk of confiscation by British

ships diminished, American trade in the region boomed. Between 1800 and 1807 alone, Brown and Ives dispatched 14 voyages to the coffee-rich ports of the East Indies, an integral part of New England’s so called “Java Trade.” Because of U.S. neutrality in the war, American merchants could access northern European markets with less competition from European merchants. By supplying European nations with

commodities such as food, cotton, and tobacco, Brown was able to accrue a substantial revenue that he converted to gold in places like Amsterdam or Gibraltar. This enabled Brown to more efficiently trade with Chinese merchants - and trade more products at that - whose preference for the use of gold specie in trading meant American merchants holding gold acquired far more product. The tea and silk procured in China was then brought back to the U.S. and Europe, where the cycle began again. Brown developed a new kind of “triangle trade,” one that did not rely on human trafficking. Rather, Brown and Ives’s trade involved only the transfer of commodities to Europe, then gold to the Far East, then teas, coffee, and silks back to the U.S. and Europe. Diverse Opportunities Despite the efficiency of the firm’s trading processes, after the end of the War of 1812 heightened competition from new European traders weakened Brown and Ives’s grip on the northern European markets. In order to sustain the profitability of their business ventures, the partners turned to manufacturing, real estate, and utilities in hopes of taking advantage of the changing nature of the U.S. economy. Throughout the rest of their careers, the men were involved in the construction of lucrative railroads and canals, including the Blackstone Canal, as well as the management of textile firms, such as Blackstone Manufacturing Company, which oversaw numerous cotton mills along the Atlantic coast. Nicholas Brown and Brown University The success of Nicholas Brown and Thomas Ives made them prominent community members in the Providence area, as well as granting them perpetual involvement in the affairs of the University. Many of the University’s buildings still standing today can be attributed to the generosity of the Browns, including Hope College and its neighbor Manning Hall. Their effective strategies in trade and management laid the groundwork for a family business that would survive over half a century before eventually falling victim to the turbulence of the Civil War and the deaths of the sons in charge of the company at the time. Despite its unfortunate collapse, the success of Nicholas Brown reflects the true nature of Brown: an institution shaped by the ingenuity of its alumni and by the progress of American society.

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Brown University the program. BMSP was initially designed for Brown Dining Service workers, built on the philosophy that the staff that provide Brown students with food every day themselves deserved fresh, local, and affordable produce. When the program first started, United Natural Foods Inc. funded the subsidized shares until Brown Market Shares was able to do so internally. The BMSP team insists that even the $20 price bracket is still around $10 less than what one might pay for the equivalent weekly amount of produce at a grocery store. A typical produce share might include an acorn squash, a kohlrabi, sweet potatoes, carrots, beets, apples, and rutabagas. The produce is grown at a number of local farms, including Schartner Farms, Freedom Food Farm, Wishing Stone Farm, and Hill Orchards.

A BUSINESS MODEL WITH BROWN FLAIR: BROWN MARKET SHARES by Camila McHugh

Can this Brown-based business offer fresh fruits and veggies at half the price? Sharing is Caring Shareholders invest in the Brown Market Shares Program at the beginning of the semester in order to guarantee farmer participation. This allows the Brown Market Shares team to forge verbal and written contracts with farmers. Some farmers are contracted on a semester basis while others are contracted weekly, allowing Brown Market Shares to maintain a flexibility that keeps shareholders happy and provides for a variety of goods week-to-week. Shareholders pay on a tiered basis -- $20, $14, or $7 a week for a collection of veggies. This tiered structure is designed such that mid and low tier price brackets allow for the participation of lower income groups in

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Funding and Financials Brown Market Shares allows the farmers to set their own prices; the financial model is designed to purchase at wholesale and sell slightly lower than retail. Brown Market Shares spends $14 per share a week and reinvest its profits into funding the subsidized program. Of the $500,000 the program grossed in the five semesters between 2011 and 2013, 91 percent was reinvested back into the local food community and 9 percent covered operational costs, such as purchasing scales and paying small stipends for coordinators. Grants from Brown allow the program to grow and cover larger investments like refrigeration. Brown Market Share states that “food is purchased directly from producers at bulk pricing, allowing the program to deliver a good value per shareholder dollar spent, while maintaining internal subsidization and accounting for small overhead expenses. Dedicated volunteer labor, as well as the the ability to use Brown’s facilities without a charge, keep overhead expenses low – a crucial part of the financial model.” This commitment to subsidized shares distinguishes Brown from similar programs at other colleges, and has helped the program to grow in the hopes that it will never turn down any applicant. Last fall, the program introduced donations to its subsidized program, and many formerly subsidized shareholders donated. Such donations are indicative of the sense of community that Brown Market Shares fosters. Ultimately, a shareholder invests not only in food, but also in the program’s mission.


Money raised through crowdfunding has increased by

SO YOU WANT TO CHANGE THE WORLD?

557%

in the past 5 years

by Lauren Sukin

Crowdfunding may bring you one step closer to improving the world. College students are notorious for ramen noodles and empty wallets, but also for being idealists who want to make a difference. For an aspiring activist, there are thousands of causes out there to support — and each is clamoring for funds that are harder and harder to find as public funding for charitable causes and movements steadily declines. Fortunately, there’s an increasing abundance of ways for students and others who can only give out small sums to get connected with causes and projects they care about: crowdfunding. And with decreasing opportunities for government-funded grants, there are fewer avenues for startups and small projects to secure the dollars they need, making this new industry increasingly critical. The crowdfunding industry is designed to allow companies and organizations to secure funding through a large number of small donations using platforms and software. The crowdfunding wave began in full force in 2012, when the JOBS Act, designed to secure a more sustainable future for small businesses, was passed. The Act was sponsored by grassroots entrepreneurship, especially from the technological sector, and its small-business and competition-based focus was able to gain bipartisan support. The bill contained provisions that laid the platform for a crowdfunding marketplace by establishing guidelines and regulations. Donation-Based Crowdfunding Crowdfunding exists in two primary forms. The first model is donation-based funding, in which collaborating investors work towards a funding goal in exchange for perks or rewards. Crowdfunding website Indiegogo, which received $40 million in investments in the last quarter alone, uses this model—donors can set an amount that they would like to give, and companies or projects can design their own benefits based on the amount donated, whether that’s a drawing from a child that a donor supported or free tickets to a concert. Indiegogo works with a wide

range of projects: anything from charities to personal financial needs. But a better site for charity work might be Crowdrise, which works primarily with groups dedicated to social causes. Perhaps the most well known organization using donation-based crowdfunding is Kickstarter. The company sponsors a variety of creative projects, but doesn’t work with charities or causes and is designed more to focus on products. One Kickstarter-backed company, Oculus VR, was recently sold to Facebook for billions. In the aftermath, many reconsidered whether the value of crowdfunding might actually be to its investors. Because Kickstarter uses the first crowdfunding model —donation-based crowdfunding— Oculus investors received nothing of the money poured into the company by Facebook, making those free T-shirts seem like a bit of a bittersweet prize. Investment Crowdfunding The second model of crowdfunding allows investors to get more bang for their buck. This model generally operates at a higher scale, getting higher returns for companies seeking investment, but at a price: It’s called investment crowdfunding, and in this model, donors secure their investments through equity or debt in a company. The donors therefore have the opportunity for financial returns on their investment. This can be used to attract both individual investors, who might have an interest in a particular company or project, and angel investors, who can help startups get on their way by providing significant funding. Myriad companies have sprouted up in the last few years to help connect potential investors to companies seeking funds, including AngelList and Crowdfunder. As crowdfunded companies begin to get big and sell, it may be that donors don’t want to settle for little perks and prizes anymore, and are looking for more of a stake. But how can companies, at such an early stage, know how much they have to give away? It’s too early to divide the company into shares and

9 WEEKS

Average campaign length

$7,000 Total raised by the average successful campaign

10%

Of campaigns raise over $10,000

much too early to go public. Investor crowdfunding does offer an option, but there’s a barrier to entry—donors need to provide higher amounts. So if investor crowdfunding does take off, there’s a chance that donation-based crowdfunding, which allows companies to get truly widely dispersed and smaller donations, might begin to fall by the wayside. Or perhaps, over time, the young crowdfunding market will just change shape, with donation-based crowdfunding growing to be focused more towards charities and activist projects, leaving room for investment crowdfunding to take over the space for young companies and products. For now, though, you may just have to hold out on the bigger donations until your diet consists of fewer Chicken Finger Fridays.

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Rhode Island

PVD: 14

STARTUP ECOSYSTEM


Rhode Island May 2014

Student entrepreneur, 16 An election split six ways, 18

Four years after the bankruptcy of a local video game startup cast a shadow of fear over the Providence startup community, recent news may show signs the city is turning the corner. by Julia Verbrugge The Providence startup community still shivers at the mention of 38 Studios. The video game startup, founded by former Red Sox player Curt Schilling, received $75 million in loans from Rhode Island in 2010 in exchange for local job creation. A large loan controversy followed shortly after as the fledgling 38 Studios went under, and to this day the lawsuit continues, leaving a large dark cloud over the spirit of entrepreneurship in Rhode Island. Despite these memories, there is an air of optimism in Providence regarding the future of the growing Providence startup community. From College Hill to the State House to the emerging “Knowledge District,” Providence is gearing up for further growth. At Brown, good news came with the 2013 announcement of the development of a Center of Entrepreneurship on campus. Beyond College Hill, start-ups celebrate the uptick in investments, as they collectively raised over $140 million in new funding last year. Additionally, startups like Splitwise and MoFuse continue to welcome Venture for America fellows as employees, enjoying the presence of top college graduates in their offices.

P M?

source of job growth, noting that since 1977, virtually all net job gain in the U.S. has come from new ventures. The economic factors fuel attempts to foster a stronger entrepreneurial community, and officials hope the payoff comes in the form of a denser startup network, and more so, lower unemployment figures. With that in mind, a lot of effort goes into branding Providence as a “less congested marketplace where people, connections and expertise are at your fingertips.” Attempting to attract high-potential startups, the city markets itself as highly connected to both Boston and New York’s startup ecosystems.

their concerns. Allan Tear, co-founder of Betaspring, claims,“if a company based in Providence exhibits early success and the ability to go to venture scale, they will attract capital from Tier 1 markets.” Locals point to Walker Williams, who recently won $20 million in first round funding for TeeSpring, a Providence-based startup, for proof of this. Beyond external support, good news recently arrived that Providence is reviving its Innovation Investment Program. The IIP, a previously suspended startup investment program, will make $35,000 investments in startups and requires recipients to stay in the city for at least two years. It focuses on high-growth technology sector companies and will be open to any company endorsed by a city-recognized “mentor.” Ultimately the hope is that the program will help bridge the gap over the “valley of death” that startups experience when trying to find funding while simultaneously allowing them to settle in Providence.

“While entrepreneurs complain about the inability of local funding groups to provide full support of the high-growth startups in the area, others counter their concerns.”

A Diamond in the Rough Across Providence, “innovation economy” and “knowledge economy” are gaining momentum as buzzwords of hope for the local economy. As is clear in the recent U.S. Bureau of Labor report, which reveals Rhode Island’s unemployment rate of 9.1 percent as the highest in the country, Rhode Island’s economy continues to struggle. Because of this, local policy-makers see the job-creating potential of startups as a promising path toward economic development. To support their claims, they cite multiple studies that prove startups are a vital

Bridging the “Valley of Death” According to Richard Horan, Senior Managing Director at a local venture capital fund, a startup ecosystem relies on a balance of three things: technology, talent, and capital. Though he recognizes that bringing talent to Providence is difficult, he pinpoints capital as the major problem in the Providence community. Given post-38 Studios funding hesitancy and an overall shortage of funding sources, Providence continues to suffer from a significant gap in the capital continuum. A handful of seed funds and angel groups exist in the area, and local accelerator Betapring provides support to the startups it mentors, but little support exists beyond that. While entrepreneurs complain about the inability of local funding groups to provide full support of the high-growth startups in the area, others counter

Batting with the Red Sox Providence has come a long way in the past five years, and moving forward, the city must avoid falling prey to “Red Sox Syndrome.” A metaphor that Richard Horan uses to describe Providence’s startup problems, the syndrome deems the local entrepreneurial ecosystem as the “minor-league” version of the one that exists in Boston. Providence may have less players, and the level of play remains of lower caliber, but local entrepreneurs should continue trying to emulate the approach and actions of their “major-league” Boston neighbors. When it comes to the actual Red Sox, though, Curt Schilling is a name never to be mentioned in the local startup community.

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“Have confidence. Think big and bottle that energy.�

Photo Credit: Blaze Lee 16


Interview with Cliff Weitzman ‘16 by Tiffany Chang FRESHMAN FALL: Founded BoardBrake - 1st prototype 1st place - Startup Weekend Providence 2nd place - Brown Elastic Pitch 1st place - MIT’s Startup Pitch Night

FRESHMAN SPRING: Co-Founded YumPass LLC Founded CellArmor Clinton Global Initiative met Bill Clinton YumPass Launches 2nd Place - Stanford Ebootcamp One-on-one lunch with Jack Dorsey

SOPHOMORE FALL: Semi-Finalist - Harvard Business School entrepreneurship conference 2nd place - MIT’s Pitch Night

SOPHOMORE SPRING: Began professional relationship with President of the World Bank BoardBrake became patent pending Gave TEDx talk - “How to Turn Big Ideas into Reality” 42 Design iterations/9 prototypes of BoardBrake

Thinking of developing a startup? We spoke with Cliff Weitzman ‘16 founder of BoardBrake, about his experience and his tips for success. BoardBrake is an attachable brake for longboards and skateboards which allows for easier braking and maneuvering, improving the safety of traveling via longboard. BoardBrake won first place in Massachusetts Institute of Technology’s (MIT) Pitch Night Competition and second place in Stanford University’s Entrepreneurship Bootcamp Pitch Competition out of the “Top 100 Student Entrepreneurs Worldwide” as chosen by Stanford. IFJ: What inspired you to start BoardBrake, and how did you get things going? CW: My first week at Brown, I lent my longboard to a friend who crashed and got injured. I realized the problem which led to the crash was that he had no effective way of stopping. That day, I looked online for a longboard brake to purchase, and when I couldn’t find one, I searched for patents—but didn’t see anything good. So, I spent a few hours in my room trying to design something myself. I then looked to recruit engineers. I spoke with fifteen different engineers, and every time one said he or she did not have time, I asked for the contact information of another engineer he or she knew. Finally, the sixteenth engineer I spoke with agreed to make me a computer aided model of my idea. From there, I did a lot of prototyping, spent some time at MIT to learn more about designing a physical product, and also entered a bunch of competitions. IFJ: What was the toughest challenge you faced regarding BoardBrake? CW: The most difficult part was learning to do something that I hadn’t ever done before. I had limited experience with building a physical product—I had done some web and iPhone app building prior to BoardBrake, but never a physical product. Recruiting talent, getting industrial designers and engineers interested and involved, was also a challenge. I ended up learning to do most of the necessary pieces myself and getting advice from the experts after asking them to show me the basics. I taught myself what I needed to know such as how to file a patent, how to make a rapid prototype, et cetera. This was my first startup that was fully founded by me. IFJ: What’s it like managing your own business while being a full-time student? CW: It’s really fun—it just takes a lot of

time! You get to apply yourself in the real world without leaving school. It shows you that at the end of college, you really don’t need an employer—you can just start your own thing. It’s really empowering, and gives you a lot of agency. IFJ: What aspect of BoardBrake are you most proud of ? CW: How novel it is. There’s some really novel aspects about it that no other solution has come up with which is why it’s been so successful [in competitions]. It solves a serious problem for longboarders in a simple and intuitive way. IFJ: What do you think is the most important skill to have when starting your own business? CW: By far have confidence. Think big and bottle that energy. To people who’ve wanted to start their own stuff but haven’t succeeded in execution: Once you form the idea, do it immediately. What happens is you have a giant wave of energy that is there right when you get the idea—but that wave dissipates over time when final exams arrive, when the idea gets old, when things get difficult. You need to do as much as you can within that first day or week when the idea is fresh and the energy is there. That’s why I never delay when I become inspired with projects. Work immediately to keep the momentum going! IFJ: What’s the biggest piece of advice you have for students who want to kickstart their own business? CW: Talk to everyone, regardless of whether or not they’re an expert in the field. Consider their input—everyone has a different perspective than you and can give you advice and inspiration. And unless you’ve invented the cure for cancer, you shouldn’t be secretive about what you’re doing. Nobody has time to steal your ideas—just talk to everybody and they’ll bring you other great people to join and help you! 17


Rhode Island

RACE FOR RHODE ISLAND’S GOVERNOR An Election Split 6 Ways by Caroline Vexler

With a quarter of voters still undecided, the Rhode Island Gubernatorial Race is still a tossup. And with the Democratic ticket wrestled between four candidates, is this race the Republicans’ opportunity to retake the office they held from 1995 to 2011? The 2014 Rhode Island gubernatorial election is shaping up to be an interesting political arena with a strong economic focus. There are currently six candidates in the running for the office. In the past 100 years, governors of Rhode Island have had a fairly even split between Democratic and Republican party affiliation. More recently the position was held by a Republican from 1995 until 2011. Then the incumbent governor, Lincoln Chaffee ’75 took office first as an Independent and later as a Democrat. Though Chafee is eligible for reelection, he chose not to run. The Democratic and Republican primaries, which will take place on September 9th, will determine which of the four Democratic candidates and the two Republican candidates will face off. The real battle lies in the Democratic primary, in which three unique yet influential candidates are currently in the lead. In a state where the unemployment rate is one of the highest in the nation, economic policy is an especially important factor. Let’s meet the candidates.

Clay Pell, Gina Raimondo, and Angel Taveras. According to a poll conducted in October by the Taubman Center for Public Policy at Brown University, Raimondo holds a 9 percent edge over Taveras. In a more recent survey conducted by the Providence Journal in February, Giroux garners a mere 1.2 percent, Pell just under 15 percent, and in a change from October, Taveras claims a slight

is “concerned about the worries of the average Rhode Islander” and plans to invest in the people of Rhode Island while the other candidates are “business as usual.” Giroux’s proposal will establish increased commerce by making loans more available for small businesses and residential properties and by lowering Rhode Island sales tax. Clay Pell While Pell has virtually no political experience, he boasts a “distinct set of skills and problem-solving experience” as a lawyer, as a Lieutenant in the Coast Guard, as the former director for strategic planning for the Obama Administration’s national security team, and as the deputy assistant secretary at the Department of Education. As part of his campaign, Pell pledges not to accept contributions from PACs or state lobbyists. He claims that “cronyism and insider-politics” are holding back Rhode Island’s economy. Pell plans to unveil a more detailed economic plan over the next several months. In a sixteen-second video on job growth, he also supports investment in human capital, such as education. The Pell campaign will be largely shaped by more explicit plans released in the months to come.

“More than a quarter of those polled were undecided. The Democratic ticket is therefore still very much up for grabs.”

DEMOCRATIC PARTY: With the withdrawal of incumbent Governor Lincoln Chafee, the Democratic race has boiled down to four candidates: Todd Giroux,

18

lead over Raimondo with each collecting less than a third of the vote. More than a quarter of those polled were undecided. The Democratic ticket is therefore still very much up for grabs. Todd Giroux Giroux ran as an Independent in the gubernatorial election of 2010 and according to his campaign website, “The Rhode Island economy is the number one focus of [his] campaign for Governor.” His blueprint for economic improvement includes $1 billion funneled directly into Rhode Island with an emphasis on small businesses and a specific job creation and training plan. The premise for his campaign is that he


Rhode Island Candidates

Todd Giroux Democrat

Clay Pell Democrat

Gina Raimondo Democrat

Angel Taveras Democrat

Ken Block Republican

Allan Fung

Ran as an Independent in 2010. Focuses on small business and “the average Rhode Islander.”

Refusing contributions from PACs or lobbyists. Experience as part of Obama national security team and at Department of Education.

Current General Treasurer of Rhode Island. Platform includes five-part plan on job creation.

Current mayor of Providence. Recalls project titled “Putting Providence Back to Work” as a part of his gubernatorial plan.

Founder of the Moderate Party in Rhode Island. Wants to save $1 billion in wasteful spending.

Current Mayor of Cranston, Rhode Island. Pledges to create 20,000 new jobs in Rhode Island.

Gina Raimondo Raimondo is currently serving as the General Treasurer of Rhode Island. As Treasurer, she has reformed pension policies and supported decreased interest rates on payday loans. The platform for her gubernatorial campaign is a five-component plan on jobs and the economy to “put Rhode Islanders back to work.” The first four parts of this proposal are manufacturing, infrastructure, workforce development, and tourism. One of her plans is the establishment of the Rhode Island Municipal Infrastructure Bank, which will serve as “a onestop shop for municipalities that want to upgrade their infrastructure” and will supposedly create 4,000 jobs over the next five years. Additionally, as part of her Workforce Development plan, she intends to pair with educators to improve the skill set of the workforce. Her focus on manufacturing also includes workforce development to prepare for advanced manufacturing jobs. Lastly, she plans to create an additional 5,000 jobs in the tourism industry in the next five years. Angel Taveras Taveras is the current mayor of Providence, Rhode Island. He plans to “stand up for good wage jobs” and reform tax and economic policies to improve job creation efforts. According to the Providence Journal, during Taveras’ final State of the City Address, the mayor “cited improvements in such areas as… tourism, development, city finances and pension restructuring.” Taveras also talks about a new project to improve

the Providence economy called Putting Providence Back to Work. Though Taveras has yet to release a detailed economic program for his gubernatorial campaign, his 20-step plan for economic development in Providence suggests that economic growth will be at the forefront of his campaign. REPUBLICAN PARTY: Though reports have shown Rhode Island residents to be Democratically leaning, Ken Block and Allan Fung - the two Republican candidates - are both legitimate threats to the Democratic powerhouses. In a poll taken back in October by the Taubman Center for Public Policy at Brown University, in a four-way race between Raimondo, Taveras, Fung, and Block then running as an Independent - the Democrats would gather a combined 48 percent and the Republicans 28 percent with 24 percent undecided. From another poll, Taveras directly against Fung would result in 41.5 percent and 32.9 percent respectively, and Raimondo directly against Fung would result in 37.6 percent and 35.9 percent respectively. Since more than a quarter polled were undecided, the race is far from settled. Ken Block Block is the founder of the Moderate Party in Rhode Island and ran as a moderate in the 2010 gubernatorial election. According to his campaign website, “Jobs and the economy are [his] #1 priority.” He plans to stimulate the Rhode Island economy by saving money. This will include reforming unemployment insurance and temporary disability

Republican

insurance, reducing the costs of healthcare for public sector employees, and auditing pensions. He posits that Rhode Island can save “$1 billion in wasteful spending” and that these savings will “make the state economically competitive.” Block also intends to back Rhode Island-based businesses by giving them capital gains tax exemptions to stimulate growth and create jobs. Allan Fung Allan Fung is the incumbent Mayor of Cranston, Rhode Island. As Mayor, Fung pursued economic initiatives by creating more than 1,000 jobs in Cranston and reducing operational expenses. According to the Providence Journal, his gubernatorial campaign focuses on job creation. Fung has said, “There’s only one important mission, and that’s to put people back to work.” He pledges to create 20,000 new jobs in Rhode Island. His proposal also includes a thorough reform of the Rhode Island tax system. According to his campaign website, Fung believes that Rhode Islanders deserve more jobs, more financial stability and safety nets, and “More return on the taxes they pay to the state.” In short, this race has just begun and it is unclear which players will even make it to the finish line. Those wielding voting power will have a serious and difficult decision to make come this fall. This is an important election for those concerned in the fate of Rhode Island to follow, as the winner will determine if and how Rhode Island recovers from its current crippling unemployment rate.

19


World Intercollegiate Finance Journal

INTELLECTUAL PROPERTY & ECONOMIC DEVELOPMENT

Fake Apple store in Wuhan, China

by Christopher Dederick

China mimicking the West in more ways than one. Criticism of intellectual property rights violations by China and other developing economies is a common part of political discourses in developed economies. Scolding China is an easy way to score political points with a domestic audience wary of its growing economic and military power. There is little doubt that failure to protect intellectual property comes with serious economic consequences. Still, an examination of developed economies’ own histories paints a more nuanced picture, suggesting that this political outrage should be taken with a grain of salt. The costs to intellectual property (IP) infringement are very real, and the protection of intellectual property is vital for economies everywhere. Established firms with the resources to bear the large up-front costs of research into groundbreaking technology have the

confidence to make these investments thanks to an expectation that they will be able to recoup their costs later. This requires granting firms at least a limited period of exclusive access to their findings to avoid a free-rider dilemma, whereby competitors use their research without absorbing any of the costs. In the absence of legal and institutional safeguards, firms will be hesitant to make these costly investments. The same can be said of small first-time entrepreneurs. An entrepreneur weighing the risks of quitting their job to pursue the next big thing may just play it safe if an existing firm can easily commandeer their idea. The costs of infringement take the form of billions in lost sales, royalties, and license payments. In an age of Internet streaming, sympathy for the intellectual property of large profitable corporations is not exactly abun-

dant. Nonetheless, intellectual property regimes play an indispensable role in facilitating and providing incentives for technological advances. Technological advancement is in turn the cornerstone of economic growth, and the only means by which countries achieve sustained GDP growth once they reach modern levels of capital accumulation. IP Around the Globe China is the most common target of criticism over intellectual property. China’s government maintained an Indigenous Innovation Policy, whereby government procurement heavily favored domestic firms, with foreign competitors arguing that it placed them at an unfair disadvantage. This policy has since been abandoned, although IP enforcement remains weaker than in developed economies, and damages awarded by

vs.

China must respect our intellectual property.

2014

America must respect our intellectual property.

1790

Cartoonist: Linda Navon Chetrit

20


World May 2014

Currency wars - beggar thy neighbor, 22 Is it time to say adios to this Cold War artifact?, 24

China’s courts are rarely sufficient to cover even the costs of litigation. Weak protection for intellectual property is fairly common in developing economies, where growth depends more heavily on accumulating capital by replicating successful technologies and production processes from developed economies. However, as countries develop and approach the technological frontier, they come closer to developed levels of capital and run out of the proverbial low-hanging fruit, and their growth must increasingly rely on technological innovation. This is a key insight of the Solow growth model. Once technology and innovation become the drivers of growth, intellectual property becomes increasingly important for developing economies. Not surprisingly, as China’s economy continues to develop, more of its own firms are filing patents and pursuing lawsuits to protect their own intellectual property. Double Standards? Nonetheless, rhetoric by developed economy leaders vilifying IP infringement seems to gloss over their own histories. America’s earliest industrialists built their fortunes from the construction of textile mills. In doing so, they kickstarted the First Industrial Revolution, launching the United States into the position of economic eminence that it continues to enjoy today. Samuel Slater, who was later called “the Father of the American Industrial Revolution”, and Moses Brown, whose name this university bears, established the first of the textile mills through a co-venture. The uncomfortable reality for those who would champion the American industrial revolution and intellectual property rights is that the former rested partially on ignoring the latter. Samuel Slater actually stole the factory plans and machine designs he later used to produce textiles in Rhode Island from Britain. This earned him the nickname “Slater the Traitor” among the British, who prohibited the export of these designs through intellectual property laws. Intellectual property rights are central to the global economy and technological innovation. The World Trade Organization (WTO) and international community must continue to protect IP rights and going after the most egregious violations. However, to politicize and inject outrage into the debate would be to willfully ignore history. After all, one man’s traitor is another man’s patriot.

IP THEFT: USA & CHINA In March 2013, China’s State Intellectual Property Office released its national IP strategy for 2013 including:

Improvements in reporting and IP management

PATENT VIOLATIONS

Intellectual Property is defined as “the legal rights that result from intellectual activity in the industrial, scientific, literary and artistic fields” including works of art, inventions, designs, and more.

An increase in the number of courts dealing with IP cases

Improved patent administration enforcement

TRADE SECRET THEFT

TRADEMARK VIOLATIONS

Promotion of software legalization

COPYRIGHT INFRINDGEMENT

$1.3 billion

$1.1 billion

$6.1 billion

$24 billion

from patent infrigement

from the misappropration of trade secrets

from trademark infringement

from copyright infringement

China was estimated to be responsible for 50-80% of losses in the United States

“Samuel Slater actually stole the factory plans and machine designs he later used to produce textiles in Rhode Island from Britain.”

Amount in sales, royalties, and license fees lost by US firms in China due to IP rights infringement

21


CURRENCY WARS: BEGGAR THY NEIGHBOR

by Christopher Dederick

Federal Reserve Chairman Janet Yellen, a Brown alumnus, may need to consider the effect of tapering on emerging markets - and in turn on the US economy. The world was shocked in 2007 to see financial meltdowns across the world underscore the true extent of global economic interdependence. Governments and central banks have since taken steps to stop the bleeding, ranging from unprecedented fiscal stimulus to quantitative easing. Monetary policies in developed economies in particular have revealed new vulnerabilities, generating currency volatility in emerging markets with far-reaching implications. The Shot Heard Around the World When the financial crisis hit, the Federal Reserve took swift action to lower interest rates – the traditional response to an economic shock, meant to encourage investment and consumption. Interest rates fell close to zero, at which point the Fed had exhausted its conventional toolbox. Ben Bernanke, then Chairman of the Federal Reserve, resorted to quantitative easing (QE) on a scale that had never before been attempted. QE entailed $85 billion of monthly bond purchases by the Federal Reserve. The Fed essentially created money to buy mortgage-backed securities and long-term U.S. government debt. The purpose of QE was to provide further liquidity to the financial system in order to encourage lending and investment, while at the same time purging private sector balance sheets of some of their toxic mortgage securities. QE came with the additional benefit of lowering rates on long term US government debt to

22

near zero. The European Central Bank and Bank of Japan have since followed the American example by pursuing QE of their own. Their actions collectively have had major impacts on emerging economies, at times creating havoc. By drastically increasing their money supplies through QE, developed economies inadvertently caused their currencies to depreciate. Like any market, currencies are ruled by laws of supply and demand, and an increase in the supply of a currency will lower its value. At the same time, the low yields on U.S. government securities encouraged investors to turn to emerging market bonds and equities. Even conservative pension fund managers were forced to search for yield in risky emerging economies in Latin America and Asia, simply to meet obligations to retiring clients. While the dollar, euro, and yen depreciated, the influx of capital to countries such as Brazil, Mexico, and India caused their currencies to appreciate. This volatility was especially harmful for commodity exporters such as Brazil, whose exports suffered significantly. Sudden inflows also contributed to domestic inflation, further exacerbating the issue. Central bank officials in emerging economies warned of a currency war, echoing fears of competitive devaluations. In the 1930s, a highly integrated global economy was plunged into a currency war when countries simultaneously

Cartoonist: Linda Navon Chetrit


devalued in desperate attempts to boost their exports. The episode ended with governments raising trade barriers, prolonging the Great Depression, and in turn setting the stage for World War II. Central bankers have thankfully learned from history, and talk of a currency war is largely rhetorical. Endgame or Black Swan? Under Janet Yellen ‘67, the Fed has pursued tapering – reducing its monthly purchases in $10 billion increments as U.S. employment approaches its target rate of 6.5 percent. The Fed is moving cautiously to prevent major volatility in the U.S. stock market as the rates on U.S. government bonds begin to rise. Ironically, tapering is presenting new challenges for emerging markets, but now for the opposite reason. Whereas exporters suffered from inflows, emerging markets such as Turkey, Argentina, and Ukraine, with current account deficits and a dependence on foreign financing, are now feeling the pain of rapid capital outflows. Their challenge will be to meet their short-term debt liabilities if foreign investors suddenly withdraw in favor of rising U.S. rates. Although their vulnerabilities differ, these countries’ economies may all unravel if their currencies fall precipitously. Outflows have already caused the value of emerging market currencies to fall, and will likely continue to do so. Argentina was hit first; its government’s hostility to foreign investors has created a credibility problem, but its woes could be sign of more to come. For a while, the Argentine central bank sought to defend its fixed currency by selling foreign exchange – its own supply of dollars – and buying its domestic currency the peso. Through buying pesos and selling dollars, the central bank hoped to counteract the outflows, which were causing the peso to depreciate in value. When Argentina came close to running out of reserves, it had no choice but to devalue. The underlying risk to emerging market economies stems from the fact that they are often forced to borrow not in their domestic currency, but in foreign currencies such as the dollar. This is intended to assure investors that their central banks will not simply print money to depreciate their currency and erode the value of their debt. Bonds issued by Argentina or Chile, but denominated in dollars, are referred to as Eurodollar bonds. Governments and private actors use the capital from new bond purchases to repay the principal

“Monetary policy could be creating financial risk, even while we’re trying to achieve other concrete goals.”

Quote from Janet Yellen

World on previously issued debt. This process works smoothly as long as GDP grows enough for governments to pay the interest on debt using tax revenue. However, as rates rise in the U.S. and elsewhere, emerging markets must offer higher rates as well to compensate investors for holding their riskier bonds. At a certain point, rates may rise higher than governments and private issuers are able to pay, rendering them insolvent and forcing them to default. Worse yet, as their currencies depreciate and the dollar appreciates, the relative value of their dollar debt grows far higher. The mismatch between domestically denominated assets and dollar liabilities was partly responsible for the Latin American debt crisis of the 1980s and the Asian currency crisis of the 1990s. During times of crisis, central banks are tasked with selling their foreign exchange reserves to defend their currencies against depreciation, and thus preventing national debt from growing to unmanageable levels. Central banks accumulate foreign exchange through national exports, which are purchased by the private sector with foreign currency that eventually ends up with the central bank. Unfortunately, many emerging markets have current account deficits, which means they import more than they export. Their central banks must consequently rely on their existing reserves or turn to the International Monetary Fund (IMF) for emergency funds. IMF bailouts are far from desirable, often requiring draconian spending cuts as a precondition for funds. Some countries are better off than others, with sufficient reserves to defend their currencies for the foreseeable future. Others are dangerously low on reserves, a situation that could force them to default. It remains to be seen whether tapering will provoke chaotic sell-offs across emerging markets. Subsequent defaults could cause major shocks even to developed economies. Clearly, the Fed will pursue domestic economic objectives over maintaining harmony in emerging markets, as any central bank would. However, the Fed would be ill advised to underestimate the sweeping consequences of its actions in today’s highly integrated financial markets. A shock to the U.S. economy emanating from defaulting trade partners is the last thing the Fed needs if it hopes to wind down QE successfully and ensure a sustained U.S. recovery. A beggar-thy-neighbor approach could yet return to haunt its proponents.

23


World

EL BLOQU by Thomas Pesce

Is it time the US said adiós to this Cold War artifact? A year ago, Beyoncé and Jay-Z stirred up controversy when they went on vacation for their five-year anniversary. The issue was their destination: Cuba. For over fifty years it has been illegal for Americans to visit the island as tourists. The United States has stuck with an embargo of Cuba, known by Cubans as el bloqueo, since 1962, and the policy has only had some minor changes since. Questions arise as to whether we should continue what was a Cold War strategy.

$12.8B IMPORTS

Thanks to the American embargo, the “yank tank” or máquina - a classic American car from the 1950s and 1960s - remains the standard on Cuba’s roads.

The Past While parts of the embargo have existed since 1960, President John F. Kennedy initiated to majority of el bloqueo by executive order in 1962. The policy was in response to Cuba’s increasing relations with the Soviet Union. Americans feared Fidel Castro’s communist regime since it took over the island by revolution in 1959. Castro’s commitment to communism was perceived as a major threat to American interests during the Cold War. The United States had already failed to oust the communist leader when it organized and sponsored the Bay of Pigs Invasion of 1961. The CIA trained 1,300 Cuban exiles to try to overthrow Castro’s BILLION BILLION government, but Castro’s E army quickly defeated U N them on the shore. E V A year later, tensions RE escalated during the Cuban Missile Crisis, in which the Soviet Union attempted to The embargo has been an attempt to arm Cuba with nuclear weapons. The weaken communist power in Cuba. By world came the closest to nuclear war preventing nearly all transactions bewhen the United States physically block- tween the United States and the island, aded the island from Soviet ships that the United States has hoped to hinder turned around at the last minute. Just the Cuban economy. The hope was that ninety miles from Florida, the United the Cuban economy would collapse and States has been concerned with Castro’s the Cuban people would revolt against communist regime for over fifty years. the communist government.

$43.6

$46.1 IN

D

EN

SP

G

24

The Present It is now fifty years later and Castro’s regime is still standing. While Cuba’s economy has certainly been hindered by the embargo, the government is still controlled by Fidel Castro’s brother, Raul. There is some criticism of the embargo today. Cuba has managed to avoid economic collapse by finding other trading partners. During the Cold War, Cuba’s major trading partners were the Soviet Union and China. Today Cuba trades with Venezuela, China,


World

UEO $4.7B

EXPORTS

Canada, and even the European Union. Many American enterprises, especially those in Florida, are unhappy that potential business with Cuba is lost to these other countries. Furthermore, humanitarians lament that the embargo causes food and medical supply shortages in Cuba, which have led to the prevalence of hunger and infectious disease on the island. In this way, the embargo hurts the Cuban people more than the Cuban leadership. The international community does not look at the embargo favorably either. The United Nations General Assembly annually condemns the embargo. In 2010, the UN Assembly voted 187 to 2 to condemn the embargo, with only the United States and Israel dissenting. Cuban-Americans are now divided in opinion on the embargo. For years, a majority of Cuban exiles, many of whom live in Florida, supported el bloqueo. Politicians have been eager to attract the Cuban vote in the swing state by keeping the current policy. There also remains a widespread feeling, especially among conservatives, that the United States has to be tough against the communist government. However, younger Cubans, especially those who grew up in the United States, do not have the same hatred for the Castro regime. Many of them are urging politicians to ease their stance on Cuba.

“It is now fifty years later and Castro’s regime is still standing.” The Future While American policy against Cuba is not likely to change, the Cuban government has recently made some steps towards a freer economy. Laws in Cuba have previously prevented foreign investment from entering the economy. On March 29, however, Cuba’s government approved a new law that allows Cubans in foreign countries to invest directly into some Cuban businesses. Cuba’s goal is to raise foreign investment in the island to about $2.5 billion a year, a huge increase from the few hundred million dollars invested today. This change could encourage the establishment of foreign businesses in Cuba, a big step from the economy that Castro used to run. Despite these changes, the embargo remains standard policy towards Cuba, The island is certainly far from the capitalist society that Americans would like to see. However, questions have been raised if el bloqueo is still an effective policy. For now, the only expected change in Cuban-American relations is when new leadership takes over the island. Fidel, 87, and Raul, 82, cannot be in power forever. Until there is change at the top of Cuba, expect the status quo to persist.

THE CUBAN

EMBARGO

25

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