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10 Ideas for Economic DevelopmentSummer 2009

National DirectorHilary Doe

Chair of the Editorial BoardGracye Cheng

Director of Center for Economic DevelopmentLucas Puente

Senior FellowDaniel Townsend

National Editorial BoardClayton Ferrara

Frank LinFay Pappas

Melanie WrightYunwen Zhang

The Roosevelt Institute Campus NetworkA division of the Roosevelt Institute

2100 M St NWSuite 610

Washington, DC 20037

Copyright 2009 by the Franklin and Eleanor Roosevelt Institute.All rights reserved.

The opinions and statements expressed herein are the sole view of the authors and do not reflect the views of the national organization, its chapters, or affiliates.

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economic development

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This series was made possibleby the generosity of

Mr. Stephan Loewentheil.

An End to Agricultural Subsidies: Introducing an Insurance ModelKatherine Blaisdell

Tax Policy and Innovation: the R&D Tax CreditSanjay Bhatt

The Dangers of Fair Value AccountingMatthew McCullough

American Asset Management ProgramAtif Ali, Shan Khan, Naakorkoi Pappoe, Kai Zhang

Islamic Banking: the Alternative Pillar of ProsperityJian Wei Ang

Promoting Community Banks in Under-Banked MarketsEric Jones, Joseph Geylin, Tsuki Hoshijima, Ryan Beauchamp,

and Nathanial Schwalb

A Volunteer-Based Solution to Homelessness in Small CitiesDaniel Hornung, Catherine Osborn, Samuel Garner, Lepi Jha,

and Steven Winter

Saving the MTA and Reducing Urban CongestionMichael Spitzer-Rubenstein

Combating Demographic Imbalance in VermontHallie Fox, Claire Williams, Mai Ann Healy, Maggie O’Hara,

and Scott Klenet

Commodity Tracking to Reduce Violence in the DRCKelly Steffen

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PTable of Contents

Earlier this year, the Roosevelt Institute Campus Network adopted Think Impact, a model that re-emphasized our organization’s founding goals of looking to young people for ideas and action, twin forces necessary in the pursuit of change.

The ideas you will read about in this year’s first 10 Ideas series are the result of the ad-mirable creativity, hard work, and scholarship of Roosevelters. These publications—on Defense and Diplomacy, Economic Development, Education, Energy & the Environment, Equal Justice, and Health—are also a testament to these authors’ engagement with the world. In environments that can be insular, Roosevelters show a willingness to look out-wards, to think critically about problems on a local, state, and national level.

But, to this end, these publications should only serve as a starting point of a greater process. Roosevelters must be willing to act in the communities where these ideas can most effect positive change. For concepts that you find inspiring, we hope that you are motivated to leverage them for the benefit of your own campus, city or state, and that you seek out channels and movements through which to bring these ideas to fruition. And, in instances where you disagree, we hope that you are challenged to see how you might improve on or adapt an idea.

Gracye ChengChair of the National Editorial Board

Letter from the Editorp

The Center for Economic Development focuses on proposing and implementing progressive policy solutions for the domestic and global economy. While many of most exciting proposals have been targeted national issues, such as financial regulation and utilization of TARP funds, many of our ideas focus on local and state issues. In fact, a recent emphasis on addressing local issues has been a highlight of Roosevelt’s work in spring of 2009.

Specifically, Roosevelt began rolling out an exciting new initiative at the beginning of this semester, called “Think Impact.” Essentially, the idea of this program was to get Roosevelt chapters across the country organically involved in policy-making decisions in their own communities. For better or for worse, college campuses have a significant impact on the local population and Roosevelt felt that it should lead the charge in making this impact a net positive. Thus, chapters started projects that set out to address their community’s particular challenges. For instance, Roosevelt students at Northwestern University have proposed a plan to fund anti-homelessness measures as well as mitigate panhandling in Wheaton, Illinois by retrofitting parking meters into donation collection devices. Addi-tionally, students at the University of Wisconsin have worked with their Deputy Secretary of Commerce to come up with an effective and pragmatic tax incentive to draw venture capital for energy technology.

Overall, I am very proud of the work that the Center for Economic Development has con-ducted this semester. In addition, we have laid out a solid foundation for future project and policy proposals that promises to be well utilized in the coming semesters. However, I am most proud of the high quantity and substantive nature of our work. Of course, life as undergraduate is full of studying for exams, writing papers, and preparing for class- not to mention extracurricular obligations. Without a doubt, all of these factors contribute to an unpredictable schedules and a level of busyness that makes external academic-oriented undertakings quite difficult to undertake, much less maximize. Nevertheless, Roosevelt students have gone above and beyond the call of duty by producing such high quality and influential work, many times without direct academic or financial support or incentives. I hope you will join me in saluting this work and appreciating the dedication of Roosevelt students across the country.

Lucas PuenteLead Strategist for Economic Development

Strategist’s Note P

An End to Agricultural Subsidies: Introducing an Insurance Model

Katherine Blaisdell, Chapman University

The government should get rid of agricultural subsidies, which have failed in their purpose and added to a global crisis of food security and failing trade rela-tions. Rather than spending $28 billion per year on agricultural subsidies8 which continue to support inflated prices on monocultural commodity crops,9 an insur-ance program should be established that would provide stability to American agricultural markets.

HistoryThe top 7% of agricultural corporations receive 45% of US agricultural subsidies,1 subvert-ing the goal of saving the jobs of small family farmers, many of whom receive no subsidies at all.2 For example, wealthier farmers in California who can afford to switch to more market-able crops and healthier crop ro-tation receive more money from the market, while poor farmers maintain soil-depleting and de-pressed-price cotton and grain crops in order to continue re-ceiving a government paycheck.3 In essence, subsidies counteract both the lifting influence of free markets and the leveling effect of fair trade.

Abroad, America’s trade relations suffer as other nations refuse to negotiate with coun-tries that refuse to remove heavy subsidies.4 Foreign countries suffer under the weight of US products that flood the market below cost.5 The US thwarts its own international development and trade goals as its agricultural policy has assumed that cheap food is the way to end hunger, when in fact freer trade has made poor countries poorer as sub-sidized US grain floods their markets and undo the critical livelihood of local farmers.6 Traditional subsistence farmers cannot continue to grow food by sustainable methods when subsidies and agricultural policies force them to resort to the luxury crops and environmentally risky methods promoted by US foreign aid agencies.7

AnalysisThere is an alternative to the current policies which would promote the interest of US trade as well as humanitarian goals. Rather than spending $28 billion per year on agri-cultural subsidies8 which continue to support inflated prices on monocultural commod-ity crops,9 an insurance program should be established that would provide stability to American agricultural markets.

Key FactsAgricultura• l subsidies cost $28 million a year.The elimination of subsidies alone would in-•crease the income for West African cotton farmers by 5.7% per year.The $3.3 billion spent on cotton subsidies •alone12 could turn cotton into school uniforms and its profits into food for African children through the UN World Food Program.

1. Tupy, M.L. (2005, November 25). Who Pays for Farm Subsidies?. Retrieved February 1, 2008, http://www.cato.org/pub_display.php?pub_id=5233.2. Carter, J. (2007, December 12). Subsidies’ Harvest of Misery. Washington Post. Retrieved February 1, 2008 from http://www.globalpolicy.org/ socecon/trade/subsidies/2007/1212harvest.htm.3. Lochhead, C. (2007, December 14). Farm bill amendment to limit crop subsidies plowed under in Senate. San Francisco Chronicle. Retrieved February 1, 2008 from http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/12/14/MN2STTMCE.DTL.4. Dougherty, C. (2007, June 21). Global trade talks collapse over agricultural subsidies. International Herald Tribune. Retrieved February 1, 2008 from http://www.iht.com/articles/2007/06/21/business/wto.php.5. Carter, J. (2007).6. N.A. (2007, October 20). World Bank Says Agriculture Must Take Center Stage in Development. Agence France Presse. Retrieved February 1, 2008 from http://www.globalpolicy.org/socecon/trade/subsidies/2007/1020wb.htm.7. Vargas Guerrero, José. (2007). Vice President, Asociación Familias Emprendedoras de Tabarcia, Mora, San José, Costa Rica. Personal com munication, November 2007.8. US Dept. of Agriculture. (2008). Budget Summary. Retrieved February 2, 2008, from http://www.obpa.usda.gov/budsum/fy08budsum.pdf.9. Lugar, R.G. (2007, December). The FRESH Amendment. Retrieved February 2, 2008 http://lugar.senate.gov/farmbill/pdf/FRESH_amendment.pdf. 10. Lochhead, C. (2007, December 14).11. Grunwald, M. (2007, November 2). Why Our Farm Policy Is Failing. Time. Retrieved February 2, 2008 from http://www.time.com/time/magazine/ article/0,9171,1680139,00.html. 12. Ibid.13. Information from USDA (2008), my calculations.14. Lochhead, C. (2007, December 14).

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Domestically, the recovered funds could be used to promote local, small-scale, and or-ganic produce to improve American diets and preserve American farmland.10 Abroad, the elimination of subsidies alone would increase, for example, the income for West African cotton farmers by 5.7% per year, enough to feed two children per family.11 The $3.3 billion spent on cotton subsidies alone12 could turn cotton into school uniforms and its profits into food for African children through the UN World Food Program. With the remaining $25 billion, domestic women’s and children’s nutrition programs could be doubled, and domestic conservation programs tripled, with $4 billion left over to refine nutrition and sustainability programs abroad.13

Next StepsEstablishing this alternative will not be easy. Bipartisan support for such cost-cutting and economically sound proposals often wavers under the pressure of agribusiness lobbies. An amendment to the 2007 Farm Bill, proposing a replacement of subsidies with insur-ance programs among other reforms, failed in the Senate in December 2007,14 primarily because its short time on the table left misgivings about the way important Congressio-

nal districts would be affected. In addition, the public perception that foreign aid takes away from resources needed for American issues will be difficult to overcome, particu-larly in a time of economic concern.

However, a careful reappropriation of subsi-dy money would have greater success than other reforms because it would actually put more money into poor farming communities through conservation and nutrition pro-

grams that make a more sustainable agriculture viable. Such a change would contribute to meeting our still unmet foreign aid commitments, ensure healthy American farms and families through more sound investment, and advance the goal of creating stable societ-ies by ending world hunger.

Talking PointsMany • small family farmers receive no subsidies at all.Freer trade has made poor coun-•tries poorer as subsidized US grain floods their markets and undo the critical livelihood of local farmers.

Tax Policy and Innovation: The R&D Tax Credit

Sanjay Bhatt, Brown University

The R&D Tax Credit should be made a permanent part of the U.S. federal tax system because it provides the best policy solution to encourage economic growth and innovation.

The current U.S. federal tax system discourages innovation and economic growth for both large corporations and small, local businesses because it lacks a stable tax credit for research and development. Tax legislation and reform is therefore the best way to make the system of taxation more favorable for expenditure on research, development, and innovation-based rent-seeking. Legislating the R&D Tax Credit into permanence is the best policy solution to encourage economic growth and innovation, as it is based on sound theory, has been proven to work, simplifies the current tax system as it deals with innovation, and most importantly, is the most politically feasible alterna-tive on the table.

AnalysisResearch and development (R&D) tax credits can be made permanent in order to increase the incentive for reinvesting funds in future innova-tion and to eliminate the uncertainty caused by expiring and ever-chang-ing R&D tax credit policies. R&D credits can even work in conjunction with other options such as reduced capital gains taxes to multiply the effect of savings and reinvestment in economic growth-enhancing operations. The permanence of such a measure is a complex issue, as the R&D tax credit has never been made permanent and has been changed or extended over 11 times since it was created in 1981.

This creates a certain level of uncertainty for businesses making long-term R&D-related decisions. An ideal, permanent, R&D tax credit should also include the existing Alterna-tive Simplified Credit to encourage R&D in the event that a company’s earnings or finan-cial situation changes so that it cannot claim the regular R&D credit since R&D credits are governed by a “base period” that establishes a R&D spending-to-gross receipts ratio for a company to qualify for the credit. An Alternative Simplified Credit therefore covers all possible situations and encourages widespread participation in the R&D Tax Credit pro-gram, thereby further encouraging R&D expenditures regardless of changing economic conditions and earnings. An ideal policy would also increase the Alternative Simplified Credit rate to allow the U.S. to better face international competition by expanding U.S.-based R&D. It should also be set at a rate eligible for permanency (i.e. included as part of a clause that sets a permanent floor rate but allows legislators to increase the rate).

Key FactsPreside• nt George W. Bush retroactively extended the R&D Tax Credit through 2009 and increased the Alternative Sim-plified Credit from 12% to 14%. President Obama supported the tax cred-•it by using the permanence of the credit as part of his technology, innovation, and domestic job-creation platform during the 2008 election campaign.

The R&D tax credit has proven to be successful in the past and is not a new, complicated, or risky mechanism, but rather functions as it should by altering corporate behavior by encouraging spending on research and development. More importantly, it is politically attainable. President George W. Bush, as part of the original $700 billion financial bailout, retroactively extended the R&D Tax Credit through 2009 and increased the Alterna-tive Simplified Credit from 12% to 14%. President Obama and Vice President Biden also supported the tax credit by using the permanence of the credit as part of their technol-ogy, innovation, and domestic job-creation platform during their 2008 election campaign. The R&D tax credit certainly speaks to Democrats, as more than 70% of the benefits go towards American salaries on US-based research. Pro-market conservatives and Re-publicans consistently support the R&D tax credit as it stimulates short-term business investment and is essentially a corporate tax cut.

Next StepsSeveral policy alternatives exist to reform tax policy in a manner more conducive towards U.S.-based innovation. Of these alternatives, the push to make a permanent R&D tax

credit (with a solid Alternative Sim-plified Credit included) is the best because it is the only option that sat-isfies all of the aforementioned crite-ria needed for an effective policy. It is based on sound economic theory and will work in practice with little to no unwanted externalities. It simpli-fies a portion of the tax system by eliminating continual changes to R&D

tax treatment policy. Most importantly, it is the most politically feasible option since it can appeal to both Democrats and Republicans even in the midst of the current eco-nomic crisis. Finally, there are large bills that have recently passed which have included forms of the R&D Tax Credit, thus further illustrating the flexibility of such a policy that can and has passed through several independent bills over the past 25+ years and in a larger emergency legislative vehicle, as is the more recent case.

Talking PointsThe R&D tax credit has proven to be suc-•cessful in the past and is not a new, com-plicated, or risky mechanism.Past political action shows that it is a fea-•sible policy.

“Plan to Strengthen the Economy,” BarackObama.com, http://www.barackobama.com/issues/economy/ (ac cessed March 16, 2009).“Legislative History of R&D Credit Extensions,” R&D Credit Coalition, http://www.investinamericasfuture.org/ PDFs/233051.pdf (accessed February 18, 2009).“Alternative Simplified R&D Credit,” R&D Credit Coalition, http://investinamericasfuture.net/factsheet-9- 24b-03.html (accessed March 14, 2009).“Plan to Strengthen the Economy,” BarackObama.com, http://www.barackobama.com/issues/economy/ (ac cessed March 16, 2009).

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The Dangers of Fair Value AccountingMatthew McCullough, University of Michigan

In order to encourage clarity in financial reports and stability in the financial sector, fair value accounting must be removed from the Generally Accepted Ac-counting Principles that guide financial accounting in the US.

Fair value accounting attempts to provide transparency by valuing assets at the price yielded if liquidated immediately – making it quite sensitive to the market. Fair value accounting works through mark-to-market (MTM) accounting: assets are listed at their market price if openly traded or otherwise priced based off a model of the market of similar or input goods or, for more complex assets, a model of theoretical predictions (McTeer 2009). The alternative is historical-cost analysis, which uses historical data to value assets and usually mitigates the effects of market volatility.

In 1938, President Franklin D. Roosevelt suspended MTM accounting; Nobel laureate Milton Friedman has decried MTM accounting as being the “most im-portant source of impairment of capital” that caused banks to shut down in the Great Depression (Berry 2008). In 1994, the Financial Accounting Standards Board (FASB), an agency appointed by the SEC to determine the Generally Ac-cepted Accounting Principles, formally reintroduced MTM accounting with FAS 115 (McTeer 2009), and the practice be-came widely used In the late 1990s. In 2006, the FASB issued FAS 157, which classified assets that could be valued with MTM accounting. In a Congress-mandated report by the SEC on December 30, 2008, it was recommended that MTM accounting should be kept, but improved.

MTM accounting is an exceptionally dangerous technique that must be avoided in all financial accounting. It magnifies economic and financial fluctuations: when markets are growing, MTM accounting presents enormous unrealized gains, over-inflating the actual success of the company. Of the over $700 billion that banks have recorded in losses in the current financial crisis, the vast majority of it has been write-downs in MTM account-ing, not actual cash losses (Forbes 2009).

While FAS 157 was supposed to address this concern, it was not enough to curb the cur-rent crisis. As banks issued mortgage-backed securities, there was no real market for the assets involved. Their value was extrapolated from housing prices, default rates, rates of prepayment and curtailment, time to maturity, interest rates, and more. Banks were given discretion to make their own models and assumptions to value these assets, allow-ing them to announce enormous profits without gaining capital. Most dangerously, MTM accounting left the financial sector’s stability subject to market fluctuations.

Key FactsMTM accounting m• eans assets are listed at their market prices when openly traded. Otherwise, prices are based off a model of similar goods.Of the over $700 billion of losses in •the current financial crisis, a vast ma-jority have been write-downs in MTM accounting.

Now, MTM accounting is forcing banks to value assets at nearly nothing, with two sig-nificant consequences (McTeer 2009). First, toxic bank balance sheets have severely restricted even responsible lending—an important tool for ending the crisis. Second, by forcing low asset valuations, MTM accounting is pressuring banks to sell assets at or slightly above these low prices because on paper this is recorded as profit, even if it is a huge loss from the initial purchase price. This drives prices down to artificially low levels and prevents banks from suffering much less severe losses if they hold onto the assets and sell later (McTeer 2009).

StakeholdersThis proposal has mixed support in and out of Congress. In late 2008, Republicans were in favor of suspending MTM accounting in the short term and Democrats were split on the issue. Recently though, Barney Frank (D-MA), chairman of the House Financial Ser-vices Committee, has expressed support for re-evaluating MTM accounting, indicating that this sort of proposal could be successfully pushed through a Democratic Congress. The banks were very much in favor of temporarily suspending MTM accounting, but

a proposal for permanent changes might face opposition and some lobbying pressure from the indus-try. Also, regulators might oppose this, arguing that it would hurt trans-parency (Lin 2009).

Next StepsWith the clear dangers that MTM accounting presents, Congress must act. Congress should order the FASB to study and find the best alternative to MTM account-ing within a year. This alternative

should at least partially incorporate the principles of historical-cost accounting but could allow for limited consideration of market factors, with specific guidance as to how. Also, the SEC and other regulators should be allowed to privately request MTM evaluations for regulatory purposes and confirmation that public figures are reasonable. Fortunately, an April 3rd decision that changed MTM accounting for assets without a market, target-ing the securities that were primarily responsible for damage to the US financial sector, has provided temporary relief, giving lawmakers time to find the best alternative without any further danger to the economy (Lin 2009).

Talking PointsMTM accou• nting is a dangerous technique that magnified economic volatilities.MTM accounting allows banks to post prof-•its without gaining capital.Currently, MTM accounting has severely •restricted even responsible lending—an im-portant tool for ending the crisis. MTM accounting is also forcing banks to •sell assets at low values, deepening losses.

Berry, John. 2008. Reverse leverage of mark-to-market wrecks banks. Bloomberg. (October 13). http://www. bloomberg.com/apps/news?pid=20601039&refer=columnist_berry&sid=a2VMZQ7uujvw (accessed April 5, 2009).Forbes, Steve. 2009. Steve: End mark-to-market. Forbes. (March 23). http://www.forbes.com/2009/03/20/ steve-forbes-mark-to-market-intelligent-investing-market.html (accessed April 5, 2009).McTeer, Robert. 2009. Mark-to-market accounting: Shooting ourselves in the foot. National Center for Policy Analysis. (March 24). http://www.ncpa.org/pdfs/ba648.pdf (accessed April 5, 2009).Min, David. 2009. Keep marking to market. Center for American Progress. (April 1). http://www.american progress.org/issues/2009/04/market_fasb.html (accessed April 5, 2009).

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American Asset Management ProgramAtif Ali, Shan Khan, Naakorkoi Pappoe, Kai ZhangUniversity of Texas at Austin

The United States should transform Troubled Asset Relief Program (TARP) into a new sovereign wealth fund known as the American Asset Management Program (AAMP).

In October of 2008, the U.S. Treasury established the Troubled Asset Relief Program (TARP) in an attempt to rescue the U.S. financial sector as it suffered from toxic assets; however, the average American taxpayer has seen little or no benefits from the pro-gram. A new plan can be forged to transform TARP into an American Asset Management Program (AAMP). With AAMP, equity assets currently managed under TARP would be reserved as preferred shares or converted to common stock, while the cash portion of the fund would be used to make effective investments in domestic asset classes. This new model for TARP holds the potential to significantly magnify the return to American taxpayers as outlined below.

ImplementationTo implement AAMP these three measures would need to be sought after by Treasury Secretary Timothy Geithner with the time remaining be-fore the expiration of TARP:

1. New negotiations would need to take place be-tween the Treasury and current recipients of TARP funds. These negotiations would focus on either a timeline for the return of funds or the approval of long-term investment in the recipients. Over the past month four recipients have returned their borrowed funds while many more have outlined a timeline for the return of major TARP funds before the end of the year.4

2. Current managers of TARP funds would continue their services exclusively un-der government payrolls, while the Treasury seeks auxiliary managers with asset-specific expertise.

3. A board of directors serving as a regulatory mechanism would need to be ap-pointed for the purpose of monitoring and reporting to Congress the activities of AAMP. The board of directors would be made up of nine individuals. Ideally this board would comprise of two individuals from each of the following departments: Treasury, Office of Management and Budget, and the U.S. Government Account-ability Office. In addition to these six people, the board of directors will include the chairmen of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, the U.S. House Committee on Financial Services, and the chief executive officer

Key FactsIn October 2008, the U.S. Treasury established •the TARP program with $700 billion; amongst it $303 billion was invested in preferred stocks.1 The S&P 500 rate of return over the past five •years has been 7.6%. If the $303 billion preferred stock produces a conservative 5% nominal com-pound annual return rate, AAMP may grow to about $661 billion by 2025.2Today there are 48 sovereign wealth funds world-•wide, managing approximately $3.59 trillion.3

of AAMP. All of the above, except the committee chairmen, would need congres-sional approval and could be nominated by their respective agencies or the presi-dent’s office.

Benefits to the U.S.•Foreign investments will counter American capital account deficits by increasing our net income and net ownership balance.

•Creatingintergenerationalequity.Taxpayersarepayingformuchofthefundto-day, but have in recent times already burdened future generations of Americans. To recoup losses from already invested TARP money, we will invest the money to gain benefits for our future generations, ex. New Mexico started a special investment fund to “preserve the permanent endowment funds for future generations and to provide future benefits by growing the funds at a rate at least equal to inflation.”5

•Poolofcapitalcanbeusedtopreventfuturecrises.Thisnewfundcanbeusedasa permanent vehicle to stabilize the market and U.S. dollar value in the future, ex. A similar fund run by the Hong Kong Monetary Authority effectively prevented the collapse of the Hong Kong stock market in 1998.6

Talking PointsYearly profits from AAMP can finance future government programs, reduce tax •rates or increase tax returns, and stem American debt sales by providing a new source of funding. AAMP will provide economic growth from investments and fulfill the objectives •outlined above. Publishing financial data and investment strategies makes it harder for AAMP to •be used as political gain tool. AAMP allows the U.S. government to invest both domestically and abroad, coun-•tering capital account deficits; helping soothe fear of foreign ownership of Ameri-can debt and corporate institutions.

1 Paul Steiger, “Show Me the TARP Money,” ProPublica, April 3, 2009, http://www.propublica.org/special/ show-me-the-tarp-money (accessed April 6, 2009).2 “Where Have All the Returns Gone,” Index Fund Advisors, Feb. 2008, http://www.ifa.com/quoteoftheweek/ index48.asp (accessed May 2, 2009).3 “Largest Funds by Assets Under Management,” Sovereign Wealth Fund Institute, Mar. 2009, http://www. swfinstitute.org/funds.php (accessed May 2, 2009).4 Eric Dash, “Four Small Banks Are the First to Pay Back TARP Funds,” New York Times, 31 March 2009. thestandard.com.hk/news_detail.asp?pp_cat=&art_id=48383&sid=&con_type=1&d_str=19980829&sear_year=1991 (accessed April 5, 2009).5 “Permanent funds,” New Mexico State investment Council, 2009, http://www.sic.state.nm.us/permanent_ funds.htm (accessed April 6, 2009).6 Bayani Cruz, “We will hold on to blue-chip shares: Tsang,” The Standard, http://www.thestandard.com.hk/ news_detail.asp?pp_cat=&art_id=48383&sid=&con_type=1&d_str=19980829&sear_year=1991 (accessed April 5, 2009).

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Islamic Banking: The Alternative Pillar of Prosperity

Jian Wei Ang, University of Michigan

With the increasing growth of Islamic Banking as a credible alternative to the conventional banking system, the USA should capitalize on this phenomenon to reaffirm itself as the global financial hub of the world.

Islamic banking is a banking system that is founded on the rejection of interest-based financial transactions, as is consistent with Islamic law (Venardos 2006). The practice appears set to enjoy rapid global growth at a rate of 15 to 20 percent, with Dubai and Malaysia leading the way (Parker 2007). As of 2008, the top 100 largest Islamic banks have outpaced conventional banks with an annual asset augmentation of 26.7 percent (Zawya 2008). The United Kingdom, sensing this huge opportunity, has taken bold steps in encouraging the proliferation of Islamic Banking within its borders, making it the Euro-pean leader in this arena.

Despite global interest, the growth of Islamic Banking within the USA has been relatively lackluster (Zaidi 2008). With a Muslim population of 3.5 percent presenting an untapped market, the USA stands to lose its global financial leadership as other global financial centers such as Lon-don, Dubai and Singapore continue nurturing the growth of Islamic Bank-ing in tandem with the conventional banking system.

The latest debacle of the credit-crunch crisis in the USA has prompted several sugges-tions that Islamic Banking might prove to be a credible financial alternative. Though such claims are still debatable, they should not be brushed aside without due consideration.

CompetitionAs of now, the UK already offers Sharia-compliant car insurances, mortgages and credit cards, which are unheard of in the USA. In the 2008 Global Financial Centers rankings, New York and Chicago were the only two North American cities that ranked in the top 10; the rest were Asian and European cities (Reuters UK 2008). In light of the financial crisis, the United States must adopt necessary measures to innovatively reinvigorate its financial system to avoid being outperformed.

Economic Opportunities With 1.82 billion Muslims in the world as of 2009, the market opportunities of encouraging Islamic banking are enormous. Some Muslims shun the conventional banking system due to its use of interest rates, which is prohibited in Islam. Furthermore, despite the recent

Key FactsThere are more than 300 Islamic Banks •and investment firms globally. This figure excludes traditional banks with Islamic Banking operations.In 2005-2006, the global Islamic financial •institutions manage more than $800 bil-lion dollars worth in assets. Islamic investments in European property •reached a formidable $2.5 billion in 2005.

financial crisis, Islamic banks have been less affected, as they are prohibited from invest-ing in activities that have contributed to the credit crunch (Opalesque 2009). Besides catering to an untapped market, Islamic banking also provides risk-averse Americans an alternative source of investment.

Foreign and Domestic Policy Islamaphobia is cited as one of the reasons contributing towards the lackluster recep-tion of Islamic Banking in America. Encouragement of this banking system would send a message to the Muslim world that the USA is willing to embrace an Islamic concept. Domestically, the acceptance of Islamic banking as a legitimate option might help ease fears that link Islam to terrorism.

Next StepsThe Treasury Department should first set up a committee comprised of ex-perts on sharia law to advise the gov-ernment regarding implementation. Financial incentives such as tax cred-its should be offered to international banks such as HSBC, Standard Char-tered and Citigroup that invest in es-tablishing Islamic banking services in the USA. These international banks with Islamic assets worth billions of dollars already have experience with running Sharia-compliant operations.

The growth of Islamic Banking cannot be the responsibility of the executive branch alone. The executive government should publicly support the growth of Islamic banking, while legislators should be prepared to hammer out banking legislation that might be different from conventional laws.

Talking PointsIts fast growth means that the U.S. needs •to implement Islamic banking to stay com-petitive globally.Islamic banks are prohibited from invest-•ing in activities that have contributed to the current credit crunch (Opalesque 2009).Supporting Islamic banking will show that •the U.S. is willing to embrace a key Islamic concept.

Opalesque. Islamic banks less affected in global recession. February 10, 2009. http://www.opalesque.com/ IslamicFinance_Briefing/?p=1137 (accessed April 5, 2009).Parker, Mushtak. Islamic Banking in 2007 Set for Massive Growth. January 1, 2007. http://www.arabnews.com/ ?page=6&section=0&article=90559&d=1&m=1&y=2007 (accessed April 5, 20089).Reuters. FACTBOX: Key facts about Islamic finance. March 21, 2007. http://www.reuters.com/article/summit News2/idUSL214795420070321?pageNumber=1&virtualBrandChannel=0 (accessed April 3, 2009).Reuters UK. London tops list of global financial centres. June 10, 2008. http://uk.reuters.com/article/domestic News/idUKN0930207120080610 (accessed March 26, 2009).Venardos, Angelo M. Islamic Banking & Finance in South East Asia. Singapore: World Scientific Publishing Co. Pte. Ltd, 2006.Zaidi, Supna. U.S. Government Embraces Islamic Banking. November 24, 2008. http://pajamasmedia.com/ blog/us-government-embraces-islamic-banking/ (accessed March 28, 2009).Zawya. Islamic banks post 26.7% growth rate. March 25, 2008. http://www.zawya.com/story.cfm/sidZAW YA20080325033525 (accessed March 30, 2009).

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Promoting Community Banks in Under-Banked Markets

Eric Jones, Joseph Geylin, Tsuki Hoshijima, Ryan Beauchamp, Nathaniel SchwalbYale University

Policy-makers should aim to provide loans, grants, tax cuts and other forms of fi-nancial assistance towards the opening and expansion of community banks and credit unions in low-income communities which lack access to the mainstream banking sector.

In 1994, 20% of all assets were held in community banks or credit unions; as of 2005, that share had fallen to 12%. Similarly, the number of community banks dropped in that time from more than 10,000 to 7,200. As larger firms sought to become more competi-tive, consolidation through acquisition of smaller community banks became a common practice.

As lending policies liberalized, these consolidated national firms were better able to secure financing for risky loans, thus ac-quiring an even larger portion of the market share. These lenient lending policies helped lead to the current financial recession, the effects of which include stricter lending policies for the low income population, many of whom have never been part of the mainstream financial sys-tem.

Community banks are now bet-ter positioned than ever to fill this need and serve the under-banked community, a vast portion of which are legalized immigrants. Through personalized, attentive banking, community banks mitigate the risk involved with servicing low-income customers. Unlike larger, national banks, which may take deposits in one area and make loans in another – transferring the wealth to a differ-ent area – community banks keep the wealth in the community.

Basic banking services like checking accounts, savings accounts, and debit cards need to be more accessible. Legacy Bank in Milwaukee offers free checking accounts that can be opened with a $25 balance. This low balance was extremely successful in attracting previously unbanked customers to the bank. Over-drafting fees were lowered, while the risk to the bank from continual over-drafting was mitigated by personalized banking (employees would look at an account, observing over-drafting tendencies and contact the customer) as well as remedial financial literacy classes. Incorporating financial lit-eracy classes as a mandatory component of opening a checking account or replacing

Key Facts35% • percent of Ecuadorians, 64 percent of Salvadorans and 75 percent of Mexican immi-grants are unbanked. In 2006, the United States issued $42.2 billion •worth of remittances, the majority of which were sent through non-mainstream financial services at significant cost to the customer. Some of the reasons why community members •had not participated in the mainstream bank-ing system include: lack of personal attention, inadequate knowledge of financial services, and high cost fees, all of which can be solved through the establishment of more community banks.

over-drafting fees with financial literacy classes are two great strategies for educating bank customers. The bank also offered accounts to people who had been previously rejected by the financial system due to a poor history of check-bouncing. Additionally, in offering alternative payday loans, banks can win customers away from the oft-used, non-mainstream, predatory payday lenders. For example, North Side Bank in Chicago has gained over 1,000 new members through its PAL loan. In comparison to the average payday loan, which has a 14 day payment fee, and high rollover fees, the PAL loan has a six month term and will cost the customer at most $54 for a $500 loan; a similar loan from a predatory lender could cost over $540.

Another even more profitable venture for these banks is remittances. Through a third par-ty company such as Vigo, community banks can operate as agents and retain a significant amount of profit. Bethex Federal Credit Union in the Bronx offers remittance services for $40, for orders up to $1000, with up to 80% of the $40 taken as profit. In addition to being more reliable, this 4% charge is actually less expensive than with non-mainstream

remittance senders who often charge up to 20% for their services.

Next StepsOne example on effec-tive policy already in existence is “Individual Development Accounts (IDA)” offered by the state of Connecticut. In this program, the state matches deposits in sav-ings accounts for first-time, low-income, account

holders. Another, less expensive option is to offer shared-liability for community banks that accept first-time and delinquent account holders. In this case, the state or federal government would insure loans and cover over-drafting costs for community banks which provided services to low-income customers and small businesses. On a larger scale, fed-eral and state governments could provide low-interest loans as start-up capital solely for those wishing to open community banks. Alternatively, they could withhold taxation on community banks with small amounts of assets up until a certain asset level.

Talking PointsIncreasin• g the number and capacity of community banks in the United States provides both an oppor-tunity to take advantage of an untapped market sec-tor while also providing financial safe haven for those subject to predatory lenders, unscrupulous check-cashers, and high-cost remittance senders. Community banks can serve a vital role in increasing •community involvement, spreading financial knowl-edge, and cutting down on illegal and unregulated banking systems.

Federal Deposit Insurance Company: “Linking International Remittance Flows to Financial Services: Tapping the Latino Immigrant Market,” 2004. <http://www.fdic.gov/regulations/examinations/supervisory/insights/siwin04/latino_mkt.html>Ibid.World Bank: “Migration and Remittance Factbook 2008,” 2008. <http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECT S/0,,contentMDK:21352016~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html>Wuennemann, Lt. Tom. Stamford Police Department. 24 Apr. 2009 <http://74.125.93.132/search?q=cache:KtI9odlaF0wJ:www.popcenter.org/library/ awards/goldstein/2000/00-30.pdf+immigrants+%22walking+cash+machines%22&cd=4&hl=en&ct=clnk&gl=us&client=firefox-a>.Check-Bouncing: When a customer writes a check for funds not currently present in their account. National Community Investment Fund: “A guide to Building Products and Strategies for Underbanked Markets,” 2004. <http://www.dfi.wa.gov/cu/ unbanked_files/guide_underbanked_markets.pdf>Ibid. “PO-1045: Assistant Secretary Bair - Remarks on Remittances as a Development Tool.” United States - Department of The Treasury - Homepage. 24 Apr. 2009 <http://www.treas.gov/press/releases/po1045.htm>.Citation added: “Office of Connecticut State Treasurer Denise L. Nappier.” CT.gov Portal. 24 Apr. 2009 <http://www.state.ct.us/ott/idatask.htm>.

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A Volunteer-Based Solution to Homelessness in Small Cities

Daniel Hornung, Catherine Osborn, Samuel Gamer, Lepi Jha, and Steven WinterYale University – Center on Economic Policy

By assigning trained volunteers to municipal caseworkers, necessary services can go to a greater sector of the homeless population more quickly.

As national budget cuts threaten to close facilities such as homeless shelters and sup-portive housing, preventative measures against homelessness become even more impor-tant. What makes a person homeless is not only the absence of a shelter but also the lack of good health, a steady job and stable relationships.

Government social workers, specifically caseworkers, help the homeless population im-prove on all three of these issues. But with overworked and overwhelmed casework-ers along with state and municipal budget cuts, there is need for volunteers. Given the national spirit of volunteerism most recently supported by Presi-dent Obama’s $5.7 billion allocation to AmeriCorps in the Edward Ken-nedy Serve America Act, we believe a program like this to be politically feasible.

AnalysisCaseworkers provide homeless cli-ents with specialized services that volunteers cannot. The goal of as-signing volunteers to caseworkers is not to convert the caseworkers into volunteer managers, but rather to lighten the load of simple follow-up work after the specialized services have been pro-vided. This follow-up work might include assistance with resume writing, job applications, or keeping track of mail and appointments. Each caseworker should be matched with certain volunteers depending on the caseworker’s specialty and the volunteers’ interests. The caseworker will still be responsible for the same number of clients, but will have frequent assistance.

Volunteers will familiarize themselves with local non-profit services and thus strengthen the relationships between the city office of social work and the non-profit communi-ty. From these relationships, volunteers will grow to be valuable sources of knowledge about low-cost housing and insurance requirements to whom homeless clients can direct questions. Each volunteer must be carefully trained before he or she begins work. The cost of having one caseworker in charge of training is alleviated by the increased ef-ficiency of a program aided by volunteers. This program not only takes important steps in the short-term fight against homelessness but expands the base of people who can be advocates for these issues.

Homelessness in New Haven, CTPopulatio• n: 120,000. Estimated homeless: 5,000.Reasons for homelessness: 50% lack of •job; 34% substance abuse; 16% family is-sues.Over 50% list all of the following service •needs: income, insurance, mental health, basics, medical, substance, vocational.State and local budget cuts threaten many •of these programs.

StakeholdersThis program will benefit the homeless population, those threatened by homelessness, caseworkers, and local governments. If executed correctly, more homeless citizens and others threatened by homelessness will be given increased services and proper guid-ance. Caseworkers will see an increase in efficiency from volunteers providing needed assistance both in specific tasks and in general office duties. Local governments will face lower costs because they will provide fewer costly services to the homeless population.

Next StepsBefore implementation, a mu-nicipality or non-profit should evaluate the program’s legal prospects in the particular state. Non-profit workers looking for a new service project, or volun-teers who work closely with the city government, are perfect ini-tiators of a program like this. In addition, volunteers should only be assigned to work according to their reliability as demonstrat-ed by consistent performance in entry-level volunteer work, such as office tasks. These are the preliminary steps that should be taken:

1. Reach out to caseworkers and the homeless population to evaluate their specific needs and determine where implementation of the program would be most beneficial.2. Design and implement a volunteer training program that is tailored to the social and economic realities of the municipality.3. Recruit volunteers through local businesses, schools, and community and religious organizations. All volunteers must sign a legally binding contract, taking full responsibility for anything that may happen to them while volun-teer for the program.4. Design and implement a campaign to educate the homeless population and non-profit organizations about the goals and methods of the program.5. Begin volunteer follow-up work and other activities, and carefully track areas in which further improvements should be made.

Talking PointsAs national fundi• ng for homeless shelters is cut, municipalities must find ways to manage homelessness without budget increases.Many self-reported primary causes of home-•lessness can be aided by the right specialized information and basic, coachable life skills.Currently municipal caseworkers provide both •the information and the skills training to home-less clients.By covering skills and follow-up work, volun-•teers can help strained caseworkers and pro-vide the next generation of progressive policy activists.

New Haven (Connecticut). “The New Haven Ten Year Plan to End Chronic Homelessness.” John Huettner et al, Community Services Director, City of New Haven. September, 2004. Revised March, 2007.

The United States Conference of Mayors. “Hunger and Homelessness, A Status Report on Hunger and Homelessness in America’s Cities.” A 25-City Survey. December, 2008.“For Your Family Archives.”

“Youth Update Archives.” Braun, James A. et al. “Youth In Need, St. Louis, MO. www.youthinneed.org“Helpful Homeless Links for San Diego.” McElroy, Robert et al. Alpha Project, Vista, CA. www.alphaproject.org

Sources

21

Saving the MTA and Reducing Urban Congestion

Michael Spitzer-Rubenstein, Columbia University

Create a system of congestion pricing for the Central Business District of New York and a commuter tax to cover the Metropolitan Transportation Agency’s operating deficit and halve mass transit fares.

In 2008, Mayor Michael Bloomberg proposed a system of congestion pricing, charging cars entering Manhattan south of 60th Street a fee of $8 if they arrived between 6:00 a.m and 6:00 p.m. This drew on successful plans implemented in London, Milan, and Stock-holm, where congestion pricing has dramatically reduced traffic. The proposal gained the support of numerous leaders including then-Senator Barack Obama, the federal Depart-ment of Transportation, and the state’s political leadership at the time, including Gover-nor Eliot Spitzer, Senate Majority Leader Joseph Bruno, Manhattan Borough President Scott Stringer and the New York City Council, which approved it in a 30-20 vote. Unfortunately, the Bill was later blocked in the state legislature. A sliding scale of tolls would be imposed on cars driving into Manhattan’s Central Business District, from $2 at night and for most of the weekend to a maximum of $10 during morning rush hour (from 6:00-9:00 a.m.), when the most cars are entering the city (Nurture New York’s Na-ture Foundation Balanced Transportation Analyzer). The average congestion price would be $6, a fee that would not seriously inhibit visitors but would still be enough to address many of the negative externalities of traffic. Car speeds would increase by as much as 28 percent, saving drivers more than $1.1 billion as people begin using mass transit or curtail-ing unnecessary trips. These congestion tolls would generate almost $1.4 billion, which would cover the operating deficit of the Metropolitan Transportation Authority, allowing the system to run and build up capital, without depending external funds.

This revenue would be available to the MTA to make mass transit a more viable alterna-tive to driving. The MTA would not only have no need to cut services or fares, but could gradually reduce fares, making it more affordable to take the subway or bus. That would in turn stimulate the economy as consumers visited more as well as open up potential jobs for commuters.

By staggering the fare reduction, the MTA could also pay off its debt, gradually freeing it from the $1.5 billion burden of servicing already-issued bonds and opening up more

Key FactsUnder the status quo, most mass transit fares •will rise by 20%.35 bus routes and 2 subway lines will be elimi-•nated if the state government does nothing.Each additional car entering Manhattan’s Cen-•tral Business District adds $30 worth of grid-lock and $10 worth of pollution.The metropolitan area loses $13 billion and •52,000 jobs annually because of those traffic delays.Car speeds would increase as much as 28%.•

opportunities to reduce fares. Within a year of this plan being implemented the base fare for the subway and bus could be halved from its current $2 a trip to just $1, making it inestimably more affordable for the millions of New Yorkers who ride MTA buses and subways.

StakeholdersEveryone would benefit in some way or another from congestion pricing: mass transit would be much more affordable and accessible for New Yorkers, spurring economic growth. Traffic reduction would reap huge benefits: drivers would spend less time stuck in traffic; police could respond to incidents faster; shipping costs would decline, since trucks would spend less time and fuel in traffic. There would be less potential for ac-cidents between motorists and pedestrians. In addition, this policy would mitigate pollu-tion from cars, a result of shorter driving times as well as lesser idling costs while stuck in traffic or looking for a parking space.

Next StepsCongestion pricing has gained the support of Governor Paterson, Mayor Bloomberg, and the New York City Council. In order to be implemented, however, it would require the approval of the New York state legislature. This is not likely to pass in the current ses-sion, as it faces opponents in the State Assembly and State Sen-ate. However, after the 2010 elec-tions, congestion pricing may gain enough support in the legislature to be enacted.

Talking PointsThe brunt of the burden of the proposed •MTA fare hikes would fall on poor, working class, and even middle class workers who need to get to Manhattan to earn a living. In addition, there is no suggestion that those hikes will reduce either transit pollution or gridlockCongestion pricing would pay for many of the •negative externalities of car driving, including pollution and traffic.

Kormanoff, Charles. “Free Buses, Cheaper Subways -- and a Solution to New York’s Traffic, Gotham Gazette (February 6, 2009), http://www.gothamgazette.com/article//20090209/255/2821. (accessed March 21, 2009).Neuman, William. “How Will You Cope With Higher Fares?” New York Times City Room (March 23, 2009), http://cityroom.blogs.nytimes.com/2009/03/23/how-will-you-cope-with-higher-fares/ (accessed March 24, 2009).Nurture New York’s Nature Foundation, “Balanced Transportation Analyzer.” http://www.nnyn.org/kheelplan/ BTA_1.1.xls (accessed March 20, 2009).Nurture New York’s Nature Foundation, “Kheel-Komanoff — A Transition to Free Transit.” http://www.nnyn.org/ kheelplan/kheel_plan_rationale.html (accessed March 25, 2009).Partnership for New York City, “Growth or Gridlock? The Economic Case for Traffic Relief and Transit Im provement for a Greater New York.” December 2006.http://www.nycp.org/publications/Growth%20or%20 Gridlock.pdf (accessed March 23, 2009).Smith, Malcolm. “Senate MTA Proposal.” March 17, 2009. http://www.nymtasolutions.org/proposal/ (accessed March 26, 2009).

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23

Combating Demographic Imbalance: A Sustainable Model for Vermont

Hallie Fox, Claire Williams, Mai Ann Healy, Maggie O’Hara, and Scott KlenetMiddlebury College

Vermont can stimulate job growth and sustainable economic development in the state through a yearlong employment and civic engagement fellowship for recent college graduates.

Vermont has the second highest median age in the country, and is losing its young people to outward migration at a rate three times the national average. If allowed to continue, these trends will have serious detrimental implications for Vermont’s tax base and its over-all economic viability. College students tend to focus their post-graduate job searches on larger metropolitan areas, which are home to many established entry-level programs with streamlined application processes and expectations for career advancement.

Governor Jim Douglas has implemented some programs designed to remedy this demo-graphic imbalance. However, while these programs have been positive steps in mitigating this issue, more needs to be done to attract and retain young, highly skilled workers in the state. AnalysisWe propose a collaboratively funded post-graduate fellowship for young people to learn about the professional, social, and civic opportunities in Vermont. The fellowship will target students of Vermont colleges and universities, as well as graduates of Vermont high schools who pursued higher education elsewhere, in hopes of persuading some to become em-ployees in the state.

The fellowship will be composed of a year-long job, working four days a week with a fifth day dedicated to civic engage-ment and an applied learning project related to their field of interest, networking events and opportunities, and personal advising from a community mentor. We will look to in-dustries of strength in Vermont, such as sustainable alternative energy and agriculture, as well as industries of projected growth. The four-day workweek model has been applied in such companies as Google, whose employees are given “20 Percent time,” to work on a project of their interest. Community immersion projects will encourage participants to be engaged and involved citizens of the state of Vermont.

Young workers are less likely to look to Vermont for job opportunities because they see less opportunity for career advancement, worry about a lack of social networks, and

Key FactsVermont• ’s per decade population growth rate has been on the decline, and by 2020-2030 is expected to be 3%, down from 10% during 1960-1990. Over the next 25 years, the total number of •Vermonters over the age of 65 is projected to double, while the number of tax-paying adults will remain approximately the same. 70% of Vermont employers cannot expand •their businesses due to the lack of available highly-skilled workers.

25

often are simply put off by the difficulty of searching and applying for jobs in Vermont. However, the application process will be a competitive one, and status as a fellow will be prestigious, making fellows competitive in the labor market.

Participating employers would contribute a portion of the fellow’s living stipend; the re-mainder would be funded through the state and private sponsors. The long-term benefits of continually attracting young talent to the state will outweigh the initial costs of invest-ment.

Next Steps The current financial crisis provides a window of op-portunity; jobs are scarce, recent graduates as well as soon-to-be graduates are having difficulties find-ing jobs in big cities and will be more likely to con-sider a wider pool of job opportunities. Governor Douglas’ “Next Genera-tion” initiative falls under the umbrella of progres-sive economic develop-ment and could be used as a funding pool to get the program started. The next steps would be to se-

cure private sponsors and host employers. It will also be important to gain support from state colleges and universities, in order to advertise to students.

Once the fellowship is up and running, the model could be implemented in other areas across the country suffering from similar issues and modified to take advantage of their regional benefits.

Talking PointsEnabling fi• rms to provide competitive employment packages to young talent would allow Vermont em-ployers to expand their businesses and strengthen the state’s productive capacity. The state government cannot combat this problem •without making a financial investment; utilizing exist-ing state resources and creating networks between the government, the education system, and the busi-ness community, it will be able to reach its goal in a more efficient and sustainable fashion. Similar programs, such as the Yale National Intern-•ship Program, have successfully attracted an increas-ing amount of young talent to developing cities and states, counteracting the problems associated with demographic imbalance.

Vermont Community Foundation, “Understanding Vermont,” p32The Vermont Innovation Challenge, http://www.jimdouglas.com/press-releases/231-the-vermont-innovation- challengeBulldogs Across America. http://www.bulldogsacrossamerica.com/baa/Default.aspxThe Ehtan Allen Institute, “Off the Rails: Changing Demographics,Changing Economics, Accumulating Obligations: How will VT Cope with a Challenging Future?”The Next Generation Commission, VT LEG 21085.v3Bulldogs in the Bluegrass, http://www.bulldogsacrossamerica.com/cities/default.aspx?C=1Life at Google, http://www.google.com/intl/en/jobs/lifeatgoogle

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Commodity Tracking to Reduce Violence in the DRC

Kelly Steffen, Michigan State University

An efficient commodity tracking system, linked with a supply chain certification, should be established in the Democratic Republic of the Congo.

Mineral resources, such as cassiterite (commonly referred to as tin), have played a signifi-cant role in fueling political violence in the DRC. First, at the mining sites run by govern-ment soldiers and other armed combatants, soldiers and combatants kill, rape, torture, falsely arrest, intimidate, mutilate and steal the earned resources from the community based at the extraction site and throughout its shipment route. From tin alone, rebel groups gain up to $ 80 million a year in the Eastern part of the DRC. This income has fueled the decade long conflict that has killed over 4.0 million people, displaced another 16 million, and resulted in the rapes of tens of thousands of woman and girls. Secondly, this ineffective, informal, and danger-ous resource extraction prevents the Congolese government from formal-ly directing the money for productive purposes, as most of the money is channeled to combatants. Without an improved system, rebel groups will continue to exploit and exacer-bate this situation.

No legislation for a tin commod-ity tracking system, working in conjunction with a chain of commodity certification, has ever been introduced in the Congolese legislature. However, many groups such as the United States, various NGOs and UN Security Council have all created legislation that condemns the illicit trade of mineral resources in the DC. None of the resolutions have focused on an effective one system commodity tracking system or a chain of commod-ity certification that addresses the long chain of extraction to production in high-tech materials for specifically cassiterite. Additionally, none have simultaneously tried to shift demand and change the illicit supply. Moreover, the DRC signed the Extractive Industries Transparency Initiative (EITI), requiring the government to fully disclose information on commodities throughout the country; as of 2009, it has not been implemented. A com-modity tracking system would greatly supplement the recommendations of EITI.

A tin commodity tracking system and concurrent certification process would analyze and measure trading data supplied by national authorities and industries. This system will identify anomalies and gaps that indirectly indicate points of illicit commodity flow. Essentially, this will prevent illegal trade with neighboring Rwanda, as well as highlight the illicit trade amongst rebel groups inside the country and with middle traders. This system would also publicize its findings to the public to raise international awareness and shift international demand to only legitimately obtained goods. A similar single commodity tracking system of timber was proven successful in a conflict zone in Cameroon.

Key FactsFrom• tin alone, rebel groups gain up to $80 million a year in the Eastern part of the DRC that fuels national conflict.A similar single commodity tracking sys-•tem of timber was proven successful in a conflict zone in Cameroon.

The current ineffective and dangerous mining sector has caused a great loss in GDP growth for the DRC. The DRC holds approximately 57% of the world’s cassiterite. How-ever, the country only produces approximately 3% of the world’s total cassiterite produc-tion. The ineffective resource extraction allows for much of the material profit to transfer to neighboring Rwanda, causing a further loss of revenue for the country. Global Witness reported that in 2003, Rwanda produced only 283 tonnes of cassiterite but exported 1,458 tons. This means that much of the Congo’s wealth is being illegally transferred to Rwanda. The exports were valued at US$ 4.49 million, which could also add a significant contribution to Congo’s GDP. An effective system would increase revenue from the resource, channel it away from illicit rebel groups and to productive government chan-nels and keep the money gains within the country. Finally, a large portion of the economy would better be able to gain revenue and avoid severe human rights abuses. Also, rebel groups would lose a large share of their financing, further improving the human rights situation in the DRC.

Next StepsThere has been proven success with a similar commodity tracking system of diamonds, known as the Kimberly Process. The Kimberly Process core provision for shipping diamonds is based on shipment in a sealed con-tainer that must contain a certificate of origin. The most dangerous point for shipment of diamonds, as well as tin in the DRC, is from the mines to the first focal shipping point. How-

ever, this can be overcome with strict regulation and recommendation controls at the first known shipment point, Bisie. A key component is that all actors must work together to monitor, enforce and publicize the tracking system. However, a tin commodity tracking system in the DRC would be led primarily by the government, the largest stakeholder.

Talking PointsThis system woul• d also publicize its find-ings to the public to raise international awareness and shift international demand to only legitimately obtained goods. The United States, various NGOs and UN •Security Council have all created legisla-tion that condemns the illicit trade of min-eral resources in the DC.

Collier, Paul, and Ian Bannon. Natural Resources and Violent Conflict: Options and Actions. Washington DC: World Bank, 2003.“Democratic Republic of the Congo.” Extractive Industries Transparency Initiative. 2009. 7 Apr. 2009.Ndikumana, Leonce and Emizet, Kisangani, The Economics of Civil War: The Case of the Democratic Republic of Congo(July 1, 2003). Peri Working Paper No. 63. Available at SSRN: http://ssrn.com/abstract=443580 or DOI: 10.2139/ssrn.443580Polgreen, Lydia. “The Spoils- Congo’s Riches, Looted by Renegade Troops.” New York Times 15 Nov. 2008.Under-Mining Peace: Tin- The Explosive Trade in Cassiterite in Eastern DRC. Rep.No. Global Witness. 2005. p. 20

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