Should the Obama Administration take Mexico for Granted?

Why is the US Congress always occupied with east-west issues such as with Afghanistan, Iraq, Syria, Palestine and Ukraine, while practically ignoring its neighbors south of its borders (i.e. Mexico)? To place it into perspective, consider the number of times Secretary of State, John Kerry or even President Barack Obama have met with Mexico’s President Enrique Peña Nieto. …maybe once or twice per year which barely compares to the hundreds of stops made in the Middle East alone.

The term ‘shuttling between capitals’ to negotiate trade deals and peace treaties with the US seems never to apply to Mexico or Central/South America, and yet Mexico is the US’s second largest trading partner moving over USD$500 billion in goods and services across its borders. With so much hanging on the balance, especially with immigration reform and border security between both countries, is it prudent for the US to take its neighbors south of the border for granted? …and what can Mexico say differently to place its agenda on a priority list for high level officials in Washington?  

Foreign Affairs Forum
At a recent forum at the Council on Foreign Relations in New York City called, Mexico as a Global Player sponsored by the Foreign Affairs publication as part of a series on Mexico titled, Mexico’s Muscle, Revealing the Strength, the Minister of Economic Growth for the State of Mexico, Adrian Fuentes Villalobos, along with a cadre of supporting experts from both countries, sat on various panels where they proposed the idea of a NAFTA Version 2.0 (North American Free Trade Agreement). This enhanced version of the 1994 NAFTA agreement would seamlessly combine Canada, US, and Mexico into a North American partnership, one based on shared job creation and prosperity building.

Over the past twenty years, NAFTA used up most of its political capital in Washington and depending upon who you ask has rendered mixed results. The Huffington Post, for example, underscores the net loss of 1 million American jobs plus a net US trade deficit of USD$181bn, while Mexican-sponsored research groups show a contrasting view that highlights the creation of 6 million jobs between both countries along with a 500% increase in trade capacity. Despite their differences of opinion, one indisputable benefit was the development of a manufacturing hub for heavy industry located in the center of Mexico.

What was once a sparsely populated territory has now been transformed into a series of industrial parks that when viewed from 30,000 feet high appear organized like the floor of a modern plant. Top multinationals such as GM, Chrysler, GE, BMW, Boeing, Nescafe, DuPont, and Embraer, to name a few, have established a presence in the region with their key suppliers located nearby. As testimony to their commitment and confidence in its future prospects, many companies are continuing to invest hundreds of millions of dollars to accommodate their imminent rapid growth. Foreign investors including global banks have had a key role in boosting Mexico’s FDI (Foreign Direct Investment), which has doubled to USD$35.2bn in 2013 when compared to the year before.

For a country that has carefully mapped this massive expansion and has been responsive to the strategic needs of global manufacturers, one would expect that by all reasonable standards, Mexico’s achievements thus far would have earned it international recognition, and yet, when it comes to members of the US Congress, nothing could be further from the truth. For a slew of political reasons, elected US officials have conveniently stuck to two key issues when discussing US-Mexican relations, immigration reform and border security. With good reason, members of the panel spoke of their efforts to change the dialogue with the US but have done so with little success. The US Ambassador from Mexico to the US, Eduardo Medina Mora, described his personal hidden frustrations as he described his daily reminders to members of Congress on the many potential benefits Mexico can offer to the US. Clearly, the two pending bills have greatly polarized US-Mexican relations, which has resulted in a decoupling between Washington politics and the multinationals operating in Mexico.

The newly elected President Enrique Peña Nieto recognized his country’s political shortcomings early on after being sworn into office and in a series of extraordinarily bold moves pushed through four noteworthy bills to help bring his country closer to a US framework. These include:

  1. An energy reform bill that for the first time allows foreign direct investments to improve the country’s energy portfolio and infrastructure.
  2. A telecommunications bill that has broken a long-held monopoly among cell phone and television operators.
  3. An education reform bill that among other challenges will reward teachers on the basis of merit.
  4. A labor bill that makes it easier for companies to hire and fire employees.

In each case, President Enrique Peña Nieto had to take on powerful labor unions and business tycoons to successfully dismantle their influential centers. His efforts won him praise both domestically and internationally. His ingenuity and leadership earned him the respect from his country peers at the G-20 economic meetings. However, despite President Peña Nieto’s notable achievements, Mexico still has never been recognized as a priority by either the Obama Administration or members of the US Congress. Not all was lost. In response to Mexico’s relentless requests to gain access to high level officials in Washington, the White House finally acquiesced in May of 2013 to form the HLED platform, which stands for, you guessed it, High Level Economic Dialogue. Truly an unimaginative acronym and more than likely a US stalling tactic, the HLED limits Mexico to one annual meeting with cabinet-level officials in Washington.

According to one of the panelists, what Mexico needs is a revised narrative, one that addresses key mutual benefits that elected US officials can pitch to garner the support of their constituents. Just asking the US to change their dialogue away from immigration reform and border security, may not be enough. I believe something more is needed and have taken the liberty to lay out a few suggestions below (see appendix) that could help a Mexican delegation send the same intended message to the Obama Administration but, hopefully, in a more compelling manner.

I would be remiss not to mention the current threat from drug cartels in Mexico and the illegal immigration of Central and South Americans that travel through Mexico to reach the US border. No doubt it is one of the key concerns that weigh on elected officials’ minds and the American people. However, as history has shown us repeatedly, a strong economy is a far greater deterrent than an over-extended border protection scheme. By boosting medical tourism along the US-Mexican border, expanding the State of Mexico’s manufacturing hub, and educating both US and Mexican youth to meet increasing STEM job demand, drug cartels will be forced to circulate elsewhere.  As for non-Mexican immigrants, they should find employment in their own respective countries caused by a spillover effect triggered by NAFTA Version 2.0.

Hopefully the acronym HLED will some day soon be changed to read The North American Partnership or TNAP – (NAFTA Ver. 2.0). There members would agree to meet at least monthly with US cabinet officials. Maybe then, Mexico will know it is no longer being taken for granted.

###

 (APPENDIX)

A Revised Narrative for the Mexican Delegation

In an effort to change the narrative presented at the event, I have listed three key strategic points that on their own merits should help gain the attention of US political leaders.

I. Establish tiered industrial zones within Mexico’s manufacturing hubs that focus on a balanced trade-off between a range of country content ratios of finished products (i.e. US versus Mexican content) and corresponding tax policies.
Currently, the Mexican delegation claims that the US content for products manufactured in the State of Mexico is 40%. If the State of Mexico developed trade-friendly policies that applied favorable tax rates based upon US content, then further  tiered them for companies with lower US content, US leaders would view the gesture favorably and be forced to respond accordingly. For this scheme to work, however, Mexico should maintain a bi-lateral, transparent, third-party auditing process to ensure the policy is attracting the right kind of companies. At the end of the day, the same US companies who enjoy the maximum benefits will become the Mexican delegation’s greatest advocates in Washington. They will do a more effective job selling Mexico’s North American partnership to members of Congress and the American public than anyone else.

II. Open dialogue to develop trade policy between medical tourism in Mexico for US baby boomers in exchange for STEM education assistance for Mexican youth.
Just south of California, Tijuana has become the capital of the world for medical tourism with over 1 million annual visitors who generate over USD$1bn in economic benefits to the area. With the predicted shortage of doctors in the US, the retiring of 77 million baby boomers, and the introduction of Obama Care, the US may no longer have the manpower to take care of its aging population’s medical needs. Rather than leaving this situation to chance, US leaders would do well to help develop affordable pathways for the most common procedures by leveraging the abundance of Mexican doctors. Another potential idea would be to use approved Mexican medical procedural rates as a basis for insurance policy reimbursements, hence giving policyholders real options rather than just high deductibles.

In exchange for Mexico’s cooperation, the US can agree to help develop stronger STEM education curriculum (Science, Technology, Engineering, Mathematics) for its young adults who comprise over half of the Mexican population. Clearly Mexico’s immediate needs lie in educating their youth to fill a growing demand for engineers, whose efforts in turn will also help fuel the US economy, especially if the US content of manufactured products remains around 40% as stated earlier in point number one.

III. Highlight the expected reduction in border crossings over the next 5 years  based on a trending reduction in fertility rates in Mexico and improvements in  job prospects for Mexican youth.
Data shared at the event claimed that by 2020, Mexico’s fertility rates will decline from 2.67 children per child-bearing mother today to 2.2, which is comparable to the US current rate of 2.06 and the ‘replacement level’ of 2.1. The Mexican delegation should circulate these findings along with studies highlighting the reduced need to protect the US border from future Mexican immigrants because there will be fewer interested candidates. The billions saved trying to protect 51 guard posts along the longest border in the world (2,000 miles) could be allocated elsewhere including for launching Mexico’s vision for NAFTA Version 2.0.

© 2014 Tom Kadala

Advertisements

How to Introduce Entrepreneurship within a Young Democracy – (a case study)

During a recent Charlie Rose interview, Christine Lagarde, the president of the IMF (International Monetary Fund), shared her views with a packed audience of international economists in Washington D.C. on how young democracies such as South Africa or Malaysia commonly have fragile dual economies operating in parallel, one run by the ‘haves’ or wealthy, while the other by the ‘have nots’ or the impoverished. The wider the gap between them the greater the chance social unrest will follow, such as what happened in Egypt with the Arab Spring in 2011 and most recently in Brazil 2013. Other areas that could potentially erupt include Ukraine, Argentina, Greece, Indonesia, Pakistan… In fact the list of countries is so long that one might wonder, what exactly could the IMF or similar international financial institutions do differently and can lessons learned from one country be leveraged elsewhere?

To further explore new insights with countries operating within dual economies, I recently led a facilitated discussion with 38 university students at the Universidad del Caribe (UNICARIBE) in Santo Domingo, Dominican Republic. This island is a foothold for over 10 million inhabitants and a micro version of a typical young democracy. My goal was to hear how young Dominicans felt about their dual economy and extract a list of recommendations to pass along to political leaders and international creditors. I also hoped their ideas might offer new insights to other country leaders.

Universidad del Caribe is not your typical university. With over 19,000 enrolled students and 330 instructors, the university covers an ambitious range of degrees and disciplines at their two building complex. Students work by day and attend classes, one to two days per week. Campus spirit is notably strong fueled by an enthusiastic faculty comprised of volunteers, many of whom hold other jobs to make ends meet.

Life for a young impoverished Dominican is a daily challenge. Most will spend their lives operating undetected by government scrutiny in an underground economy where basic financial stop gaps such as access to credit for emergencies or a reasonably priced business loan are rarely accessible. Their greatest asset is their ingenuity and vibrant personality, which shines in much of what they do. Job security does not exist. They earn what they can from odd jobs, pay no taxes, and cut corners wherever and whenever by, for example, stealing electricity off the national grid. Providing for family needs consumes their meager incomes leaving them with little to no savings. In short they have few options within their reach to improve their livelihood.

On the other side of the economic spectrum, the Dominican middle class have their own set of problems. As avid consumers they buy beyond their means and spend much of their time fighting frivolous lawsuits or fulfilling new government requirements. Aside from having to pay income taxes, they are also saddled with higher utility bills required to offset the electricity stolen by freeloaders.

Surprisingly, the number one aspiration for a young Dominican adult is not to earn a college degree or to own their own business but rather to align himself or herself with a political party early on in life. In their minds, the only way to obtain job security is by serving a well-connected political group. Competition for these positions can be fierce, not because of an over-supply of skilled workers, which are scarce to begin with, but more for the oversubscribed pool of politically connected job seekers.

Open positions require a minimum of three years working experience, which leaves first time entrants with no other alternative than to join a political party.  This type of politically-motivated workforce, one based on connections rather than qualifications, tends to create a vicious circle. On the one hand, managers and leaders, also mentors, will send the wrong message to younger Dominicans who will see little value in advancing their own education or training, since the better paying jobs can be won with less effort through political connections. On the other hand, less qualified government officials are less inclined to require professional certifications from contractors to ensure that state-of-the-art services are rendered. The end result is a less competitive workforce.

The upkeep for a politically motivated workforce can become prohibitively expensive for any government. Venezuela and Cuba are two good examples where individuals are forced into political alliances for fear of being denied even basic services. Over time the workforce becomes lazy, and their leaders complacent. To please their international creditors, government officials devalue their local currency, which only makes matters worse with higher inflation rates. Eventually, both public and private sectors become trapped by the weight of their own unwillingness to progress. Adding to the malaise are party leaders who fail to recognize the immense value their Informal Sector could otherwise render with existing resources. Instead they would rather keep a tight lid on their potentially vibrant young workforce who due to their discouragement will enter a life of crime making matters even worse for their government and the rest of society.

With these facts on hand, I asked the discussion group what they thought was the root cause for their dysfunctional dual economy. Some cited a lack of women’s rights as they affect the welfare of the family unit. Others pointed to the criminal justice system for sending hardened criminals back on the streets without offering them a job or alternative form of income.  After a lively exchange, the unanimous vote for the root cause focused on the country’s weak judicial system.

According to the participants, on paper the justice system appears formidable, while in practice, it is virtually spineless. Laws are readily legislated, approved, and published to please voters; however, in the courtroom, these same laws are rarely enforced as written or at all. For the right price, a political leader or powerful investor can influence a judge’s decision to their advantage.

Despite their impoverished status, these 38 student/workers recognized the importance an independent legal system. Participants noted that whenever politicians or influencers are allowed to operate above the law, trust between the government and its people erodes. This same feeling of distrust infiltrates society and its family units creating a precariously, wider gap in their dual economy. This revelation raised an important question.

In a dual economy governed by a biased legal system, what can the government and international financial institutions such as the IMF do differently to create a brighter future for the Dominican Republic?

To counter the gap-widening effects caused by a weak judicial system, the group suggested the formation of a student entrepreneur association based out of the University del Caribe.  Members would join the Association then be matched through an interviewing process according to skills, experience, and interest to a cluster of no more than ten students each. Each cluster would be be guided and arbitrated by a university appointed mentor. At least one member of a cluster would have a specific entrepreneurial venture in mind or a launched startup in its initial stages. Members of a cluster would become the new startup’s board of advisors and help in their varying capacities to further the entrepreneur’s venture. As the venture grows, members of the board of advisors can opt to work for the new entity or start their own venture within their same cluster. The University would act as an independent arbitrator to ensure members adhere to a clear set of rules and contracts.

On an interesting side note, one individual admitted that if a cluster were to help him launch his dream construction business, he would most likely leave the cluster and not return the favor. His revealing comment confirmed the inherent distrust among his peers, which our facilitated discussion found to be primarily caused by the lack of an independent judicial system in the country. His comment re-enforces the University’s role as the cluster’s so called ‘mini judicial system’, one that is independently operated. Initially the process will most likely be an uphill battle but after a few success stories should convince others of the many benefits that can be gained from trusting each other.

Although our time ran out, other questions remained unanswered that could serve for future facilitated discussions. For example, how should the contract among members be drafted and how should the spoils and liabilities of a successful launch be structured to ensure a sustainable business? Of course, securing funding for mentors, garnering support from government officials, attracting outside investors, and designing an eco-system for future entrepreneurs are important topics too. After the discussion ended, the enthusiasm from both the students and faculty was evident by the clusters that began to form immediately among them.

As I listened to their animated voices, I could not help but think how a this two-hour discussion with a sample of prospective local entrepreneurs could potentially change the course of a nation. Hopefully, members of the IMF and other international financial institutions can learn from this case study and consider including a similar cluster program as a funding requirement for young democracies.

© 2014 Tom Kadala

Greece: Land of Economic Tragedy or Entrepreneurial Opportunity?

Would an ancient Greek playwright like Euripides have ever considered Greece’s current economic malaise a source of inspiration for a modern day Greek tragedy? Probably not. …and yet, an audience for this unwritten, modern-day Greek tragedy has surged as members of the Troika continue to relentlessly pressure Greek politicians to address their overdue financial public obligations now teetering above 170% of GDP.

One can just imagine the utter frustration that Greece’s Government VP and Foreign Minister, Evangelos Venizelos, must feel every time he updates ECB officials of Greece’s economic progress or lack thereof. At a recent ECB review meeting, Venizelos, a burly looking character, bellowed a strong opinion in the nearly empty chambers of onlookers. He told anyone who would listen that to view Greece as the “central problem” of the European and global economy was “false, dangerous, and unfair”. When I read his quote in a local paper, it sounded like the perfect opening line for a riveting and engaging modern-day Greek tragedy, whose first scene might begin as follows:

A Modern-Day Greek Tragedy
As the sun sets over the Athenian skyline, scene one begins. A spotlight, as though originating from the night sky, shines brightly upon the Acropolis. The stage is the city of Athens, while the audience is a virtual network of headline news readers who watch with great anticipation for clues on how this extraordinary Greek tragedy will unravel. 

The first scene begins with a narrator’s soliloquy on Greece’s current financial woes. In a monotone voice, he tells the audience that Greece is in debt up to its eyeballs. The country of 10 million inhabitants owes over 317.31 billion euros plus interest to European bankers and other investors, …which translates to a shared debt of over 31,731 euros per Greek citizen. With unemployment at 27.8% and almost twice as high among its youth (58%), the Greek population has a slim chance of ever paying back its creditors. Increased austerity measures have helped reduce the need for more debt but have done little to address the amount the country owes overall. The severe cut backs have made Greek everyday life exceedingly difficult by spreading public misery, triggering social unrest, encouraging talent drain, and fostering capital flight. 

In a baffled voice, the narrator turns to the audience and asks the following questions:

If austerity has truly brought the Greek people to a dead end, what can Greece’s leadership do today to help secure a better future? How can their government policymakers attract foreign direct investments, create local employment opportunities for its citizens, and eventually reignite a new and sustainable Greek economy? Are we doomed or is there hope among us?

Suddenly, the silence is broken. From the audience, a group representing the future of Greece, speaks out loud. Their message is direct. Their recommendations spot on and their intentions, genuine. They are none other than representatives of Greece’s young professionals.

A Dynamic Facilitated Discussion
Unwittingly scripted into this next scene, I arrived in Athens for a last-minute business trip earlier this year. Prior to my departure, I had asked various groups of Greek young professionals through LinkedIn and other sources to meet with me for an informal discussion. For nearly two hours, we chatted candidly about the future of their Greece.

They were an eclectic bunch, fifteen in all. They covered a wide range of backgrounds including post graduates, young entrepreneurs, teachers, and professionals working in the private sector. Many had spent time outside of Greece either studying or working internationally. For them, Athens was their home, and they had a vested interest in her future. I agreed to write an op-ed expressing their views so their collective recommendations could be read globally.

I began our facilitated discussion with a hypothetical question that went as follows:

If this Group was offered access to a 100 million euro fund to spend in any way they chose for the betterment of Greece, what would they do first and why?

The Group offered three suggestions, which together revealed some fundamental issues that go far deeper than the well-documented mistrust between Greeks and their government. First, funds should go toward changing Greece’s educational system and specifically toward the placement of more non-Greek teachers. Group members felt that the practice of recruiting teachers from the same student body had potentially fostered a myopic view among Greek academics. Bad teachers who have little fear of losing their jobs are rarely challenged by outside peers nor formally evaluated by their students for their comments and suggestions. With a strong bias towards ‘teaching to the test’, teachers have become unchallenged, while students have lost their genuine desire to learn for the sake of gaining new knowledge. To make matters worse, students are never certain if and when they will graduate as teacher and student strikes are common.

Exposed early on to disinterested teachers and unpredictable graduation dates, Greek students have developed an inherent dislike to academia. Their disdain for their educational system has resulted in a long-standing rift between industry and academia, one which has severely lessened the government’s support and industry interest in the development of Greek-based R&D initiatives.

From an early age, children are taught to aspire to public sector jobs. These jobs form part of a government promise that offers lifetime, financial security for its citizens. Aiming for a different career path is considered out of the main stream. Under these preconceived notions, entrepreneurship ranks low as a worthy career among Greek family members. They view young would-be entrepreneurs as fools rather than business pioneers. In fact the literal translation in Greek for entrepreneurship is ‘business man trying to do something’. …they just don’t know what that might be!

Not surprising, the second suggestion for the allocation of the hypothetical 100 million euros was to boost the poor image of entrepreneurs within Greek society. At first I thought the Group’s suggestion would also include financing for an entrepreneurial eco-system which might include a startup incubator and an innovation center. Instead it focused entirely on addressing the severely marred image of entrepreneurs within Greek society. Intrigued, I verified this stigma with other young Greeks I met during my trip and found that indeed it was true. They also felt like ‘social outcasts’ who preferred not to share their dreams with their respective friends and families.

Where American entrepreneurs relish the rebellious freedom associated with entrepreneurship, Greeks do not. Greeks rank social acceptance of their entrepreneurial dreams as a top priority. Not addressing this social concern first could significantly lessen the long-term effects of any experimental entrepreneurial program. Certainly much more can be read into this social angst, and I encourage readers to delve further into this discussion among their friends and colleagues to explore innovative approaches that will turn the tide of traditional thinking.

The third suggestion for the fund was expressed as an off-handed comment but nevertheless unveiled some valuable truths. To the Group funds should be spent to create a new and independent political party, one that would be open to delivering new government promises for financial security that were not associated with a position in the public sector.

A New Normal
Undoubtedly the Troika’s demands have forced layoffs and salary cutbacks within the Greek government that have jolted the fundamental foundations upon which Greek life has been based for decades. Today, a new normal is evolving between traditional Greek  family expectations for job security and government promises. Neither has experience navigating through these troubled waters and as a result blame the other for Greece’s severely weakened economy. Workers strike frequently, making matters worse, while lawmakers struggle to acquiesce to the demands of their key industry groups. Last year alone, the government published over 240 legislative reforms, which created havoc among business owners and investors who remain on the sidelines awaiting greater economic and political visibility from their government.

The Group’s Recommendations
Hanging Merkel in effigy may help release some anger among the Greek population but as the Group pointed out, there are better ways to deal with the current crisis; however, first things first. Steps to favorably reassess the role of the entrepreneur in Greek society will very likely spark a cottage service industry of business coaches, entrepreneurial therapists, web designers, mentors, and more. Their growing presence will encourage other young adults to consider entrepreneurial pursuits, while simultaneously, reverse the current ‘social outcast’ stigma associated with entrepreneurship. If supported by favorable policies and legislation, Greeks living abroad may see this initiative as their calling card to return to Greece. Their expertise, networks, and enthusiasm should further unleash the many innovative capabilities currently bottled up within the Greek population.

The Group felt Greece could one day become a low-cost solution for big data and data analytics services globally. Just as India captured the call center and IT sectors, Greece’s mathematical prowess, recognized throughout history and the world, could drive both the low end side of the business where big databases require meticulous ‘cleaning’ as well as the high-end side of the business where sophisticated algorithms for machine- to-machine communications among devices or robots are required.

Institutes for Excellence
The Group suggested the development of an independently operated Institution for Excellence or IE whose purpose would be to teach and mentor students on the educational tools and skills needed to launch a big data and data analytics eco-system, specifically a human capital engagement research center. The Institute would reside within an existing university but operate independently. Their campus presence should reignite a new sense of purpose at academic institutions, one that industry could value and be willing to support financially. The Institute would have to be fully insulated from political influence and be governed through an independent board whose members represent its constituents equitably. The IE’s footprint should be designated a tax-free zone to help students finance their startups. Startups that reach a specific threshold in sales would be spun off into the Greek economy under a gradual legislative assimilation process.

Funding for an Institute for Excellence could come from three sources. First, from Greek diaspora who may be willing to return to Greece and actively participate in a teaching/mentorship program. Second, from a modified tax amnesty program similar to one implemented in the UK where tax avoiders can come clean with their overdue tax bill by investing in qualified startups. To help Greeks make the transition to entrepreneurship, however, this tax amnesty program could be further simplified by issuing shares from a fund whose charter includes the establishment of multiple Institutes of Excellence throughout Greece and, potentially, other countries.

A third funding source would come from international private equity funds whose involvement could lead to future investments in the IEs startup companies and relevant initial public offerings or IPOs at both local and global stock exchanges.

Existing organizations such as MIT’s Venture Mentor Service ( http://vms.mit.edu/) can be tapped for guidance, know-how, and strategy. As is often the case with entrepreneurship, the initial phases for proof of concept are the most difficult, however, there is little doubt in my mind that the 15 Greek young professionals who worked through these ideas with me in less than two hours can lead this charge. If given the chance, they and their peers could offer Venizelos with another set of talking points that will change the Troika’s next discussion from one of exasperation to one of opportunity fueled by sustainable economic growth.

© 2014 Tom Kadala

Could PayPal become the Global Reserve for Cash and Data?

As PayPal continues to reinvent itself, expect the mother of all disruptions, a global currency comprised of cash and data. Similar to how voice and data coexist over the same copper wire today, PayPal’s next move will co-mingle cash and data over a shared platform. Instead of bits to sound bytes, however, PayPal hopes to seamlessly integrate customer and peer data (in the cloud, of course) and deliver customized business intelligence across multiple platforms to small business merchants all over the world — right when they need it most. There is one catch. Every merchant transaction including credit cards would have to involve PayPal.

Last July at a PayPal sponsored ‘Battle Hackathon’ event, which took place at AlleyNYC (alleynyc.com) near Times Square, over 100 local software developers worked through the night in small groups to create a new ‘killer app’ of their choice for a chance to win a $100,000 grand prize. This event was one of ten stops along PayPal’s world tour, which included Barcelona, Berlin, Moscow, Seattle, and Tel Aviv. Throughout the night, PayPal’s minions were on-hand to help developers integrate a list of special access APIs (Application Programming Interface) into their code. These APIs offer developers controlled access to PayPal’s databases. Aside from identifying worthy programmers for hire, PayPal uses these Hackathons for feedback on their growing library of APIs. While attending, I caught up with their Global Director for their developer network, John Lunn.

A former marine biologist who compares PayPal’s membership behavior to schools of fish, Lunn shared some eye-popping statistics from PayPal’s extensive databank.

  • 65% of items purchased in a retail store have been researched prior on the Internet.
  • 43% of browsers at a retail store actually make a purchase.
  • 37% of shoppers who price compare in the aisles using a smartphone App, complete their purchase online later,
  • On average 15 year-olds will remain on a retailer’s web page for less than 6 seconds.

“You have to be where your customers frequent”, claimed Lunn who strongly believes that the future of the web is with mobile devices, especially since market near-term predictions for mobile payments are upwards of $20b. Already a prominent player, PayPal expects to process $7 billion in mobile payments next year, which is 10 times more than its volume two years ago.

The increased payment activity has PayPal eyeing the customer-specific,  behavioral/buying-preference intel that can be extracted from the transactional data. Rich in details, this harnessed data could become a game-changer for small retailers.

“Without data, you actually know nothing about the consumer,” Lunn exclaimed. Conversely, with data, a merchant can react or address a customer’s wants and needs at a lower cost. Showing a customer what they will most likely purchase based on their personal profile and peer comparisons can make every aspect of running a business immensely easier and efficient. From marketing, sales, inventory control, retail space, and employees on the floor — every improvement that is based off better business intelligence derived from rigorous data analytics and self-teaching algorithms will have a lasting impact on the rest of the business as well as for its corresponding supply chain.

A customer’s buying experience is important too…  

“Buyers no longer want to wait in line,” Lunn notes. …and why should they if technology can enable them to simultaneously step up to the same checkout counter. Lunn used Jambo Juice as an example of how PayPal card holders can order up their favorite drinks from their mobile device and use face recognition to verify their purchase in the store. There’s no waiting around since drinks are prepped in time to be picked up. Watching a worker cut up vegetables and blend a customer’s health drink was once perceived as fresh and worth the wait. Not anymore. Consumers value their time as much as they do the products they buy.

With buyers who are far more knowledgeable of products than ever before, the only line of defense available to merchants is a deeper understanding of their customer’s buying habits. But knowing what a customer purchases in one store is not enough to make a difference. Merchants need access to richer and timely intel about their customers and their peers, not just what they bought recently from them, but elsewhere too, with other merchants, on or offline, locally and globally.  With access to this much data, merchants could target their best customers and provide them with exceptional service especially during the few minutes a customer spends at the check-out counter. For example, once a face is recognized at the register or an account number entered, hundreds of points of data could be co-mingled, correlated, then calculated instantly between PayPal and the merchants database to extract a customized product recommendation such as a special offer or custom-printed coupon booklet. Each timely recommendation would help build a stronger bond with the store’s brand.

Integrating into a merchants database or CRM system requires an army of developers. PayPal knows this fact and hopes that its easy-to-use APIs will encourage developers to include PayPal with their client’s transaction processing needs. PayPal’s inclusion would do away with the ‘clunky terminals and expensive equipment’ many merchants use today to process credit card payments. However, to make PayPal’s ambitious business intel plan really work, every merchant on the planet would have to become a PayPal member.

Could PayPal become the Global Reserve for cash and data?

To appreciate PayPal’s shrewd and brilliant strategy, pick up a copy of a fascinating book titled, “The PayPal Wars” by Eric M. Jackson. The author explains in compelling, narrative detail how the simple idea of helping world economies through job creation, prosperity, and world peace is hinged upon merchants trading freely and seamlessly across borders. If merchants in The Congo, for example, could sell their goods as easily to a local buyer as they would to a buyer in New Zealand, their improved cash flow would help strengthen their local economies and grow their businesses.

PayPal’s past success was predicated on the individual support of its very members. When eBay tried to replace them with an in-house solution called BillPoints, PayPal’s members rebelled. …and after many other similar competitive encounters, members could indirectly claim a personal stake in PayPal’s ongoing success. Their formidable presence overwhelmed even their craftiest challengers. Time will tell if PayPal’s loyal customers will once again help them forge on with their ambitious quest to become the Global Reserve for cash and data.

© 2013 Tom Kadala

Data Mining Lessons for Obama

Earlier this month an ex-CIA employee and whistleblower, Edward Snowden, exposed the federal government’s 6-year old, clandestine initiative, referred to internally as PRISM, a covert data-gathering program that began in 2007 as a corollary to the Patriot Act of 2001. This White House-directed, domestic-espionage project has been collecting phone logs of millions of U.S. citizens from major telecommunication giants (e.g., Verizon, AT&T, and Sprint) and emails from nine prominent Internet companies (e.g., Google, Yahoo, Apple, Microsoft) in a concerted effort to thwart future terrorist attacks.  

History shows that PRISM has prevented numerous incidences, including a foiled backpack bombing plot in New York in 2009. Despite its undisputed success record, PRISM has ignited a national debate on whether the administration has gone too far seeking tighter security at the expense of civil liberties. In a statement to the American people, President Obama argues that his actions are justified.

 “You can’t have 100-percent security and also then have 100-percent privacy and zero inconvenience,” he famously stated. “We’re going to have to make some choices as a society.”

Not surprising, many Americans disagree with Obama’s position and have taken action. Among them is Sen. Rand Paul (R-Ky), who will soon introduce a class action suit of which he hopes to obtain more than 10 million signatures. Those in favor of Obama’s PRISM believe that the price to pay for security is small in comparison. Just how damaging can a diverted phone log be to anyone, or a random email read, for that matter, if terrorist attacks can be prevented? However, when the process requires canvassing mountains of data that could randomly incriminate anyone, the fundamental basis for the U.S. judicial system where defendants are considered innocent until proven guilty, is truly at risk.

‘Con’ concerns do not stop there. Dissenters argue that PRISM has set a precedent for further erosion of individual freedom. Without a counter mechanism in place, future leaders will more than likely continue to up the ante on domestic surveillance until an unimaginable, automated version of a Russian-style KGB informant process becomes undetectable and virtually unstoppable. If you are skeptical, consider what happened with consumer debt after Reagan’s supply-side economics took hold: Every American consumer was doused with credit cards. The combination of economic bubbles that followed eroded the effectiveness of our elected leaders in Washington who today are trusted by less than 20 percent of the population.

If eliminating PRISM is not an option, then what mechanisms can be put into place, early on, to prevent domestic surveillance from reducing our individual freedom… and what solutions have worked in the past, and with whom?

Data Mining vs Mining Precious Metals
Lessons can be learned from another type of mining activity that is very similar to mining data, namely, mining for precious metals in some of the most remote areas on the planet. Surprisingly, the operational principles of the two efforts are nearly identical. In both cases expensive machinery and sophisticated software are used to sieve through enormous amounts of data/ore. Both identify specific assets (i.e., key leads/gold nuggets) that in aggregate could create exceptional value, a value so great that individuals, corporations, or governments would break laws or silence whistleblowers to secure its use or acquisition. Finally, both processes are confronted with a conflicting tradeoff that involves the invasion of privacy of a constituency of voters.

Just as Americans feel an attack on their personal freedom from PRISM’s data mining activities, local communities in Peru, Congo, Guatemala, South Africa to name of few, experience a similar personal upheaval when global mining companies (i.e. Barrick Gold, Rio Tinto and many, many more) set up operations without the communities’ consultation or consent. Environmental disasters, such as toxic chemicals found in the water supply or increasing numbers of birth deaths or defects, have exposed rogue mining operations and over time have forced the hand of powerful politicians and legislatures to comply with legal mechanisms that protect the rights of affected community members.

Recent examples include Peru’s mining town of Bagua where 34 people were killed in 2008 in a staged military attack against peaceful indigenous demonstrators. In the Congo, where many rare-earth minerals are used to make mobile phones and appliances, increasing local uprisings have forced mining operations valued at $1 billion to close.  These uprising are clear evidence of a failed system or policy. They offer a lesson and illustration of a similar dark future for Obama’s PRISM project, if left uncontested.

The striking resemblance between data mining and traditional mining suggests that some of the best practices used to resolve conflicts in the mining industry could also be applied to the PRISM project to safeguard it from escalating and potentially causing a ‘trust rift’ between the US government and the American people.

American Society/Council of the Americas
At a recent gathering of the American Society/Council of the Americas (AS/COA) in New York City, a distinguished expert-panel with deep field experiences working on some of the toughest mining-related conflicts in the world offered their insights, best practices and ongoing recommendations to a packed audience of interested parties of non-profits, NGOs, and private investors. (AS/COAs recent issue of, Americas Quarterly, covers additional details.)

To qualify as a best practice, the panel highlighted a simple yet fundamental metric that involves a transparent two-way conversation between the mining company’s project (consultation) and the local communities concerns(consent). Social unrest is almost inevitable when the conversation becomes opaque and one-way or as referred to by the industry, “consultation without consent”. Fortunately, legislative progress continues in countries like Peru where mining laws have been passed that require both consultation and consent, for example, in cases where a community is forced to move.

One of the expert panelists, Rachel Davis, the managing director at ShiftProject.org, highlighted the imperative need to include consent mechanisms. To this end she outlined three key challenges that mining companies must address properly to ensure an open-dialogue with an impacted, local community.

  1. Offer a venue for consultation but be prepared to spend at least one month of face time to earn the people’s trust.  “Trust,” she emphasized, “is the imperative currency for collaboration.”
  2. Train staff members within the mining company to develop a genuinely concerned attitude along with the skills to handle awkward conversations or even hostile responses.
  3. Ensure available access within the company to handle grievances and capacity-building, coordination efforts within a cross-functional, corporate structure.

Emily Greenspan, the Senior Policy Advisor at Oxfam America, tweaked Davis’ three points by adding one more important stipulation. She recommended that mining companies evaluate how decisions are made at local levels.

“Taking the time to understand the culture, temperament, timing requirements, and so much more are crucial from the out start,” Greenspan explained. 

Her comments reminded me of President Obama’s lunch engagements with members of Congress earlier this year. They were, in my opinion, too little, too late to have the desired effect. Had Obama requested these luncheons at the beginning of his first term, perhaps the paralyzing partisan gridlock that we have today would have found common ground. The lesson learned is the vital importance of getting to know your audience from the beginning; otherwise the cost of catching up becomes prohibitive and meaningless.

With the looming ‘black cloud’ surrounding the PRISM Project, Obama would do well to learn from his prior experiences and heed the advice from field experts, many of whom are already within his administration and working on  global mining issues for precious metals. Why not tap on their wealth of experience to help clean up the PRISM project mess?

As history has shown in the mining industry, time may be running out for Obama. A failed policy of this magnitude could turn into an irreversible tide of social unrest.

© 2013 Tom Kadala

Advanced Manufacturing – GE’s Response to Full Employment

When Tom Donilon, the National Security Advisor for President Obama was asked what the two most pressing issues that kept him up at night, he replied, terrorist attacks and the US declining national competitiveness. The backdrop of 600,000 unfilled manufacturing jobs at a time when unemployment is near 8% has most certainly been his nightmare in the making. He must be asking himself, how could our educational system fall so out of line with industry demands, especially when student debts have exceeded $1 trillion? With such a large investment made to prepare our youth, what kind of a workforce do we have as a Nation? If vacant manufacturing  jobs were filled today with US workers, experts tell us that the contribution of our manufacturing economy would jump from its current level of $1.8billion to $2.2trillion! What has gone terribly wrong?

Political leaders supporting manufacturing initiatives in Washington are calling for another ‘Sputnik moment’ to inspire American students to pursue manufacturing careers. Without a ready inventory of workers to support a competitive manufacturing base, America’s future will always be vulnerable to outside economic threats. History reminds us of our true potential, when in 1945, 50% of the products produced in the world were ‘Made in USA’. Today that number has trended down to 22%.

At a recent press gathering in Washington DC’s Newseum sponsored by GE (General Electric Company) and The Atlantic Magazine, GE’s CEO, Jeff Immelt, along with an impressive slate of industry experts and thought leaders addressed the next chapter in US manufacturing and its expected role in creating jobs. David Arkless, Manpower Group’s President of Global Corporate and Government Affairs, led the discussion with a non-sugar coated account of how the Chinese have managed to grow their manufacturing base, while the White House has been floundering along forming more committees than solutions. Arkless explained how the Mayor of Tianjin, Huang Xingguo, (the 4th largest urban population in China) learned from speaking with over 2,000 foreign firms in his district that their number one concern was a ready supply of skilled workers at the right cost. Working with his local universities, the mayor and his team of advisors forecast the skill sets companies in Tianjin would need in the future and created specific course tracks that met these requirements. Local students who chose a STEM career were offered a tuition-free package and employment after graduation. Tianjin’s efforts appear to be paying off well, since this year the city is expected to grow at 17.5%, well above China’s average of 6.5%. Arkless asked out loud why the US Government could not do the same as the Mayor of Tianjin.

Could/should the US follow a similar manufacturing strategy as the Chinese? 

The other panel members argued strongly against Arkless’ recommendations, citing that the US has a different political system and could never ‘get away’ with what is socially acceptable in China. What the US Government could do, instead, is establish a set of certification guidelines that colleges can follow and employers can use to hire with confidence. Colleges that produce well-trained employees using these standardized tests could expect their employers to reciprocate with needed financial support, which in turn would alleviate the need for future government subsidies. Based on each college’s performance, free markets would determine the academic institutions that can deliver and those that should be dissolved or merged.

Despite the many efforts to entice students to follow a manufacturing career track today; however, the US strategy is clearly not working. For starters, most students are not aware that goods are produced on factory floors in the US. For years they have heard negative news coverage about the loss of US factory jobs to other countries with lower wages, so much so, that college to them is their ticket to avoid a dead-end job on an assembly line. Like a page taken from a Charles Dickens novel, they perceive factory jobs as requiring long tedious hours in a dark and dingy work space spewed with numerous health hazards.

At the event, GE’s CEO, Jeff Immelt, exclaimed the pressing need to change this archaic perception of factory work among young students. Parents, teachers, and guidance counselors alike had to be on-board too. Results from a recent survey showed that only 3 out of 10 parents supported a manufacturing career for their children. Without greater parental support, the hurdle to attract students to a STEM career path (Science, Technology, Engineering, Mathematics) would become insurmountable, especially among the emerging, young Latino population who tend to be family centric. Alcoa’s VP of Human Resources, Natalie Shilling, noted that children’s long-term interests in STEM subjects tend to drop off significantly during the 6th grade level. In response Alcoa has partnered with local schools to sponsor science fairs and family factory visits but expressed concern that their ‘grassroots’ efforts may be insufficient.  Like GE, they also see the urgent need for a formalized regulatory framework backed by sound government policies.

Advanced Manufacturing
Factories today are referred to as operations of ‘advanced manufacturing’.  Unlike yesterday’s plants, they include robots, ‘lean’ manufacturing practices that improve overall process efficiencies, and local distribution channels. They are smaller, cleaner, and automated. For example, the labor required for the production of a GE refrigerator is only 1.8 hours, less time that it might take to install the unit at a customer’s home and read the manual. Breakthrough technologies such as 3-D printing are pushing the limits on smaller runs of customized products with near-zero waste. GE is investing heavily in 3-D printing technology citing its shorter design cycle benefits. Shaving one or two years off the traditional design-to-production process could translate into significant savings and competitive advantages.

Immelt’s predicament poses an interesting future for manufacturing. As wages have been squeezed out of the cost of production, the focus on future investments has shifted away from countries with cheap labor to regions that offer a steady flow of skilled workers, access to specialized materials, and a basic infrastructure to move goods to consumers. Where specific components are lacking, GE is prepared to make investments to ensure the integrity of their business model over an expected plant life-span of 40 to 50 years.  Immelt believes that this ‘in-country’ strategy will prepare GE to serve an expected one billion middle class entrants over the next five years.

What does Immelt consider to be a skilled workforce worthy of GE’s consideration? According to Immelt, future workforces must be capable of performing ‘additive manufacturing’, which means they will need the knowledge-base to combine some computer training with artisan skills. They must also work competitively in teams. How important are team skill sets to Immelt? Recently the shortage of skilled workers prompted GE to call back veteran GE employees, who according to Immelt, will need some technical training but will easily fit in, since they already have proven GE team work experience. 

…and yet, one key question remains. Can GE’s ‘advanced manufacturing’ strategy achieve full employment without an increase in US exports? Time will tell.

As currency wars mount, what will stop US trading partners from setting up their own ‘advanced manufacturing’ operations that service their own local markets? Factories will be cheaper to build and faster to set up locally, therefore, offering a distinctive advantage over imported finished goods. Furthermore, STEM online training courses such as edx.org and ocw.mit.edu will help prepare a viable pipeline of qualified local STEM students/workers virtually anywhere in the world.

Immelt’s predecessor, Jack Welch, once envisioned the future of manufacturing with factories mounted on moving barges that would dock at different ports-of-call depending upon the market demand for a manufactured good. In part his vision had some validity. The barges he referred to, are today, smaller and more agile high-tech factories that can be easily built adjacent to their intended buyers.

© 2013 Tom Kadala

Lessons from the Other ‘Fiscal Cliff’

The infamous morning of Black Sunday, April 14, 1935 began as a bright sunny day filled with the hope that a three-year drought was finally coming to an end, but by evening, one of the most damaging dust storms in American history charged through the open landscape like a raging bull removing over 300 million tons of topsoil from the prairies, causing economic and agricultural devastation across the Midwest. It came at a low point during the Dust Bowl of the ‘30‘s when food and jobs were already scarce. By 1935 Congress initiated policies, incentives, and legislation that helped the economy to bounce back and its farmers to develop preventive measures that would save the Nation from what was then considered ‘the end of the world’. 

Nearly 77 years later, another bowl of devastation is heading our way loosely referred to as the ‘Fiscal Cliff of 2013’.  Its similarities to the Dust Bowl are truly striking, with one exception. the Dust Bowl of the 1930‘s was a natural phenomena caused by Mother Nature while the ‘Debt Bowl’ of today will have been self-inflicted by the US Congress.

During a recent PBS Documentary, the narrator quoted one of the families who had lived through the Dust Bowl era as saying that despite their efforts to plug every crack in their home, the dust still managed to get in. I could not help but think how, for the past decade, easy credit had similarly crept into every household in America the same way that dust had during the Dust Bowl. No matter how frugal one chooses to live today, Americans will be liable for not only their collective personal debt, but also their share of the rapidly growing National Debt. Like dust, our National Debt has infiltrated every American household for generations to come.

Washington Ideas Forum
Recently, The Atlantic Magazine, a political/business/entertainment publication, held their fourth annual Washington Ideas Forum at the Newseum in Washington DC where they conducted a series of live interviews with a Who’s Who list of Washington politicos including Senator Marco Rubio, Sheila Bair, Chris Matthews, Gene Sperling, and David Rubenstein. When asked to comment on the ‘Fiscal Cliff’, their combined assessments were bleak.  All of them agreed on the need to avoid the ‘Fiscal Cliff’, if at all possible, but like the example from the Dust Bowl era, they could not see any sure way to avoid the inevitable. The following is a recount of what they had to say.

Sheila Bair on the true Amount of Debt
Sheila Bair, the former head of the FDIC during the economic crisis of 2009, clocked the unsustainable size of US private debt at 160% of GDP, which she claimed was twice the size of the US public debt (80% of GDP). She noted that the size of the private debt had become a quiet secret that no one in Congress seemed eager to discuss. The private debt that goes unpaid, as we are seeing today with the recent unraveling of unpaid FHA loans, will eventually wind up on the US Government’s balance sheet and become every citizen’s concern. When added together, the aggregate public and private debt is truly astounding.  Bair has always preferred a ‘rip- off the band-aid quickly’ approach to the crisis and reminds her colleagues that banks should have taken a full hit early on to allow for a faster economic recovery. According to her intended strategy, banks that received government loans were expected to use the funds to realign their portfolio of home mortgages.  Instead they used the borrowed funds to increase their reserves and improve their capital ratios leaving home-owners with ‘underwater mortgages’ to their own devices.

Gene Sperling on Preserving a Tax Revenue Framework
Gene Sperling, one of Obama’s economic advisers, focused on the greater potential damage that could result from a surge in negative investor sentiment if Congress waits too long to act. Also present, David Rubenstein, a billionaire philanthropist, agreed.  Rubenstein felt that political uncertainty can create far more economic damage by holding businesses back from investing in their business and hiring new employees.

Sperling went on to defend the Democratic position of extending all tax cuts prior to the Holidays for those earning less than $250k/year, while hitting the remaining 2% of taxpayers with a hefty tax bill.  Republicans countered his proposal with a $50k tax deduction cap citing that the amount of tax revenues raised would match Obama’s plan ($750 billion/year).

Sperling’s response offered a glimpse at the intensity of the debate between both parties.  He felt that a tax deduction cap would discourage future donations to charities and non-profits, while encouraging the use of crafty lawyers to find tax loopholes for their rich clients.  Skeptical that the Republican plan would raise sufficient funds, Sperling noted that in principle the Republican plan would have ‘frozen the tax revenue framework’ by locking out the option of raising revenues at a time when voters today are willing to accept higher taxes.  If sufficient revenues were not raised using the Republican plan, Sperling points out, the onus of closing the revenue gap would fall on the middle class.

Senator Marco Rubio on Building a Middle Class
One could make a case that the Republicans may not have thought through their plan as thoroughly as the Democrats, but that is unlikely. Senator Marco Rubio, a young Republican hopeful for the 2016 Presidential elections, felt that Mitt Romney had failed to convince the American people how limited government and free markets can create a thriving middle class – a cornerstone in Republican ideology.

Rubio began his analysis by asking how the ‘fiscal cliff’ would reduce the national debt, if it also ‘wiped out’ small businesses through higher fees and taxes.  In his opinion any plan that does not include a comprehensive formula to stimulate growth is unsustainable and foolish.  The economy must produce something for it to service its debt, otherwise, its debt levels will continue to rise.  The products and services it produces will require jobs with new skills and those jobs can only be filled if the government invests in its workforce by, for example, making student financial aid accessible to anyone in need of proper training. Rubio notes from his Hispanic background that tomorrow’s workforce will depend upon a comprehensive immigration reform policy that balances the supply and demand for jobs as baby boomers continue to retire.

Rubio exemplifies a modernized version of a member of the Republican Party that our founding fathers probably had in mind, but he is only one person in a party severely split over a slew of self-serving cronies.  Many older Republicans have sided with arguing for the sake of argument rather than seeking ways to work together toward a common goal.

Chris Matthews on Restoring Respect in Politics
Chris Matthews, a news anchor and political commentator for the popular TV talk show Hardball, reminisced over the Reagan era when politicians respected each other’s office and compared the then-to-now changes with Senate Minority Leader Mitch McConnell’s comment that his number one priority going forward was to ensure that Obama would become a one-term President. McConnell’s comment coupled with Romney’s ‘47%’ blunder including his ‘self-deportation’ remedy for immigration during a debate have demonstrated how out-of-touch the older leadership have become, offering an unprecedented opportunity for young Republicans like Senator Rubio to regain control of the Republican Party and its true ideology.

Summary Remarks
Historically crises such as the ‘Fiscal Cliff’ have a silver lining.  They can whip a complacent and divided group of leaders into line and force them to work together despite their differences. During the famous Dust Bowl, President Roosevelt was heard saying to an affected group of farmers that the US Government did not know how to remedy their desperate situations but that if a solution existed, ‘they’ were sure to find it.  The ‘they’ President Roosevelt referred to included every living person who could lend a hand, which amounted to just about everyone. Today, 77 years later, President Obama already knows what needs to be done to tackle the ‘Debt Bowl’ of 2013 but lacks the political will and the genuine respect on Capitol Hill that President Roosevelt and his constituents had taken for granted.

So as we gather around our respective Thanksgiving dinner tables, think for a moment what our world would be like if we respected each other as individuals and not just as stepping-stones for personal gain. As the liberal Democrat, Tip O’Neill, a former Speaker of the House, once told the staunch conservative Republican President Ronald Reagan, “We may agree to disagree, but after 6pm, we are always friends.”