A question from Yahoo! Answers:

What effects did World War I have on Europe?

In a nutshell, WWI laid Europe to waste. In many respects, the damage done to the European economy during WWI was worse than that inflicted by WWII… At the end of WWI, Europe actually experienced widespread famine…

Read The Economic Consequences of the Peace by John Maynard Keynes, it describes the impact of the war on Europe in quite some detail:

http://socserv.mcmaster.ca/~econ/ugcm/3l…

A question from Yahoo! Answers:

Do yall thing the US is going to fall, if it is when why and how?

If the U.S. ever falls, it will probably happen much the same way as the fall of Rome did; first, the generals take power away from people, next, they go on a rampage trying to conquer the world, finally, there will be a point when there are too many generals, each wanting to be the emperor, so the empire is divided accordingly…

A question from Yahoo! Answers:

What does John F. Kennedy have to do with World War one?

Please help me figure out how J. F. Kennedy was related to World War one. I’m doing an article report during the time and I found an article with his opinion on World war one, but who was he at the time?!

In 1955, JFK (a U.S. Senator then) wrote a book titled “Profiles in Courage“, profiling eight U.S. senators who crossed party lines and/or defied the public opinion to do what they felt was right and suffered severe criticism and losses in popularity because of their actions. One of the eight senators profiled was George William Norris (1861-1944), who was one of only six senators to vote against the declaration of war on Germany in 1917.

A question from Yahoo! Answers:

Which is the first country that establish stock exchange and bank?

Banks (or at least bankers) existed for as long as money did. There are actually books written about banking practices in ancient Mesopotamia (see, for example, “The Old Babylonian Loan Contract: Its History and Geography” by Aaron Skaist, 1994).

As to the stock exchange, the priority definitely goes to Rome, where public stock market has existed since the Republic.

A question from Yahoo! Answers:

What labor force was used to build the levees by Sacramento?

Was it Chinese immigrants forced into labor? Isn’t it true that to accomplish some big engineering feat, some source of cheap labor is ALWAYS required?

Was it Chinese immigrants? Largely. Forced into labor? Not exactly, but close. Chinese workers were paid wages far exceeding what a daily laborer could earn in China at the time (but still below what an immigrant from Europe could hope to earn in the U.S.), but only single men were hired, and they were forbidden to marry. In addition, in 1863 the Congress passed the Chinese Exclusion Act, which made naturalization very difficult, and in many cases impossible, for the Chinese workers. Quite a few actually ended up settling in Mexico and assimilating there.

Is it true that to accomplish some big engineering feat, some source of cheap labor is ALWAYS required? Used to be, but not anymore. Heavy machinery and concrete paving work miracles when it comes to labor requirements…

A question from misc.entrepreneurs.moderated:

I read with envy the story of Dineh Mohajer and her company, Hard Candy.
…
Anybody know of any other similar stories of unexploited niches that blew up huge, or was this just a one-in-a-million opportunity that’s as rare as winning the lottery?

There is really no way to tell. Moreover, people come up with the same idea over and over again, but some fail while others succeed.

Today, almost every major car company has a crossover SUV, and crossovers generally sell like hot cakes. The “crossover SUVs” of the previous generation (Subary Legacy Wagon and Volvo XC 70) were only moderately successful; the original “crossover SUV” (AMC Eagle) was a near-failure.

From Institutional Investor

Chile: The Empire Strikes Back

10 Apr 2007

Jonathan Kandell

The much-maligned private pension funds of Chile have salvaged their reputation at last. Though still under attack for not living fully up to their promise, the funds — and their goal of increasing global investments — are now gaining favor.

A year ago Chile’s world-renowned private pension funds had become the bogeymen of local politics. In the two-round presidential and congressional elections that ended in January 2006, no issue prompted more agreement among leftists and conservatives than the need to rein in the Administradoras de Fondos de Pensiones, or AFPs, the six private pension funds that manage scores of billions of dollars in assets.

The AFPs, which largely replaced a bankrupt state-run social security system beginning in 1981, were praised for providing the long-term capital that powered Chile to the economic forefront of Latin America. But they stood accused not only of failing at their main task of delivering enough benefits to retirees — but also of grossly overcharging them. One center-left senator-elect, Guido Girardi, went so far as to call the private pension managers “thieves in jackets and ties.” Bankers grumbled that the bloated AFPs were making it difficult for other financial players to turn a profit. And with disgruntled retirees providing President Michelle Bachelet, a Socialist, the margin of comfort in her 53.5 percent run-off victory, the future for the AFPs looked bleak indeed.

Today the AFPs are clearly in more of a comfort zone than the president. Bachelet’s popularity ratings and her political clout have declined because she is perceived as often unfocused and ineffective. Given the record revenues pouring into the Treasury from copper exports, many Chileans can’t understand why the government isn’t spending more on the social benefits promised by Bachelet. Meanwhile, the 14-member Marcel Commission, which she appointed to recommend an overhaul of the pension system, has largely vindicated the AFPs, backing proposals that the pension funds have been advocating for years.

“The Marcel Commission has helped us recover the image we lost during the campaign,” says Jorge Matuk, chief executive officer of BBVA Provida AFP, the biggest of the pension funds, in a November 2006 interview with Institutional Investor. In February he became CEO of BBVA’s private pension fund management company in neighboring Argentina.

The Bachelet government has passed along the Marcel Commission’s recommendations and some reform proposals of its own to Congress. Although legislators probably won’t vote on the measures before May, the key reforms recommended include:

• Guaranteeing a minimum pension of about $150 a month, to be paid to the poorest retirees by the government.
• Requiring that self-employed workers, who constitute more than one third of the labor force but have not contributed to AFPs in the past, make regular pension fund payments.
• Assigning new employees, who today can choose any private pension fund, initially to the pension fund that offers them the best deal, in an attempt to lower the high management fees charged by AFPs. (Banks would be allowed to form pension funds to foster more competition, which could also lead to lower fees.)
• Authorizing AFPs to invest the bulk of their assets in foreign equities, a move the funds insist is necessary because Chile has become too small a market.

“The Marcel Commission has made an extraordinarily good suggestion with this proposed change in investment policy,” says Cristián Rodríguez, chief investment officer for AFP Habitat, the second-largest pension fund.

More broadly, the Marcel Commission repudiated charges that the AFPs were illegitimate because they were created under the dictatorship of General Augusto Pinochet (1973­’90). “The original sin of the Pinochet link was finally eliminated,” says Axel Christensen, a Marcel Commission member and former chief investment officer at AFP Cuprum, the fifth-largest pension fund.

When the AFPs were launched by the Pinochet regime, the state-run social security system was in a shambles. “People today don’t remember how little retirees received under the old system,” says Sergio de Castro, who as Economics minister in the early years of the Pinochet era was a main architect of the AFPs. De Castro was dean of “the Chicago boys,” a tight-knit group of conservative Chilean economists who had trained under Milton Friedman, the late Nobel laureate, at the University of Chicago during the 1960s. Pinochet gave the economists free rein to carry out economic reforms that were deemed wildly capitalistic in the Latin America of the 1970s, when state involvement in the economy was unquestioned.

In Chile, mines, farms and factories were returned or sold back for a pittance to the private sector. Foreign investment was welcomed. Trade barriers were lifted, forcing Chileans to compete with imports or close down. “Maybe the most radical of these policies was to privatize the social security system,” says de Castro, now chairman of a large real estate development firm in Santiago.

Under the privatized system, for which no model existed elsewhere, young Chileans entering the labor force were required to sign up with the new AFPs. Older workers had the option of remaining in the state system. The funds collected 10 percent of gross monthly wages; they charged an additional 2.5 to 3 percent of gross income in management fees and to pay for mandatory life and disability insurance. Complaints were widespread that those fees (which remain almost as high today) were onerous. But the AFPs promised a “retirement with dignity” for all Chilean workers, who were supposed to be the first blue-collar generation in Latin America to spend their golden years in something approaching economic comfort.

Long before anybody retired with an AFP pension, the privatized social security system was generating excitement both at home and abroad. The continuous, massive flow of contributions into the pension funds created a large pool of long-term domestic capital, an unprecedented financial phenomenon in Latin America, where governments and private companies had long depended on global capital markets for investments and loans. The sleepy Santiago stock market became flush from AFP purchases of local company shares. Thanks to the AFPs, loans and bonds for infrastructure projects, mines, electricity production, factories and department stores became available at lower interest rates and longer maturities than were being offered by foreign banks and investors. Today the AFPs manage an astounding $88.6 billion in total assets, in a country with a GDP that reached $120 billion in 2006. “We hadn’t planned on any of this when the AFPs got started,” says de Castro.

When GDP began to expand dramatically in 1986 — and continued to grow at a 6 percent annual average over the next two decades — emissaries from governments throughout Latin America and as far away as Eastern Europe booked flights to Santiago. Their immediate interest was to build in their own countries a deep reservoir of domestic investment capital, just as Chile had done. The longer-term attraction was the promise of a well-funded privatized pension scheme to support or replace ailing state retirement systems.

But the goodwill that the AFPs reaped for their role in Chile’s economic success diverted attention from some glaring flaws in the privatized pension fund system. Although all Chileans entering the labor market are required to become AFP “affiliates,” barely half become regular “contributors” to their pension funds — that is, regularly pay into the system. To this day, the gap is dramatic. At the end of December 2006, when the latest figures were available, there were 7,606,844 affiliates but only 3,932,184 contributors.

“The gap is related to changes that have taken place in the labor market,” says Andras Uthoff, a pension expert at the United Nations Economic Commission for Latin America and the Caribbean, based in Santiago. During the Pinochet era the trade union movement was crushed. A “free” labor market allowed employers to fire and hire workers more easily. “There is no longer any guarantee of full, permanent employment during an affiliate’s economically active lifetime,” says Uthoff, who was a Marcel Commission member. This leads to dramatic shortfalls in retirement income for many Chileans. By law only permanently employed affiliates are required to contribute to their AFPs. Those affiliates who are temporarily unemployed and the 35 percent of Chileans who are “self-employed” — usually a euphemism for part-time workers or those in the underground economy — don’t have to make pension fund contributions. As a result, they don’t, and many retire nearly destitute.

There are also many cases of affiliates who experience shortfalls because they were middle-aged when they first began contributing to their AFPs in 1981 and failed to accumulate enough savings in their pension funds before retiring. “The pension system is still in transition,” insists Matuk of Provida, which had 3,215,341 affiliates but only 1,573,436 contributors at the end of November 2006. “We haven’t yet seen an entire generation of retirees who have made contributions throughout their working lifetime.”

It is this in-between generation that has protested loudest. Eight years ago Yazmir Fariña, an accountant at the University of Chile, began to suspect the AFP system was shortchanging personnel whose paychecks she had monitored. Now retired, these university professors, administrators and blue-collar employees were calling her to complain that they were receiving much less than they had anticipated from their private pension funds, while the small minority of their colleagues who had stayed with the maligned, state-run system were doing as well as they had expected.

Fariña queried other retired university personnel and public sector employees across Chile. More than 12,000 answered with similar grievances. “We discovered a nationwide catastrophe,” says Fariña, who subsequently organized an association of retirees –the Association of People with Pension Damage — to lobby for lost benefits and pension reform. Membership has ballooned to more than 150,000.

At an association meeting last December in Santiago in a small auditorium belonging to the University of Chile, a dozen retirees — a quorum of misery — detailed their plight. AFP executives place the blame for most shortfalls in retirement income on the failure of pensioners to have contributed regularly to their funds, but the participants disputed this claim, saying they had been employed continuously and had made pension payments without interruption since the AFP system had begun a quarter-century ago.

Graciela Ortíz, 66, a retired lawyer who worked for the state-run Instituto Nacional de Estadísticas de Chile, said her last monthly salary in 2004 was 1 million pesos (about $2,000 at the time). She is receiving only 300,000 pesos a month from her AFP. She expected to do at least as well as a former colleague who stayed in the old state-run social security system and is collecting a monthly pension of 700,000 pesos. “We were duped,” says Ortíz. “The AFPs talked about retirement with dignity — what dignity?”

María Bustos, 64, a former chief public accountant for Chile’s internal revenue service, is doing even worse. Her last monthly salary was almost $3,000, and she expected to receive about $2,000 a month from her AFP. Instead, she gets only $540. She has cut her expenditures, giving up “anything superfluous,” she says, such as new clothes, cable television and, most recently, her cell phone. Once a defender of AFPs, Bustos says, “The scales fell off my eyes.”

Considering the large impact that complaints about the AFP system had during Bachelet’s election campaign, Fariña is frustrated by how little influence her association has wielded. She dismisses the Bachelet government’s proposed $150 minimum monthly pension as insulting. And she wonders whether her association has failed to show sufficient militancy. “Maybe what we have to do is go out on the streets and block traffic, or something like that,” says Fariña.

The heart of the AFP system remains its mostly female sales force, which sells pension funds to young workers first entering the job market and entices older employees to switch from their existing AFPs. With 500 agents, Provida has the largest sales force. But that’s only a quarter of the sales agents it had 20 years ago. Back then there were more than 20 AFPs, with a total of 23,000 sales agents, and competition for affiliates was much fiercer than it is today among the six surviving AFPs — Provida, Habitat, Santa María, Summa Bansander, Cuprum and Planvital.

A generation ago AFPs argued that the expenses incurred by their huge sales force were to blame for the high commissions charged to affiliates. But the consolidation of the industry and reduction of its overall sales force haven’t led to a noticeable decline in management and insurance fees. They still average about 2.5 percent of an affiliate’s gross monthly income — and seem especially burdensome to blue-collar workers who are already forced to invest 10 percent of their monthly gross wages in an AFP fund. High commissions account for the bulk of the AFPs’ eye-catching profits. Over their quarter-century existence, the pension funds have averaged an annual return on equity of 25 percent, according to the Superintendencia de Administradoras de Fondos de Pensiones, the government regulatory agency for the AFPs.

Lately, Provida has been charging among the lowest commissions — about 2.39 percent. But its sales agents don’t believe lower commissions are the reason for their success. “The first thing affiliates look at is how well their AFP fund is doing compared to the other AFPs in terms of return on assets,” says Gloria Sabag, a sales supervisor in Santiago. Those returns are announced every three months on the Internet, in newspapers and in mailings sent to affiliates.

Moreover, since 2002 the AFPs have abandoned a one-size-fits-all approach in favor of offering five funds of decreasing risk. The highest-risk fund — called an A fund — is weighted 80 percent in favor of stocks. The lowest-risk, E fund, is loaded with government bonds; it is recommended for affiliates nearing retirement. In 2006, for the first time, stocks overtook bonds as the main investments of AFPs, accounting for 51 percent of total portfolios.

The concern among affiliates about the return on assets at their funds was evident during a visit in December by Sabag and her sales agent Laura Morales to Canal 13, a television broadcasting station owned by the Pontificia Universidad Católica de Chile, where there are 200 Provida affiliates. To arrange meetings with affiliates, sales agents must maintain good relations with the head of personnel at the company. So, Sabag and Morales bring along bags of candies and a bundle of ballpoint pens with Provida logos for Pablo Araya, personnel chief at Canal 13. Araya himself has always been an affiliate of Habitat, the second-largest AFP, and claims not to favor any pension fund.

“Whenever young employees ask my advice, I tell them to pick the A fund — no matter what AFP they choose to join — because it is heavily invested in stocks and will do better for them over the course of 40 years,” says Araya.

Since their inception in 1981, the AFPs have averaged a 10.1 percent annual return for their contributions. With growth has come newfound respect from foreign fund managers. Joaquín Cortéz, Provida’s chief investment officer, remembers contacting a large foreign fund six years ago to discuss the possibility of an investment. “They mailed me a form to fill out and send back with a check,” he says. Nowadays? “Every important foreign fund manager visits Chile to sell services to the AFPs.”

With a staff of only 15, Cortéz keeps his investment criteria simple. For example, if Provida decides to go overweight in emerging markets, he and his assistants research the best-performing fund managers over the previous three to five years. “And then we look at their prices, because the only thing we can be certain of about the future is how much they are going to charge us,” he says.

The AFPs are even more notorious penny-pinchers in their domestic market. “Nobody makes money off the AFPs,” says Gonzalo Menéndez, a senior bank manager who sits on the board of Banco de Chile, the country’s second-largest bank after Banco Santander Santiago. Former AFP executives admit as much. Christensen, now a partner at investment bank Moneda Asset Management, recalls his hard-nosed behavior as chief investment officer at AFP Cuprum, which he left four years ago. “I can tell you that if we could get away with it at Cuprum, we wouldn’t pay a dime to a broker,” he says. “If the broker provided us research on a deal we went into, maybe we paid three to five basis points.”

So what keeps smaller financial players like Christensen’s Moneda in thrall to the AFPs? The big pension funds provide much of the daily flow and liquidity for investment banks and brokerages. “We don’t make much profit from individual brokerage transactions with the AFPs,” says Alejandro Montero, a partner at Celfin Capital, a leading Chilean investment bank and brokerage. “But we make money on volume — and in other businesses with them.”

Those other businesses include IPOs, big corporate bond issues and private equity deals, none of which would be possible without capital from the AFPs. The funds have become the biggest institutional investors in Chilean retail giants Falabella and Cencosud, in leading telecoms Telefonica CTC Chile and Entel, and the biggest airline, LAN.

Increasingly, the AFPs have felt constrained by the domestic market. “Chile is just too small a pond for the big AFP fish,” says Christensen. That is particularly the case for Chilean equities. By law, AFPs cannot invest more than 30 percent of their assets in foreign equities. When such limitations were first put into effect in the 1980s, the government was concerned that Chile would never develop a large enough domestic capital market if the AFPs were allowed to invest abroad unhindered. Chile’s problem is no longer a lack of capital but rather a lack of enough domestic vehicles. “AFPs receive about $200 million per month in new flows,” says Guillermo Tagle, managing director of IM Trust, a local investment bank. “Because they have to invest so much in the domestic market, they risk artificially inflating their Chilean assets.”

AFP investment officers complain about the straitjacket imposed on them by legal requirements to invest so much locally. “Every time we buy Chilean stocks, we jack up their prices,” says Cortéz. “And every time we sell, the prices fall sharply.”

In a particularly notorious instance three years ago, AFPs took months to reduce their exposure to the local electricity sector by slowly selling off shares in Enersis, the largest domestic power company, so as not to make the stock price plummet.

No such worries are aroused by foreign stock transactions. That’s why the AFPs made the lifting of legal restrictions on foreign equity holdings their priority among the pension reforms proposed by the Bachelet government. And they seem to have gotten almost everything they lobbied for: The government agreed to press Congress in 2007 to lift the 30 percent foreign equity limitation to 80 percent beginning in 2010. The AFPs are also lobbying for the creation of an independent commission of financial experts to determine any changes in investment policies. The current system leaves such matters up to Congress. “Financial markets are too fast-changing and complex for legislators,” says Habitat’s Rodríguez.

In the meantime, AFPs continue to chafe at lost investment opportunities. Last year the Chilean stock market rose by 28 percent in dollar terms, while Latin American stock markets overall showed a gain of more than 39 percent. Because they have reached their limits in foreign stocks and are overexposed in domestic equities, AFPs keep more than 20 percent of their assets in low-yielding time deposits at Chilean banks. “Unfortunately, our legislators confuse our returns on investment with our profits,” says Rodríguez. “And, of course, the only beneficiaries from our investments are our affiliates.”

If many politicians fail to share the AFPs’ enthusiasm for more liberal investment policies, it is because they are angry over the high commissions charged by the pension funds and the resolute opposition by the AFPs to reforms that call for more competition to lower those commissions. Under the most important of those proposed reforms aimed at bringing down AFP commissions, Chileans joining the labor market for the first time would have to sign up with the AFP that offers the lowest commissions and would not be allowed to switch to another pension fund for at least 18 months.

Although AFP spokesmen publicly bellow about the unfairness of such a measure to their businesses, some pension fund executives privately scoff at its effect. Any AFP that lowers its commissions to new entrants must by law extend such cuts to all affiliates. “That’s not much of an incentive,” says one AFP executive. Nor are AFPs especially concerned over reforms that would allow banks and insurance companies to launch their own pension fund management companies. After all, of the 20-plus AFPs that existed a generation ago, only six remain — and they have the deep pockets, extensive distribution networks, sophisticated information technology platforms and marketing experience to cope with new competitors.

One potential reform that troubles the AFPs involves the possible entry of the powerful, government-owned BancoEstado into the fray. “A state-owned AFP not motivated by profits would be a good regulatory tool,” says Juan Antonio Gómez, a leading center-left senator. The conservative opposition in Congress has warned that a BancoEstado pension fund could lead to a return to a subsidized, state-run social security system that would undermine the AFPs. The debate has divided Bachelet’s cabinet, with Labor Minister Osvaldo Andrade favoring a BancoEstado pension fund and Finance Minister Andrés Velasco opposing it.

Beyond the fate of specific reform proposals, there is growing skepticism that President Bachelet has the clout to pressure the AFPs to help forge “the great social protection system for all citizens” that she promised at her March 11, 2006, inauguration. Her ratings climbed to 65 percent after she named women to half the 20 cabinet posts, called for “a citizens’ government” and announced more than 30 top-priority social welfare measures that she intended to carry out during her four-year term. With copper prices tripling since 2003, to just under $3 a pound by the end of 2006, many Bachelet supporters expected immediate, large infusions of public spending. But the government maintained a long-standing policy of fiscal caution and treated the copper revenue windfall as a temporary bonanza.

“The president raised too many populist expectations that she could not possibly fulfill quickly,” says Carlos Huneeus, a prominent political analyst and director of the Centro de Estudios de la Realidad Contemporánia, a nonprofit think tank based in Santiago. Bachelet’s vulnerability was exposed when 800,000 secondary school students went on strike in May 2006 throughout Chile demanding reforms and more subsidies for public education. Their street protests were put down harshly by the police, and the ensuing popular backlash forced Bachelet to shake up her cabinet. After falling to a low of about 45 percent in July 2006, Bachelet’s popularity rating hovered at 47.5 percent in March, according to a survey by El Mercurio-Opina, a leading pollster.

Meanwhile, the AFPs have been displaying a single-minded, sophisticated strategy to restore their image. When Girardi, the center-left senator-elect and Bachelet supporter, denounced AFP managers as thieves during the election campaign, he was sued for libel by the AFPs. He issued an apology, insisting that he wasn’t referring to any AFP executives in particular. (Girardi has since become embroiled in a scandal involving his campaign finances.) The incident forced AFP critics to lower their tone.

The reform battle then shifted behind the scenes, with the AFPs lobbying hard to get their candidates onto the government-appointed Marcel Commission. Some of its most prominent members were former AFP managers. Though critics were included on the commission, none called for a scaling back of the private pension system or other radical changes. When the Marcel Commission delivered its recommendations to Bachelet in July 2006, AFP managers sounded far more elated than did their critics.

“The most important thing to remember is that when the Marcel Commission was set up, the government described the private pension system as being in crisis,” says Provida’s Matuk. “But in its very first paragraph, the commission report stated there was no crisis.”

The specific recommendations by the commission largely met the AFP wish list. On the investment side, they backed AFP calls for greater freedom to move capital abroad. On the benefits side, they backed AFP calls for the government to finance minimum pensions for retirees who fell through the cracks in the privatized system. This led one outspoken commission member, Uthoff, the U.N. pension expert, to remark, “If the state continues to be responsible for the failures of the system, you are privatizing the profits but nationalizing the losses.”

That seems too harsh an assessment for some foreign experts who have followed the AFP system and the proposed reforms. They point out that in a developing country like Chile, the working poor tend to be poor in retirement as well. “It’s unreasonable to chastise the AFP system for not curing all the problems of poverty,” says Olivia Mitchell, director of the Pension Research Council at the Wharton School of the University of Pennsylvania in Philadelphia.

Maybe so, but as Uthoff points out, no matter how instrumental the AFPs have been to Chile’s economic development, “they seem to have forgotten about their social welfare role, which is the main reason they were created.”