Stanford University

Essay in Pakistan newspaper traces roots of crisis in the Islamic world

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In an essay published June 25 in The Friday Times (out of Lahore, Pakistan), Thomas W. Simons, Jr. -- a CISAC consulting professor and former Payne Visiting Lecturer at SIIS -- traces "today's crisis in the Islamic world" back to conditions in the 1970s "in Islam's old Arab and Iranian heartlands."

The post-1970 crisis in the Islamic world and Pakistan's role

It is possible to trace today's crisis in the Islamic world back to the time of the Prophet (pbuh) and the four Righteous Caliphs. Many Salafists among Muslims and many so-called Orientalists among Westerners do just that. Opposed in every other way, they both believe in an Islamic "essence" unchanged since then. Others go back to the 19th century CE, to the onset of Western domination over much of the Muslim 'umma. Yet it seems to me that to understand today's crisis adequately we need go no further back than the years around 1970 in Islam's old Arab and Iranian heartlands. Admittedly a number of factors had to come together to produce the dilemmas we still live with.

The 20th century struggle against colonialism raised high hopes that the departure of the colonisers would usher in a new era of dignity and prosperity for Muslims. The main ideology of these hopes was the kind of republican nationalism associated with Gamal 'Abd al-Nasser in Egypt and Muhammad Mossadeq in Iran. By about 1970 these hopes had collapsed.

Not only had Israel persisted as a reminder that decolonisation did not mean an end to subordination, but the 1967 Six Days' War was such a catastrophe that its casualties were not just military: it discredited the republican nationalist ideology as well. The Arab world was rent by rivalries between republicans and monarchists, with the Cold War protagonists egging them on and paying them rents for friendship. Worst of all, the postcolonial regimes turned out to be authoritarian and corrupt.

Nor was that the whole story. There had also been much economic and social development, yet it was of very special kinds. State-led industrialisation had been based mainly on oil and gas, and oil and gas are special commodities. The iron and steel that drove earlier Western growth had created new middle and working classes; oil and gas do not, and their profits are easily captured by sitting elites. To pay for industry, moreover, states ran down agriculture. Within decades this drove millions from farms and small towns into cities that then exploded their infrastructures. The states offered education, particularly at higher levels - at one point Egypt was producing 75,000 graduates a year - but beginning about 1970 states were withdrawing from the economy and turning responsibility for growth over to captive and anaemic private sectors. So more and more first-generation graduates were entering increasingly slack economies with no real prospects for jobs or dignity.

All this was a recipe for political radicalism, and the ideological vacuum left behind by discredited republican nationalism was filled by the dream of recreating the unity and purity of the original 'umma in the 7th century CE. That dream had been part of Islamic discourse almost from the beginning, but it had mainly appealed to the 'umma's fringes, the Bedouin soldiers of the Khariji movement, the small townsmen of Islam's middle years who had then become Shi'a or Sufis. Now, around 1970, the dream had been modernised by thinkers like Sayyid Qutb in the Arab lands, 'Ali Shariati in Iran, and Maulana Abu-l-'Ala Maududi in this country, and in that form it entered the Islamic mainstream. It became the chief ideology of opposition to the authoritarian and corrupt postcolonial regimes.

The result has been thirty years of savage and bloody civil war among Muslims. It has struck Westerners and Israelis too, but most of the victims have been Muslim, because the regimes were now headed by Muslims. When Syrian leader Hafez al-Assad retook the city of Hama from Sunni insurrectionists in 1982, he killed at least 10,000 people, three times the casualties of September 11.

What would it take for Muslims to transcend this crisis? Time after time in their history they have overcome huge challenges by creating marvellous new syntheses of thought and feeling and practice. I have no doubt that they have the spiritual and intellectual and physical resources to do so once again. But what would be the elements of renewal at this new stage?

Some elements have already been moving into place.

As the civil war has proceeded, there has been covert movement on both sides toward a new centre. Regimes have been Islamising themselves. They have been introducing some Islamic law and some Islamic practice into their governance. Conversely, Islamists have been entering the political system. They now run for election; they enter cabinets; they serve in parliaments; they function as (more or less) loyal oppositions.

The process has been drenched in bad faith on both sides, but movement has been real.

Concurrently, more and more Muslims who might have become Islamist political revolutionaries two decades ago are now forsaking politics for community action in the 'umma. Rather than bombs and guns, the name of the game is now schools, clinics, charities, and the Islamic piety of individual Muslims and their families.

Moreover, with the end of the Cold War sitting regimes can no longer collect rents from the USSR, and they find it harder to collect rents from the US now that competition with the USSR is over. Even the new rents the US is paying since September 11 will never match Cold War largesse. There will never again be enough official assistance to keep regimes in power by sustaining their growth rates.

Now they must rely instead on private foreign direct investment (PFDI). This is because all over the world production of knowledge is replacing production of things as the engine of economic growth. PFDI flows mainly on economic grounds. It is not attracted by the archaic, state-dominated, information-shy economies of the Arab Middle East and Iran. Their share of world PFDI has fallen from 12 percent in 1990 to 3-4 percent today. To attract it, they need reforms that will make them less rigid, less state-dominated, and less information-shy. Such economic reforms typically lead to demands for political reforms too. That is their quandary.

Such pressures will not end Islamist radicalism. The conditions that give it birth are often still there. But such pressures do tend to force radicalism to the margins of the 'umma once again. Osama is a perfect example: through the 1990s he was forced step by step back to the only place in the world where he now had a double layer of protection and hence the space and time needed to mount an operation like September 11.

Nor will such pressures automatically generate the new Islamic synthesis the planet needs. But they do create a new opportunity for Muslims to fashion an authentically Islamic modernity that is adequate to their history and their hopes.

I would argue that September 11 did not change this basic picture. It came as a shock to most Muslims, and even Islamists asked themselves whether Osama's methods were the best path to the common goal. Iraq, of course, has been much more problematic. There military defeat was so rapid and complete that it rekindled the usual Arab feelings of helplessness and rage, and the botched aftermath has given these feelings time to swell and take political form. Radicalism is reconstituting itself, but - it should be noted - on a new basis.

For Osama, for Dr Ayman al-Zawahiri, Islam may still be the banner of revolutionary overthrow. For younger Muslims, Islam is increasingly the badge of membership in national communities. It is no longer just an ideology for outsiders. More and more it is the ideology of outsiders and deprived or threatened ruling ethnic elites: Sunni Tikritis in Iraq, Pushtuns in Afghanistan. Driven toward the margins by repression, cooptation or military defeat, Islamism is re-entering the body politic through the service entrance of Islamo-nationalism.

The consequences can be unhealthy. If only Muslims should be citizens, Christians and Jews are excluded in ways quite novel in Islamic experience, and quite dangerous. But there may also be a new and exciting opening for an Islamic legitimation of the modern nation-state that is valid for Sunnis.

So far, the only place in the Islamic heartlands to produce such a legitimation has been Iran. Not long before he died in 1989, Imam Khomeini ruled on religious grounds that in emergencies national interests can take precedence over the shari'a. It helps explain how Iran has emerged from the charismatic phase of Islamic rule without widespread violence. But Iran's special Shi'i traditions make it hard to transpose to Sunni-majority societies. Taliban rule in Afghanistan was perhaps an effort to create a version for Sunnis, but it ended before it succeeded. In both cases, moreover, the effort took place within a theocratic framework, direct rule by 'ulema.

Theocracy is not a mainstream Islamic tradition and will not appeal in most Muslim countries. A broader version of religious legitimation of the nation-state could be taking shape now in Iraq. It may be that the Americans are needed both as a parameter and as a target. But the outcome is very uncertain, the circumstances very special. And Iraq too has a majority of Shi'a.

Where does Pakistan fit in this picture? I see some similarities and more differences.

Like some Arab states, Pakistan inherited a postcolonial security threat that has absorbed disproportionate resources and has thereby reinforced older socio-political structures and a traditional sense of political irresponsibility: someone else is always to blame.

Although Pakistan was founded as an Islamic nation-state by modern means and modern people, here too modernity is so associated with the West that it must be denied as un-Islamic.

And Pakistan too has been stranded by the end of the Cold War and the onset of the IT era in economics. New rents from the war on terrorism will not restore the levels of official assistance Pakistan attracted before 1990, and private foreign direct investment has not rushed in to fill the gap.

But Pakistan is also different from the Arab world and Iran in relevant ways. Some are counterintuitive; most are to Pakistan's advantage.

First, Pakistan is not dependent on oil and gas, and can be better off for it. Pakistan is dependent on cotton, and compared to oil and gas, cotton and cotton textile production makes for larger middle and working classes, better attuned to modern political and economic needs than Middle Eastern elites.

Second, Pakistan is less developed than the old Islamic heartlands - more agricultural, less urbanised, less educated - and that too can help. It has not destroyed its agriculture. Except for Karachi, rural outmigration has not exploded its cities, and even there civil war has been on an ethnic and not a religious basis. And the graduating cohorts entering the limp economy have been relatively small. In other words Pakistan has not yet produced the conditions that brought Islamist radicalism to the centre of Middle East politics. It therefore has a window of opportunity to create better structures less conducive to civil war.

Third, Pakistanis have been struggling for over half a century to bring religion and politics together in a functioning system of governance. The need to experiment came with Pakistan's original mandate; it has led through the Ahmedi riots, the Objectives Resolution, the MRD in 1977 (sic: PNA is meant), and various Islamisation steps thereafter. Certainly, however, experimentation has been particularly intense since 2002. Its outcome is also quite uncertain.

What this means, though, is that Pakistanis have a wealth of lived experience wrestling with issues that are newer and more destructive in other Muslim societies, and of doing so mainly without violence. They should therefore be better able to integrate the religious impulse into a basically democratic political system without first establishing theocracy. If they can, it will be a first version of religious legitimation for the modern nation-state in a society with a recognisably Sunni majority. Where Pakistan fits in todayís Islamic world is as a major test case. Not for Americans: for Pakistanis. And for all the other members of the 'umma.

*Footnote: This essay draws on themes from the writer's book on Islam and a talk he gave at the Administrative Staff College in Lahore on May 24, 2004.

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Arms control workshop honoring George Bunn explores obstacles to nonproliferation

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Those advocating nuclear arms control and nonproliferation have few reasons for optimism and many reasons for concern, with obstacles including a lack of public interest in the issue; inadequate security controls at facilities storing nuclear-weapons materials; the threat posed by rogue nations such as Iran and North Korea; and the Bush administration's opposition to the Comprehensive Test Ban Treaty banning nuclear weapons testing.

These and other challenges were explored at a special CISAC workshop on "Arms Control and Nonproliferation: Past Triumphs, Future Prospects," held June 1 at SIIS. The event honored George Bunn -- a nuclear nonproliferation pioneer and consulting professor at CISAC -- on the occasion of his 79th birthday. The workshop, which drew more than 120 attendees, was moderated by CISAC co-director Christopher F. Chyba and featured presentations by four expert panelists who have worked closely with Bunn. They included his son Matthew, a senior research associate for Harvard University's Project on Managing the Atom.

As the first presenter, Matthew Bunn discussed the problem of inadequate security systems to prevent the theft of weapons-grade nuclear materials. Because there are no worldwide standards for protecting such materials, many nations devote inadequate resources to the task. Bunn showed slides of nuclear materials storage facilities with primitive locks, flimsy seals and broken-down fences. He cited Russia as the largest threat, because it has the world's biggest stock of unguarded nuclear-weapons materials. He urged international standards for safeguarding nuclear materials; renewed discussion with Russia on the issue; and the removal of nuclear material from sites where adequate security is not feasible.

In the second presentation, Thomas Graham -- a senior U.S. diplomat who has negotiated numerous major arms-control agreements -- said the nuclear Non-proliferation Treaty was not meant to forever discriminate between nuclear "haves" and "have-nots." Instead, it was designed so that those without nuclear weapons would benefit by receiving peaceful nuclear technology from weapons-producing nations, and guarantees that they would not be attacked. But when the United States shirks its nonproliferation obligations -- as it has done by rejecting the Comprehensive Test Ban Treaty and taking steps to develop new nuclear weapons -- the entire regime is threatened, Graham said. He cited Pakistan and North Korea as the biggest nuclear threats, and said the United States must engage in direct negotiations with the latter.

The next presentation, by Daryl Kimball -- executive director of the Arms Control Association -- addressed prospects for the Comprehensive Test Ban Treaty. Though the treaty has been signed by 171 nations including the United States, it has been ratified by only 113 of those nations -- not including the United States -- and must be ratified by 12 more of the 44 designated "nuclear-capable" nations before the treaty can take effect. Kimball discussed the Bush administration's opposition to the treaty, noting that Bush has sought to remove it from the Senate's agenda. Still, Kimball said he's optimistic that the treaty will ultimately be ratified by the United States and will take effect. He cited increasing international pressure on CTBT "holdout states," and a recent U.S. poll showing that public support for the treaty is at its highest level ever, 87 percent.

John Rhinelander, an attorney who helped negotiate the ABM Treaty and SALT I agreements, discussed the prospects for nuclear weapons in space. The weaponization of space is supported by the Bush administration, he noted, and is a real possibility if the United States follows through on its missile defense program. He predicted that President Bush, if re-elected, would continue to pursue weapons development in space, but said Kerry seemed unlikely to do so if elected.

During a question-and-answer session following the presentations, the panelists offered perspectives on why it is so difficult to get the public's and lawmakers' attention on nuclear non-proliferation issues. The panelists agreed that since the breakup of the Soviet Union, most Americans -- including lawmakers -- no longer perceive nuclear weapons as a serious threat, and they have little knowledge about the existing quantity of nuclear weapons. Matthew Bunn said the problem is, "there is no one whose reelection depends on reducing or securing nuclear weapons." He said nuclear non-proliferation could best be promoted by tying it to the issues of terrorism and homeland security. Rhinelander and Grahm advocated holding Congressional hearings on the issue for the first time in 20 years.

Regarding Israel, India and Pakistan, Graham said those nations -- which produce nuclear weapons but have refused to join the NPT regime -- cannot continue to remain outside the regime. He proposed that the three nations be allowed to join in limited form, in exchange for accepting basic limitations such as no first use and no nuclear testing.

Throughout the event, Bunn was praised by the panelists and moderator; Chyba described him as "the personification of the best that CISAC strives to be." Bunn was the first general counsel for the U.S. Arms Control and Disarmament Agency, helped negotiate the nuclear Non-Proliferation Treaty, and later served as U.S. ambassador to the Geneva Disarmament Conference.

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Faulty terror report card

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An opinion piece co-authored by CISAC affiliated faculty member David Laitin, published May 17 in the Washington Post, argues that a recent State Department report on international terrorism is misleading and deceptive in its conclusion that worldwide terrorism is on the decline.

Although keeping score is difficult, the State Department's annual report on international terrorism, released last month, provides the best government data to answer this question. The short answer is "No," but that's not the spin the administration is putting on it.

"You will find in these pages clear evidence that we are prevailing in the fight," said Deputy Secretary of State Richard Armitage. As evidence, the "Patterns of Global Terrorism" report says that worldwide terrorism dropped by 45 percent between 2001 and 2003. The report even boasts that the number of terrorist acts committed last year "represents the lowest annual total of international terrorist attacks since 1969."

Yet, a careful review of the report and underlying data supports the opposite conclusion: The number of significant terrorist acts increased from 124 in 2001 to 169 in 2003 -- 36 percent -- even using the State Department's official standards. The data that the report highlights are ill-defined and subject to manipulation -- and give disproportionate weight to the least important terrorist acts. The only verifiable information in the annual reports indicates that the number of terrorist events has risen each year since 2001, and in 2003 reached its highest level in more than 20 years.

To be sure, counting terrorist acts is not as straightforward as counting the number of SARS victims. Specialists have not agreed to any test that would unambiguously qualify an act as one of international terrorism. But in the words of the Congressional Research Service, the State Department's annual report is "the most authoritative unclassified U.S. government document that assesses terrorist attacks."

So how did the report conclude that international terrorism is declining?

It accomplishes this sleight of hand by combining significant and nonsignificant acts of terrorism. Significant acts are clearly defined and each event is listed in an appendix, so readers can verify the data. By contrast, no explanation is given for how nonsignificant acts are identified or whether a consistent process is used over time -- and no list is provided describing each event. The data cannot be verified.

International terrorism is defined in the report as "premeditated, politically motivated violence perpetrated against noncombatant targets" involving citizens or property from multiple countries, "usually intended to influence an audience." An event "is judged significant if it results in loss of life or serious injury to persons" or "major property damage."

A panel determines whether an event meets this definition, but the State Department refused to tell us the members of the panel or the practices used to count nonsignificant terrorist acts.

We do know that the definition leaves much room for discretion. Because "significant events" include such things as destroying an ATM in Greece or throwing a molotov cocktail at a McDonald's in Norway without causing much damage, it is easy to imagine that nonsignificant events are counted with a squishy definition that can be manipulated to alter the trend.

The alleged decline in terrorism in 2003 was entirely a result of a decline in nonsignificant events.

Another curious feature of the latest report is that its catalogue of events does not list a single significant terrorist act occurring after Nov. 11, 2003, despite averaging 16 such acts a month in the rest of the year.

The representation that no terrorist events occurred after Nov. 11 is patently false. The bombings of the HSBC Bank, British Consulate, and Beth Israel and Neve Shalom synagogues in Istanbul by individuals associated with al Qaeda occurred on Nov. 20 and Nov. 15, respectively. Additionally, the report mentions the bombing of the Catholic Relief Services in Nasiriyah, Iraq, on Nov. 12 but somehow omits it from the official list of significant events.

So the record number of 169 significant international terrorist events for 2003 is undoubtedly an understatement. It is impossible to know if these and other terrorist events were left out of the State Department's total of events.

Despite the lack of transparency and the rose-colored graphs, the department's data reveal that administration policies in the past year have not turned the terrorist tide. Of course, it is impossible to know how many terrorist acts would have occurred absent the war on terrorism, but it is unambiguous that the number of significant international terrorist acts is on the rise.

The fact that the number of nonsignificant terrorist acts has headed down -- even if true -- is, well, nonsignificant. What matters for security is the number of significant acts. It is regrettable that one casualty in the war against terrorism has been the accurate reporting of statistics. This seems to be another fight we are losing.

Alan Krueger is the Bendheim professor of economics at Princeton University. David Laitin is the Watkins professor of political science at Stanford University.
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Renowned political economist and author Francis Fukuyama speaks on state-building

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In a May 14 lecture hosted by the Center on Democracy, Development and the Rule of Law, Francis Fukuyama, PhD -- professor of international political economy at Johns Hopkins University and renowned author of The End of History and the Last Man -- discussed the problem of weak, underdeveloped nation-states; the effectiveness of various approaches to strengthening such states; and the importance of culture, context and history in the task of state-building. His lecture, titled "State-building: A Framework for Thinking about the Transfer of Institutions to Developing Countries," drew a full room of attendees to the Bechtel Conference Center in Encina Hall

A former member of the RAND Corp. and the U.S. Department of State who has written widely on issues of democratization and international political economy, Fukuyama first presented a framework with which nation-states can be evaluated according to two key criteria: the strength of the state, and the scope of its functions. The first refers to a state's ability to enforce its own laws and policies; the second refers to how involved the state becomes in carrying out various societal functions, ranging from basic functions such as maintaining law and order and protecting public health, to more "activist" functions such as running industries and redistributing wealth.

Fukuyama asserted that from a development standpoint, nation-states should be strong but should carry out only the minimum necessary functions. He said that only one country he has studied -- New Zealand -- has effectively moved toward this ideal in recent years. He noted that many struggling, developing nations, such as Brazil, Mexico, Pakistan and Turkey, are overly ambitious in their scope -- attempting to run vast industries, for example -- but are weak and unable to carry out their policies because of factors like corruption. Other states that Fukuyama identified as "failed states," such as Haiti and Sierra Leone, are both limited in scope and weak, attempting to carry out only the most basic governmental functions and not doing it very well.

Fukuyama then discussed and evaluated various approaches to strengthening developing nations. He noted that in recent years much emphasis has been placed on encouraging such nations to reduce the scope of their functions, through deregulation and privatization, but said the effectiveness of this approach is now in question. A more effective approach, he said, is helping weak nation-states build their own strong institutions, such as political parties, public health networks and central banking.

Unfortunately, Fukuyama said, sometimes the efforts of outside organizations to strengthen a country's institutions only make things worse, because solutions are imposed from outside rather than developed from within. "Ideally, we would want a country's own public health system to handle that country's problems with AIDS or malaria," he said. "But when you flood the country with your organization's own doctors and nurses and infrastructure, what do the local doctors do? They quit their government posts to get on the payroll of your NGO." In a few months or years, when the organization withdraws its support, Fukuyama noted, the system collapses, because it was not built to be self-sustaining.

At the end of his talk, Fukuyama emphasized the importance of understanding local culture, context and history in the task of state building. For example, he said, those who run programs aiming to reduce the spread of HIV/AIDS in Africa should consider working with traditional faith healers, as they are an important part of the healthcare system in Africa.

Francis Fukuyama is dean of faculty and the Bernard L. Schwartz Professor of International Political Economy at the Paul H. Nitze School of Advanced International Studies of Johns Hopkins University. His book The End of History and the Last Man was published in 1992 and has appeared in more than 20 foreign editions. It made the bestseller lists in the United States, France, Japan and Chile, and has been awarded the Los Angeles Times' Book Critics Award.

Fukuyama received a BA in classics from Cornell University and a PhD in political science from Harvard University. He was a member of the Political Science Department of the RAND Corporation from 1979-1980, then again from 1983-89, and from 1995-96. In 1981-82 and in 1989 he was a member of the policy planning staff of the U.S. Department of State. In the early 1980s he was also a member of the U.S. delegation to the Egyptian-Israeli talks on Palestinian autonomy. He is a member of the President's Council on Bioethics, the American Political Science Association, the Council on Foreign Relations, the Pacific Council on International Policy, and the Global Business Network.

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Nuclear Reversal Revisited Again: Libya, North Korea, and Iran

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Dr. Levite has served as the Principal Deputy Director General (Policy) of the Israeli Atomic Energy Commission (IAEC) since September 1, 2002. Dr. Levite has extensive experience dealing with issues of nuclear proliferation as both a scholar and practitioner. Prior to his current position, Dr. Levite was a Visiting Fellow at the Center for International Security and Cooperation (CISAC) from 2000-2002, where he also served as co-leader of the CISAC Discriminate Force project. His previous jobs include Deputy National Security Advisor (Defense Policy) and Head of the Bureau of International Security at the Israeli Ministry of Defense.

Dr. Levite will update his argument ("Never Say Never Again: Nuclear Reversal Revisited," International Security, Winter 2002/2003) regarding government decisions to slow or stop officially sanctioned nuclear weapons programs in light of recent developments in Libya, North Korea, and Iran.

Readings attached. Limited copies available at Alice Chen's cubical, Encina Hall (C206-7).

Tea & Cookies will be served at 3:15.

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Reuben W. Hills Conference Room

Ariel Levite Principal Deputy Director General Speaker IAEC
Joe Felter Graduate Student Moderator Department of Political Science
Seminars
Preventing Nuclear Proliferation and Terrorism

Israel and America: Two Nations We Love to Hate

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Joffe is a leading European commentator on international affairs. He is a frequent commentator on BBC, National Public Radio and various German radio stations, as well as on German, American, British, and Austrian television.

CISAC Conference Room

Josef Joffe Editor Speaker Die Zeit, Germany
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Not Quite the World's Silicon Valley

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APARC's Rafiq Dossani comments on offshoring U.S. jobs to India, the so-called "reverse brain drain."

Silicon Valley cannot be replicated-not even in the US, leave alone India.

But there is no underestimating the complex and high end nature of information technology work that's increasingly being done in India.

There is almost nothing that is not doable, except certain high investment, high value manufacturing, like microprocessors.

This year stands out for the speed with which India, still very much a poverty ridden developing country, has emerged as a partner of mature econom-ies in a wide ranging field that covers information technology, business processes and research and development.

Unsurprisingly, such a major development has been accompanied by drama, excitement, anguish and misunderstanding. The rapid acceleration in trends, which in some cases date back to over 10 years, has given little time to players on both sides to rationally assess and adjust to new realities.

Some don't seem to know what has hit them and have therefore gone on to make unrealistic assumptions.

In the west, particularly in the US, there is a backlash against outsourcing to countries like India, China, the Philippines and Russia, with India being the most visible and so taking most of the rap.

Correspondingly, there is an element of euphoria in India in the belief that it has arrived. Some are making unrealistic assumptions that it is on the way to becoming a new Silicon Valley to the world.

Significantly, the knowledgeable and those who are in the vortex of change have a realistic view of what exists on the ground and an enlightened foresight of the shape of things to come.

In this survey of opinion leaders in the information technology industry, we try to come to grips with the new, rapidly emerging reality what is the exact nature of the high tech work taking place in India in information technology and what are the precise contours of the emerging cross border partnerships?

First, the Silicon Valley red herring. Sridhar Mitta, managing director of the incubating firm e4e Labs, almost snorts at the mention of Silicon Valley.

He recalls how the good professors at Stanford University started to get too many visitors who came and asked the same questions what makes Silicon Valley tick and can we replicate it in our country?

They undertook a methodical study for a couple of years and helped define the uniqueness of the creative process that occurs in a small geography 30 miles by 10 miles, near the Californian city of San Francisco.

To Mitta, the Valley's defining characteristic is that some of the best brains in the world are concentrated in a small geography. "It is an innovative high tech cluster. There is an ecosystem of companies which add value to each other."

In Silicon Valley people are willing to share ideas and are not worried about theft. Business discussions are concluded very fast as people want to get on with a project. A project can be started in a week.

There is no concern over individual ideas being stolen as it is assumed that if you are bright you will have many more worthwhile ideas. In the Valley, people don't care about religion, creed or nationality. "There is only one religion, business," Mitta says.

Another industry insider concurs. "Silicon Valley is not a service, but a risk taking model, whereas the Indian software model is largely based on cost effective and efficient delivery of services," he differentiates.

Many of tomorrow's problems are first defined in US universities and then get crystalised as business opportunities. "Firms in the Valley work closely with those universities to quickly grasp the business ideas that emerge from diagnosing and solving a technical problem, for example."

Where does Indian expertise and capability stand then? "The Indian environment still lacks the original ideas that create the new business models. This is because of the lack of proximity to markets," the industry insider explains.

"Once an engineering problem is defined, it can be executed in India." The key and growing Indian competency now is that it has crossed the technical hurdle, there is little that cannot be technically done in India.

If Silicon Valley scores 100 for the purpose of our present discussion, Mitta gives Bangalore 15.

"Bangalore has passed criticality in technical prowess but is still abysmally low in interaction. The culture of networking is better in Bangalore than in the rest of India but nowhere near what exists in the Valley. Here a major part of the load is carried by multinationals which guard their secrets very jealously," Mitta says.

Bangalore also scores on its educational institutions which can deliver the raw materials or skills. Like the Valley, it has some of the best brains, relatively speaking, and some companies have reached criticality of size. Some complex work gets done here in a serial way within companies.

"I know that a US company can start a complex work group here which involves doing many things, though not all. But I don't know what the company on the floor above mine is doing," notes Mitta.

Subroto Bagchi, COO of MindTree Consulting, who is based in the US, explains that in the 1990s people thought that any work that required a high degree of customer knowledge and collaboration, design and architecting had to be done exclusively in the US.

"Anything that required innovation had to be done near the water cooler. So now there is hardware, software and wetware the coffee machine and what's between your two ears, as most of the human brain is water."

But the big change has come with the availability of high bandwidth which has made the water cooler virtual.

"If earlier we looked at India for just development or maintenance work, now we are able to look at co-development and co-architecting," Bagchi notes.

Till two human beings meet, trust is not established. Innovation-related activity, co-development and co-architecting are not done by two entities but by two human beings.

Two techies have to accept each other as "buddies" before they can innovate together. "That happened after Y2K. It established the cross cultural comfort. In a nutshell, India has become legitimate," Bagchi adds.

Higher value add projects are now coming to India and company boards across the world are increasingly being asked, 'What is your India strategy?' Investors in venture capital funds are asking them, 'What are your plans for India,' and they in turn are asking companies 'What are your India development plans?'

The software insider says India's current role is to "complement" not "replace" Silicon Valley. "If present trends continue, maybe India can equal Silicon Valley in seven to 10 years. But the approach cannot be 'We versus they.'"

Another authority adds his support to this scenario, making a deft distinction between what is on and not on.

Says Madhukar Angur, David M French distinguished professor at the Flint School of Management, University of Michigan: "Today almost nothing is too high-tech for India. In technology (IT, designing, R&D) India has taken significant strides. It is pretty close to self-sustaining growth. But it is not quite there. So MNCs will look at India as a location for startups but not standalone ones."

So they will also seek out partners, as Intel has done with startups like Tejas Networks.

The cooperation and joint development approach is underlined by K P Balaraj, managing director of WestBridge Capital Partners.

He feels that "the vast majority of the work being done by start-ups in India is led by teams located in the Valley. What is changing though is the timing of an India ODC (overseas development centre) which is being set up much earlier in the life cycle or even at the seed stage."

What is more significant is that as multinationals which follow the example of early leaders such as GE, TI, Intel, Oracle and others start to do more cutting edge work here, there will be a large base of India-based engineers and managers who will have the experience of building and bringing a world-class product to global markets, primarily the US.

"From this base, we will see a future generation of product entrepreneurs emerge who will have the vision and market credibility to attract high quality VC funding for their plans," Balaraj adds.

Innovation means developing new technology or products. Product development in India is already taking place but as a secondary exercise.

Sanjay Kalra, CEO of the HCL-Deutsche Bank joint venture DSL Software, explains the sequence of what came first and then what followed. At any point of time more than 70 percent of spending takes place on sustaining investments in existing technologies.

This, like work on new technologies, also requires high end work that is innovative. But a majority of the effort is in tasks that are process and procedure bound.

In such tasks, innovation is focused on how to deliver the subcontracted tasks better (process improvement, quality).

High end startups are now beginning to allocate and locate a high percentage of employees (or contractors) in India.

In the past it was the large technology players that leveraged the lower costs and high availability of talent. The smaller startups would contract to small and large players on a need basis.

But of late a lot of smaller startups are also beginning to factor in India as an integral part of their business plans right from the beginning.

What is more, several start-ups are now using India as the base to also conceptualise and then produce in India for markets in Asia.

The good news on products is that Intel is in India in a big way and is going in for the joint effort startups that hold the key to the future. Intel's own agenda, says Ketan Sampat, president of Intel India, is to establish leading edge design capability.

Says Sampat: "At Intel's development centre (its largest non-manufacturing site outside the US), we are engaged in some of the most advanced development activities not just in India but anywhere in the world. For example, the flagship next-generation enterprise processor that Intel will have in volume production is being designed entirely in Bangalore."

But he sees an important milestone that has to be crossed Indian firms still have not broken into the ranks of product companies with their own intellectual property and branded product lines.

"The i-flex's of the world are still too few and far between," Sampat says. So Intel Capital, the company's strategic investment programme, has been an investor in several Indian technology companies. Sampat mentions the investment in Sasken Technologies.

"Its product GSM/ GPRS software stacks complements our "Manitoba" (wireless Internet on a chip) product and it has customers worldwide."

He also mentions another telecom company, Tejas Networks. "It is starting with the Indian market which is sizeable now and is using it as a springboard to the global market."

Sanjay Nayak, CEO, Tejas Networks, sees only the beginnings of high end startups in India, like his company. "It will take some time before we see a major shift in startups originating in India, though the enablers are all there."

The most common trend is to have an "engineering backend" in India of a US originating startup. Within this, the major amount of work that is being done is "software" centric not much system design or hardware design work is done.

He expects that "once we have a few success stories of high-end product companies from India, it will accelerate the trend." In the past, countries like Israel and Taiwan have witnessed such trends.

Srini Rajam, chairman and CEO of Ittiam, another startup product company, sees high end start ups becoming increasingly dependent on designs done in India.

"There is a strong push coming from the investors of the start ups to locate a large part of their design team in India or source their key designs/IP from Indian companies, in order to improve R&D budget utilisation and time-to-market."

He sees early revival worldwide in one segment-the semiconductor and embedded systems. "This is in turn is enabling the growth of chip design, embedded software and system design activities in India."

Several factors are likely to encourage more high end work to come to India and help it become an increasingly important partner of Silicon Valley.

First, the reverse brain drain or brain gain that has been taking place in the last few years, especially since the tech bubble burst in early 2000 and the recession that set in in Silicon Valley.

One person who has been plotting it carefully is Rafiq Dossani, a senior research scholar at the Asia-Pacific Research Centre of Stanford University.

"My guess is that 6,000 jobs have been lost from Silicon Valley in IT to India. Looking ahead, the flow will depend on both opportunities in India and here."

The Silicon Valley economy is picking up rapidly and hiring should soon increase, feels Dossani. In addition, it remains unbeatable on new product development because of its global reach of talent and proximity to markets.

So the younger and more innovative will be attracted to the Valley. India will continue to attract those in the 30-40 age group interested in raising families in India and those interested in a rapid rise up the executive ladder through a stint at a senior level in India.

Also, a key security factor is enabling high end work to shift to India, argues Angur. India will be a country of choice for location of partnerships on considerations of economic stability.

"Multinationals gamble on technology but are cautious on geography. Even China and Taiwan have a security downside. India-Pakistan relations is indeed perceived as a security risk but still India is on the preferred US list."

He sees a significant historical parallel. Technology and IT will be to India what the automobiles industry was to the US.

"One out of every three in the US has something to do with automobiles. The IT revolution has the seeds of becoming something like that. In the immediate future mutlinationals will consider India more and more for high-tech startups and there will be more high tech jobs."

Bagchi shares a deeper insight rooted in Indian history and social development. India, he feels, has two cards up her sleeve: "One is the power of diversity and two the power of pluralism, imparted to it by its institutions."

The future of the global economy is in more trade but post 9/11, the west is also looking for a sense of comfort a degree of security and cultural fit.

How many countries are there with world class capability in IT services from which an American company can source? Out of the choices available, how many countries are both diverse, so that there is a democratic-cultural fit, and believe in institutional pluralism - executive, judiciary, legislative system? "These institutions give a guarantee of continuity," he says.

To become an innovation partner to Silicon Valley, an economy must innovate. Innovation is invariably linked to diversity. The US has been at the cutting edge of technologies because it has such a pro-immigration policy.

"We did IT services for 15 years and moved up the value chain. But the next big value chain is about innovation. That innovation depends on the fertility condition on the ground. That condition is necessarily about diversity," Bagchi adds.

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What is the Valley's Future?

Authors
Rafiq Dossani
News Type
Commentary
Date
Paragraphs
As the region begins to emerge from a brutal recession, questions haunt the Valley. Will the jobs come back? Will we be able to maintain our global leadership in technology? How many more jobs will be sent offshore? What must the Valley - and America - do to remain competitive. The Mercury News convened a roundtable discussion of CEOs, venture capitalists, policy experts and legislators to begin to answer those questions.

Roundtable Participants:

Jim Jarrett, VP of Worldwide Government Affairs, Intel; Aart de Geus, Chairman and CEO, Synopsis; Michael Dardia, VP, economist, Sphere Institute; Kevin Fong, General Partner, Mayfield; Brian Halla, Chairman and CEO, National Semiconductor; Zoe Lofgren, Congresswoman, 16th Congressional District, House of Representatives; Rick White, CEO, TechNet; Jim Morgan, Chairman, Applied Materials; Diana Farrell, Director, McKinsey Global Institute; Rafiq Dossani, Asia Pacific Research Center, Stanford; Sue Bostrom, VP, Worldwide Government Affairs, Cisco; Joe Natoli, Publisher, San Jose Mercury News; David Yarnold, Editor (Editorial Pages) and Senior VP, San Jose Mercury News; Miguel Helft, editorial writer, San Jose Mercury News; Daniel Sneider, Foreign Affairs Columnist, San Jose Mercury News

YARNOLD: Help us define the scope of the current globalization trend, from a jobs perspective. We all know and understand that technology companies need to send jobs overseas. Cost is the primary reason. Access to foreign markets is another. Some economists believe that virtually every job that can be sent overseas will be sent overseas. Researchers at UC-Berkeley have said recently that 14 million U.S. jobs are at risk. Do you agree with that?

HALLA: There's a tremendous migration of jobs to Asia -- to China, in particular. That's just part of our lives and part of the way we evolve. But we will create new jobs. Let me give you an example. It used to be just HP and Fairchild were here, and that grew into Intel and several other semiconductor companies. Today, we have a different kind of job creation. We have companies for flat-panel displays. We have graphics companies. They are all creating brand new jobs, all because of innovation in our industry. That will go on.

What's happening today, however, is the technology industry is under attack from -- present company excepted -- from the majority of our politicians who are trying to eradicate stock options under the name of stock-option expensing, which makes all things not equal anymore. In China, stock options are flourishing. We fan the flames by putting a cap on H-1B visas, so we send all the Ph.D.s home where they can compete against us.

DOSSANI: To give you a sense of what's happening in India, at the start of this year, in business process outsourcing, there were 170,000 jobs. By the end of this year, there will be 300,000. We forecast it to go to about a million at the end of 2005.

That said, what's going offshore (is) the simpler kinds of work, stuff that's increasingly subject to price deflation, competition, automation. So I'm not really worried. I think Silicon Valley will do just fine.

DE GEUS: You cannot only look at the equation of job loss, jobs transfer. You have to, at the same time, say there are two massive new markets being created -- the China market and the India market. There are 200 million Chinese along the coastal region that are all going to raise their standard of living. They will be consumers. We are all there for the work force, but first and foremost, most of us are there because of the potential business. Now the combination of the two has to rebalance itself, because these are enormous numbers that change the global balance.

LOFGREN: I think that the truth is that we don't actually have any data on what jobs have gone offshore, where they've gone, the nature of those jobs. We've got anecdotal information. I think it's essential that we get a handle on the facts as much as we can. We should have some national discussion and some policy issues emanating out of whatever is going on. Without knowing what's going on, we're liable to make some mistakes.

The concern I have is that investment in research and development has been declining for the last five or six years. Our ability to attract scientists and excellent students is now suffering; and our ability to innovate in the tech sector is no longer unique. I think it would be a mistake to assume that the next new thing will inevitably be ours and the jobs inevitably will be created.

FARRELL: In this discussion, it's understandable that the focus is on jobs, as that's what's disturbing and distressing to people who lose them. But that's not the right discussion. A lot of what we're seeing here through the offshore outsourcing is about increases in productivity, innovations that are driving a higher level of wealth in the economy by driving increasing savings, by allowing us to innovate in the way we deploy resources, both capital and labor. That shift away from a pure job mentality is necessary to really understand the bigger picture.

YARNOLD: Sure, but offshore outsourcing and productivity increases have implications for jobs in the Valley. What are they?

FARRELL: Well, it's a great story for the Valley, because what the Bay Area represents in the United States is precisely what the United States is representing in the world.

Productivity of the Bay Area person is twice as high as the average of the United States. The Bay Area has achieved that by outsourcing lower value-added activities. What you have here is a concentration of high-value activities that explains the very extraordinary wealth level that we enjoy. That is a microcosm of the U.S. situation, vis-a-vis the rest of the world.

MORGAN: There are a lot of markets in the world that are just emerging. Part of the job movement is to move resources into the areas where the markets are, not to drop our costs. I think the ability to understand that and prepare our people to support that so that you can project capability from Silicon Valley to other places in the world is an important thing.

I think we have to think about things in a systematic way. We're in a competitive challenge as a region, and it isn't the United States against China. It's Silicon Valley against Austin, it's Silicon Valley vs. Shenzhen, it's Silicon Valley vs. Bangalore. The ability of Silicon Valley to be successful (depends on its ability) to hone its competitive skills.

There's a lot of opportunity here, but we have to make ourselves (a place) that companies want to do business in, because they go where they're wanted and stay where they're appreciated.

FONG: We are going through a little bit like what happened in the '80s with respect to Japan Inc. vs. the semiconductor industry. High tech has been commoditized. Silicon Valley is not the only high-tech center of the world. Our market share is going down, but we can still be leaders.

I've lived in the Valley for 50 years, and there was always a discussion about gee, eventually with the land and real estate here, there's only going to be Ph.D.s and people that have started companies who have the money to buy houses here. We can't be smug about the fact that we're always going to be the center; but I think we do have to look at where the value added is. This is all about where value is.

HALLA: Japan is absolutely nothing like what's happening with China, because Japan is a very tiny island, and they very quickly ran out of people. Their cost of labor exceeded the United States', so they're no longer the low-cost manufacturer. Also, Japan needed the U.S. market, therefore, they had to obey our laws, particularly the laws against dumping. Taiwan, the same thing. With China, they graduate more (electrical engineers) in a year than all the other universities on the face of the planet. They have a big enough market to sustain themselves without coming to the United States.

This is more like the Industrial Revolution, only this time we're Great Britain, and the great American dream is moving to Shanghai.

DARDIA: That's a great segue, because I wanted to bring up the history of globalization. The second half of the 19th century saw the same kind of increased globalization that we've seen in the last 20 or 30 years here.

I think your analogy is correct that the United States is to China (what Britain was to the United States). Real wages in Great Britain actually rose in the second half of the 19th century, because of market broadening. In 1980, Japan's wage level relative to the United States was 56 percent. In 2000, it was 111 percent. In the Asian (economies it) was 12 percent in 1980, 34 percent in 2000.

The same thing's going to happen to China. As higher-value activity goes there, they will become more expensive. They will become consumers, and other markets will grow. Our challenge is to stay in front of that. But China's not going to remain static in its situation while sucking away all of this activity.

DE GEUS: So I think it begs a little bit the question for Silicon Valley, now what do you do? And we need to understand that in high tech, there's only one pathway, which is to race forward faster.

I propose that we have to pay attention to three I's: Innovation, incentives and infrastructure. Innovation is what has driven technology. There is new innovation in the Valley, but one of the ways to actually take advantage of these markets is to be the leader in that.

Incentives, I think Brian (Halla) already eloquently highlighted that. If you cut the fundamental incentive driver of Silicon Valley -- stock options -- you're going to destroy a very, very unique system.

And then infrastructure, I mean first and foremost education. And if you look at education, Brian highlighted how strong these other countries are. They are doing Silicon Valley plus plus, so we need to do Silicon Valley plus plus plus.

BOSTROM: Just to add on to your infrastructure comment, we don't want to forget broadband either. If you look at many of the countries that the United States is competing with, they have much more extensive broadband infrastructures.

Climbing the value chain

YARNOLD: One of the things that has changed most dramatically over the past few years is the kinds of jobs that are leaving the United States. It used to be very low-end, and it's now moved into the engineering ranks. The presumption is that Silicon Valley is going to continue to be able to distinguish itself by climbing up the value chain. Can we do that? If not, will we simply have fewer people employed here?

FARRELL: I think your question hits at the core of the concern that many people have, which is that productivity gains necessarily come at the expense of employment. So can you continue migrating, and continue generating employment? The United States is a wonderful petri dish to understand that. We have been, for a very long time, the productivity leader in almost every sector, and we have been the employment leader in almost every sector.

It's the process of innovation that drives productivity gains, and it's the process of innovation that drives employment gains. And that's the beauty of this system. We can have our cake and eat it too.

DOSSANI: Let me give you some background, again, looking at India. I interviewed in the last two years, about 170 (companies) in the IT and business-processing field. These companies covered about 80 to 90 percent of the value of work being done in India.

We found that India is pretty much still stuck at a certain level in the supply chain of writing code. It currently does about 50 percent of the labor in a typical software project, but only about 10 to 15 percent of the revenue.

So I think there's a lot of fear here that is unwarranted, in the sense that sophisticated, innovative work is not shifting.

BOSTROM: I think there's a new nomenclature that's coming out with regards to outsourcing; we really use the term "out-tasking.'' What we see in companies moving toward out-tasking, whether it be onshore or offshore, are really the lower value-added activities, or things that have been in process for a long period of time. In IT, it could be maintenance of an existing software application. The new application development could be here in San Jose or some other city in the United States. To do great application development, you have to be close to the business function that you're developing the application for. Some companies have had the experience of outsourcing a significant function and have realized they lose control and ability to innovate. And sometimes they're trying to bring (the work) back.

YARNOLD: Really? It's only the low-end engineering work that's going overseas? Kevin (Fong), you have a different opinion?

FONG: Take Intel. The development of the next Pentium chip is based in Bangalore.

JARRETT: Well, we have several hundred people there. But we're developing all over the world. We're doing chips in Israel. We're doing software in India. We're doing software in Russia, in China, you name it.

FONG: Wait a minute. One of your key Pentium designers is running the design center in India with a charter for the next-generation server processor.

YARNOLD: You're suggesting that's the kind of work that would have been done in Silicon Valley previously.

FONG: Absolutely.

JARRETT: No. No.

YARNOLD: No?

JARRETT: No. No.

We started our design center in Haifa (Israel) in 1974. We've been designing and doing a lot of technical work around the world for a long, long time, and we'll continue to do that. In that sense, nothing has really changed.

At the same time, we're continuing to invest here, and I'm talking about the United States, not specifically Silicon Valley, to do advanced technical work and advanced manufacturing.

We've just put in $24 billion in the last three years in new factories, R&D, support for education and employee training, and that's all in the United States.

Government's role

LOFGREN: To say that we should not have at least some thoughtful strategy to maintain a prosperous, employed nation would be a mistake. And that doesn't mean a heavy regulatory approach, necessarily. But when chips were under attack, you know, Bob Noyce went off and led an effort, and it was partly government supported, and industry driven. And it was, I think most people thought, useful.

Although the economy is showing some signs of life, we are not creating jobs in the United States sufficient to even keep up with population growth at this point. The question is why? I don't know that any of us really know all the answers to that. Some of the job loss has been because of productivity gains here. Some of it appears to be offshoring of jobs.

I think the policy implications for each of those scenarios is different, and what we might want to do, in terms of nurturing employees, especially the engineers that have been displaced in this Valley. We need to have a strategy so that (displaced) people are well treated instead of knocked off unemployment insurance, as we're about to do; and retraining individuals so that they can keep up to date; and nurturing American students so that they can be successful in the hard subjects, math and science.

DARDIA: I think the plight of the laid-off workers is important. We certainly don't want to, in reaction to the effects of globalization, shut things down to much worse effect. One of the ways you avoid some of that backlash is certainly by attending to people displaced.

That leads to the question of why (do we have a) jobless recovery? There's some good work done in distinguishing between cyclical vs. structural job losses in recessions. In the '70s and early '80s, recessions ran about 50-50 between cyclical job losses and structural job losses. In the early '90s recession, about 60 percent was structural vs. 40 percent cyclical. In the current recession, the estimate is about 80 percent is structural. Structural job losses take longer for people to (adjust), whether it's by training or just looking further afield. That's one of the reasons we see a relatively slow increase in employment relative to output. And that's why we do need to think about better ways to help displaced workers.

WHITE: There's economic evolution all the time. There's dislocation associated with economic evolution, and that's definitely going on right now. The challenge when that happens is to not panic and do the wrong thing.

In a situation like this, you have to have the courage of your convictions. You have to recognize that China's a great place. They've got a lot of engineers, but they've got a political system that's going to bump up against a lot of the things they're trying to do. It's going to be difficult for a dictatorial state controlled by one party to really allow the kind of sharing of information and other things that have made our economy so successful.

You've got to let the market work this situation out without the government taking pre-emptive action, because there's a less-than-even chance that they're going to point you in the right direction.

FONG: One other thing, which hasn't been thrown in, is intellectual-property protection. China's not going to play fair until they feel that they're at a more even footing with us. So the governmental pressure for them to play ball fairly is a pressure that has to be continued as well.

YARNOLD: Whose job is that?

FONG: It's the government's job.

WHITE: We could do two things, focus on what the government does well, like these trade pressures, and start to peel back some of the things that we have done in the past. If you look at California in particular, the challenge we face is basically to undo the effect of resting on our laurels for a long, long time. We've loaded up the business community year after year with disincentives for them to be able to compete. We have a little bit of that at the national level, too.

Choosing to compete

JARRETT: The mindset that we think really has to be implanted in the United States among policymakers is that the United States really has to choose to compete. We don't see enough sense of urgency. As we look at policies like stock options and others, we need to be asking ourselves, does this policy help or hurt the nation's ability to compete? I don't think that kind of questioning is going on right now in Sacramento and elsewhere.

MORGAN: Unless (we) collectively decide (we) want to compete, we keep shooting at each other about all the problems. A good example (was) Sematech. The government provided the seed, but really what was effective is that the U.S. semiconductor companies finally started working with their suppliers, the way the Japanese had been doing for decades. You had a shift in mindset and a collective competitive desire to be successful. And that made a big difference.

And so the local, state and federal (governments), and the industrial interests, and the universities, and all the groups, we have to really get focused (on being) competitive.

It's not (useful to) put up trade barriers. You saw what happened when you had the Iron Curtain. Those countries were just disasters, from an economic viewpoint.

The only way you're going to compete is to work more effectively together.

BOSTROM: High tech is driven by innovation first. Cost is something that you have to consider as part of the innovation. And so what (things) can the government be doing to help fuel innovation? And one of those things is making sure that basic R&D, which has been the core of innovation for the country, that we continue to see funding at a decent level.

LOFGREN: Our investment in science research has declined 29.5 percent as a percentage of GDP. That is not good news for innovation and the technology future. We need a strategy that advances competition and technology development. Now it will never work for the local, state or federal government to say, "Well, here's the way it's going to be.'' That isn't how the Valley grew. But that doesn't mean there's no role for the government to play.

YARNOLD: But the presumption here is that you're talking about a competitive Silicon Valley. Does it really matter anymore whether Silicon Valley is competitive, to your businesses? Very often I hear CEOs say, "We're driven by cost and by what it takes to produce the goods that we manufacture. Where the dollars end up is irrelevant to us because we're global.''

MORGAN: That may be true for companies, but that's not true for Silicon Valley collectively. If Silicon Valley wants to be competitive, to build jobs here, then we need to do some collective things to try to make it attractive to be here.

YARNOLD: So does it matter whether Silicon Valley retains that leadership role? Does it matter to your companies?

FONG: Absolutely.

DE GEUS: No question.

YARNOLD: Why?

DE GEUS: Because you can improve cost by 50 percent by going to other places. You can improve your return by 100, 200 percent by innovating. That's at the basis of Silicon Valley.

FONG: But I think David's point is if you could do it someplace else, would you do it someplace else?

MORGAN: Our company, and me in particular, think this is (an) enormously critical resource for the state and for the country. And so it should be nurtured.

FARRELL: You know, I think it's easy, in the spirit of the last year or two, to overstate the degree to which this area has lost its competitiveness. Productivity is the measure of competitiveness, and this region remains highly competitive. The things that put that at risk are the things that make it harder to attract the people who have made this the thriving innovative center of the world. That gets back to basic government issues of land use that are driving real estate prices and make it impossible for young, talented people to live here.

BOSTROM: I think the belief in continued opportunity is where companies in the Valley can make a difference. Because I know one of our areas of focus at Cisco has been how do we help transition our employees, engineers or otherwise, to new, advanced technology markets. Those skill sets are slightly different; and we're saying, "Well, we should be accountable for helping with that transition with that employee base.''

If we can encourage companies to help with that evolution, I think that's one of the things that would make people feel like there's continued opportunity in the Valley and in high tech.

SNEIDER: Let me come back the global-competition issues. There's a pretty wide perception out there that gains (in India and China) are coming at our expense. That's generating already tremendous political pressure for public policies that probably everybody here would agree are not such a great idea. But in the absence of really addressing this problem, you leave the field open basically to protectionist solutions.

WHITE: I'd like to take a quick crack at that, because I do think there are two things you have to focus on.

No. 1, I think you're absolutely right that there's a lot of political concern about job loss. But Americans expect their country to be competitive, and they're willing to look for policies that help them be competitive. And that's what's going to prevent this job loss from being a big problem.

On the Chinese front, I just want to reiterate one thing I said earlier. In the late '80s, people thought (Japan) was an unstoppable juggernaut that was just going to run right over us and keep going. The fact is that every society has its advantages and disadvantages about the way it's organized, and those catch up with you after a while. What's happened to Japan is they had some imbalances that didn't really work over the long term.

One of the things we have to do is recognize that there's never been a society on the face of the earth that is as hospitable to innovation as the United States. We're doing a lot of things right. So you wouldn't want to make a dramatic change to respond to somebody like China in particular. They've got a lot of great things going on, but they also have some things that are going to catch up with them. To overreact would be a mistake.

HALLA: Having been one of the few people at this table that's been through every cycle since the beginning of man, I can tell you that this, too, shall pass. If we were having this session a year from now, we wouldn't be having this session, because half the people would be late because of the traffic jams. The industry will be booming. If history is a teacher, Cisco was born here; Ebay; Google; Sun Microsystems was born here; all these creative new industries and new jobs. We are still the IQ magnet for the world. Berkeley is here, Stanford is here.

In terms of government support, I agree with R&D tax credits, and (there are) many proactive ways a government can help. I'd say a good start would be (for) the government to please retire to a neutral corner and not eradicate stock options and not cut out H-1B visas, so that we can go on and continue this cycle that's been so healthy for us.

This is a substantially different time for us, however. China is completely different than any cycle we've ever been through. It's an opportunity at the same time.

LOFGREN: If we don't have some policies in place, and if the American public doesn't understand that we, No. 1, have an appreciation for what's happening to them, then we're going to have some reactive policies that will probably make our situation worse.

I have a neighbor who recently was sent to India to train a whole unit. He has just been told that he's been laid off. The whole place where he works is now going to the people he trained. He's got a master's degree from an excellent university, in a scientific field. He is feeling not very well appreciated here in America. Becoming more insular is not the answer to prosperity. But that will be the knee-jerk reaction, unless we have a better strategy.

Future of growing companies

YARNOLD: I had a conversation recently with a venture capitalist who said more and more, companies that get started here have 12 people here, the CEO, the CFO, the COO, the marketing director, and a few other people. They're being asked by VCs, "Why aren't you doing your work offshore? How are you going to drive down your costs? How are you going to be competitive?'' It raises the specter of shell companies that are founded in the Valley but don't have very deep roots or very big employment bases.

FONG: All of the dollars that I raise for our funds, which is $2 billion, goes to pay for R&D only. By the time you get to the manufacturing, the company's at a different phase of life. But people from France and Israel and China still come here to start a company. People come here not just because -- we talked about IQ. Our way of doing business here is as much a key part of it. People come here for our capital markets. They can get liquidity. They can attract capital. It's all those things. I was just meeting today with a company, and they're moving from Brisbane. They're only talking about moving marketing and sales and a few of the key people here. And so it is an issue. I don't think it's a long-term, sustainability issue we have to worry about.

DOSSANI: It's not such a bad thing that this is happening. Look at the U.S. disk-drive industry, which was started here. By the early '80s, it had lost a lot of market share to Japan. It was down to 30 percent. And because they aggressively outsourced, it's back up to 80 percent now. If you look at employment, it's less than half of what it was. But the value-add is very high.

Market share, value addition, all these things will improve with outsourcing. What won't is employment, if you're just looking at numbers in a particular industry.

YARNOLD: So the Valley's employment won't come back to its pre-boom levels or boom levels?

DOSSANI: Not in that industry, but in something else.

Helping displaced workers

JARRETT: I think just one point I'd make about policy prescriptions to fix this problem. They tend to be sort of the policy equivalent of a hand-off to the fullback. It's very straightforward stuff, and it's very long-term. These are not quick fixes. We've been talking about increasing the basic physical sciences R&D spending by the U.S. government. That's not going to pay off tomorrow, and nobody in office is going to be able to point to it in their current term and say, "Here are the fruits of that investment.'' But it's still the right thing to do.

LOFGREN: The good news in this Valley, though, is that the citizens support those long-term investments, because our people know (they) will pay off. I think where we're really missing the boat, though, is to not take care of people who are being displaced for the first time. They're willing to do their part. They're willing to get the education. They're willing to be entrepreneurial. But there is some dislocation, and we are not handling it well.

FARRELL: The magnitude of the savings that are possible as a result of (sending jobs offshore) does provide at least the basis for some shorter-term solutions that you're trying to generate here. What we need to do is help employees find jobs faster, be willing to take new and different jobs faster.

That can come, not as some big, inflexible program of the government, but as a corporate program, to facilitate the change that they need to go through. Why would companies do this? Partly because it makes possible a transition that is very difficult, politically and otherwise, and partly because it matches up with a trend that we haven't brought up in this debate at all, but is critical to this conversation, which is the demographic shift that is taking place in the Bay Area and in the country, of the shrinking working-age population, and therefore the need for companies to remain attractive to employees. Having the programs in place that will help alleviate the displacement becomes a very self-interested thing that can be achieved at a relatively low cost (compared) to the savings that are being achieved.

WHITE: It's so much more effective, to do that at the private level.

BOSTROM: Well, we do this at Cisco. We are invested in re-skilling our work force for new market opportunities, new advanced technologies. And the reason we do is it makes good business sense. First of all, when the economy does recover, those are workers that you need. And second, we really value the culture that we've created; the people really know our products.

FONG: There's something at an individual level that people in the Valley have to sign up to do, as well. In this globally competitive marketplace, you have engineers in China that go to work from 8 (a.m.) to 10 (p.m.). The company feeds them lunch, a great lunch. They have great facilities, equal to the Valley. They serve them a great dinner, and they work six days a week. They go home to be with their families during a month during Chinese New Year. But after that, they're working hard, and they're really dedicated to what they're doing.

And so we have to recover from the sense of entitlement. Individuals have to want to get retrained. They're going to have to want to work hard. Sometimes I wonder whether or not we've lost that in the Valley.

Corporate responsibility

SNEIDER: In an interview that Intel CEO Craig Barrett did with us and a few other newspapers, he said, "Look, as company, as a CEO, I can't resist the compelling arguments for moving jobs and moving operations overseas. But for the country, I'm not so sure this is such a good thing.'' And I don't have his exact quote, but it was something along those lines.

Is there a difference between the way you necessarily have to look at this in the framework of a company, and the way we should look at it in the framework of the interests of the nation? Is there a tension there between those two, and how do we deal with that?

JARRETT: I think there's definitely that tension. You wear one hat as a citizen and another hat as a CEO. We do care about the future of the country, and that's why we're out trying to advocate policy changes that we think will keep the United States competitive, long-term.

At the same time, you know, we've got 70 percent of our sales outside of the United States; our fastest-growing markets are China and India and Russia and Brazil and Mexico and Eastern Europe. We've got to be there.

HALLA: All of us that are CEOs have to do that which makes our companies competitive first. And, we all have community-support programs and foundations and everything else to support the community.

My own feeling is that the best way to take care of a displaced worker is, if he leaves Synopsys, to be able to go right across the street to Google or Ebay and get another job, because there are many more requisitions for new jobs than there are people. And that's when the Valley is thriving again. And by the way, we're approaching that.

LOFGREN: Obviously, Craig is right; I mean, his obligation is to his shareholders, not to the citizenry at large. That is the job of the people who are elected.

And most of these companies, I know, are very generous. At Evergreen Valley High School, there's a whole building that Applied (Materials) built. All of you have foundations and do wonderful things. But the societal obligation to make sure that the children are in school and learning is really devolved to the school board and to other levels of government. We need to find the money to pay for it, which may make you feel not competitive, but these things do have to be paid for.

So we need to set a strategy that really responds to the citizenry. That's not Applied (Materials) or National Semi's obligation, although it cannot be done without your collaboration.

Three-year outlook

YARNOLD: OK. You have all done a very good job of mining deeply into issues that you know very well. I'm going to ask you a very simple question that I think our readers would be interested in. What will the Valley look like in three years? What's your level of optimism?

HALLA: I think we'll absolutely be thriving. There'll be new companies, and there'll be companies that are doing things in imaging and sensors and RFID (radio frequency identification tagging); and we'll continue to prosper.

FONG: I'm very optimistic about the Valley. And three to five years from now, what I do hope is that China and India, the two most populous countries in the world, will also have economic gains. At the end of the day, from a global perspective, as a country our security is best served by other people wanting to come after us and wanting to emulate us and having a better standard of living. The Valley will benefit from that.

BOSTROM: I'm very optimistic. If you look at the end consumer of the products that we make, there is this continued demand and interest for doing more and more, using technology as an enabler, whether it's little IP (Internet Protocol) video cameras in our phones, or whether it's enterprises that want to drive up levels of productivity.

LOFGREN: I think we could have either of two scenarios. We could have the kind of roar-back that's been described, and I hope that that is what happens. Or we could continue to have a very sluggish job creation. I've lived here all my life. We've been counted out a million times. And I'm not counting us out again. But the rate of improvement, if we play our cards wrong, could be much slower than we hope.

NATOLI: My guess is that the job growth is going to be modest. Economy.com thinks that in the second half of next year we'll begin growing jobs for the first time, but that the job growth will be in the 1- to 2-percent range each year for the next three years.

As I look back over the last 20 years here, downturns tend to touch parts of three years. We're now three years into this thing, and there's no recovery in jobs in sight. I think this is structural. It's different than what we've had before. Job growth here has come from a combination of mostly small companies and some small companies that become quite large companies and wind up having 6,000 employees here or whatever. I don't think anybody's going to scale up to 6,000 employees here anymore. And I'm not sure that there would be enough of the smaller-company growth, at least in the next three years. I think it's going to take longer to sort of have that whole thing shake out. I hope I'm wrong.

YARNOLD: But nobody saw Ebay coming either. And maybe it's the exception.

MORGAN: No, it's not the exception. In 1975, you could have purchased all the companies in Silicon Valley, except for HP and Varian, for probably $350 million, including Applied Materials and AMD and Intel and all of them. A lot of them, have market caps in excess of $20 billion today.

WHITE: I think job growth may be a little slower here than it is elsewhere. But if I were writing the stories that you guys are going to write as a result of this, I'd be a little careful that I don't look too foolish a year from now. We're just at the end of a sluggish time. There's been a lot of discussion about the jobless recovery. It's entirely possible there won't be a jobless recovery six months from now.

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Getting Closer? Southeast Asia and the Middle East

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In the United States since 9/11, there has been a tendency to reduce Southeast Asia's connections to the Middle East to religion: that is, to the Muslim faith shared by majori-ties east of the Mediterranean and south of the South China Sea, not to mention the Muslim minorities elsewhere in Southeast Asia. While addressing the changing nature and importance of this overlap, Professor von der Mehden will also analyze how and why these two regions, spatially so far apart, have been interacting on a range of economic, security, and political issues, including the question of Palestine. He will argue that there is more interaction today between the two regions than ever before. Each region has become more involved in the affairs of the other. But these burgeoning connections are not what they were expected to be. Nor are they all benign.

Fred von der Mehden is internationally known for his extensive scholarship on politics, religion, and development in Southeast Asia. His talk will update and expand on his 1993 book, Two Worlds of Islam: Interaction between Southeast Asia and the Middle East. A senior editor of the Oxford Encyclopedia of the Modern Islamic World (1995), Professor von der Mehden's many other books include Religion and Modernization in Southeast Asia (1986); Southeast Asia 1930-1970 (1974); Comparative Political Violence (1973); and Religion and Nationalism in Southeast Asia (1963). He has just returned from Southeast Asia, where he has lectured or done research almost every year since the 1950s. He is California-trained, having earned a Ph.D. from the University of California, Berkeley; an M.A. from Claremont Graduate School; and a B.A. from the University of the Pacific.

Okimoto Conference Room

Fred von der Mehden Professor of Political Science Emeritus Rice University
Seminars
Southeast Asia Program

Japan and the Arab-Israel Conflict, 1952-56: The Story before Oil Became the Factor

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Recently released Israel state archives indicate that during its formative years the Israeli government actively sought to expand its relations with Asian states based on the belief that ties with countries in Asia would break the political siege erected around it by the Arabs. At that time, the Israeli foreign ministry was of the opinion that good relations with Asia would disprove the Arab claim that Israel was imperialistic, foil the Arab design to cut Israel off from the east completely, and persuade the Arabs that it was time to make peace and come to terms with Israel's existence. After having failed to make inroads into what Israeli decision-makers considered to be key Asian countries at that time (India and the PRC), Israel turned to a newly independent Japan. This talk will highlight Japan's response to Israel's initial advances between 1952-1956, before Japan became dependent on Arab oil, by drawing upon primary sources in Japan and Israel.

Philippines Conference Room

John C. de Boer

Building 200, Room 23
450 Serra Mall
Stanford University
Stanford, CA 94305-2024

(650) 724-5433 (650) 725-0597
0
MA, PhD

John de Boer is a postdoctoral fellow in Japanese studies at FSI. Over the course of exploring the main socio-economic and political factors that have influenced Japan's relationship with Israel/Palestine in the twentieth century, Mr. de Boer has opened the door to the possibility of probing a broader time-space framework for thinking about the historical significance of Japan and Israel in their Asian contexts. His research aims to document the profound interconnections that exist between Japanese and Zionist intellectuals, activists and politicians on ideas related to colonialism, progress, cultural identity, democracy and security in order to assess the formative impact that both nations had on Asia's modern historical trajectory.

In addition to this historical approach to understanding transnational exchanges involving Japan, de Boer is also actively engaged in analyzing Japan's recent policy initiatives as they relate to human rights, militarization and armed conflict. Some of his work in this area has been published by the Japanese Institute of Global Communications and is available at http://www.glocom.org/map/alpha/index_ju.html#weekly_review He received a BA in political science from Wilfrid Laurier University (Ontario, Canada), an MA in international relations from the International University of Japan (Niigata, Japan), and a PhD in area studies from Tokyo University.

Postdoctoral Fellow in Japanese Studies at FSI
John de Boer
Seminars
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