The United States and India have gone a long way from Cold War days of wariness and suspicion to genuine friendship and incipient global partnership. The visit of President Clinton to India in 2000 marked a breakthrough in Indo-U.S. ties, which had been set back by India's decision to conduct nuclear weapons tests in 1998.

President Bush, to his credit, broadened the road opened by Clinton and paved it with a more solid foundation. Cooperation in a range of areas, from military ties to joint scientific work, is well established. A presidential visit puts a personal seal on that budding partnership -- even if it is a couple of years late.

When it comes to Indo-U.S. relations, however, there are three pitfalls to avoid: the India card; democracy matters; and it's the economy, stupid!

The India card

Washington has a surplus of geo-strategists. As Kissinger famously played the "China card'' against the Soviet Union, the strategists imagine cleverly using an India card against a rising China.

There is one small rub in that grand design -- India isn't interested in being an instrument of an American containment strategy against China. As Robert Blackwill, former Bush administration ambassador to India, put it recently: "There's no way better to empty a drawing room in New Delhi of Indian strategists than to start talking about this idea.''

Indians eagerly compete with China for economic leadership in Asia. They have a legacy of tensions, from border wars to nuclear rivalry. But Indian policy is to engage China and create the best relationship possible.

The president is avoiding India card talk. But it is no secret that some inside the administration harbor these illusions. Let's hope they keep their mouths shut for at least this week.

Democracy matters

Beyond cliches about the world's two largest democracies, both governments have a habit of forgetting that democracy really matters. Witness the up-to-the-last-minute effort to salvage a deal from July to open India's civilian nuclear program to international inspection in exchange for access to nuclear energy technology and fuel.

The Bush administration did little to sell that deal in Congress, either ahead or afterward. Opposition has mounted on both sides of the aisles from those who fear it would undermine nuclear proliferation controls, particularly when Iran is claiming its own right to pursue peaceful nuclear technology.

The United States has now toughened its requirements. But the coalition government of Prime Minister Manmohan Singh faces rising resistance in parliament, encouraged by the prestigious nuclear establishment, to any deal that would significantly restrict India's ability to develop and build nuclear weapons.

I favored the July deal and support any reasonable new agreement that would separate a significant part of India's civilian nuclear program from its military one. Hopefully, the negotiations will succeed, but even if they do, both governments need to do a much better job selling it in their feisty democratic systems.

It's the economy, stupid

The biggest threat to this emergent partnership is to forget what brought the two countries together -- not geopolitics but shared interests. Some of those are security-driven, not least a common foe in Islamist terrorism. But the real driver has been economics.

Since India decided to open its protected economy in the early 1990s, the country has taken off, producing sustained growth rates nearing double digits. Led by the high-technology industry, foreign investment and trade with India is rising rapidly. The Indo-Americans who thrive in Silicon Valley form a powerful cultural and economic bridge between our two countries.

India's billon people include a middle class of 200 million to 300 million, equal to the population of this country, with an increasingly sophisticated appetite for Western consumer goods. In contrast to China, India has a young population, half of them under 25 years old.

For the United States, there are added opportunities -- and competitive challenges. As is evident from the Saturday morning phone calls from telemarketers in Chennai trying to sell me a new mortgage, India has a great resource in its English-speaking educated elite. That has meant job loss in the United States but also openings to create new businesses and new jobs.

Both governments need to focus on what is needed to accelerate the kind of virtual integration between India and the United States we see in Silicon Valley. If we do that right, the geopolitics will follow naturally. If we mess that up, all the strategic castles in the sky will come crashing to Earth very soon.

This past autumn the Freeman Spogli Institute for International Studies (FSI) in conjunction with the Woods Institute for the Environment launched a program on Food Security and the Environment (FSE) to address the deficit in academia and, on a larger scale, the global dialogue surrounding the critical issues of food security, poverty, and environmental degradation.

"Hunger is the silent killer and moral outrage of our time; however, there are few university programs in the United States designed to study and solve the problem of global food insecurity," states program director Rosamond L. Naylor. "FSE's dual affiliation with FSI and the new Stanford Institute for the Environment position it well to make significant steps in this area."

Through a focused research portfolio and an interdisciplinary team of scholars led by Naylor and CESP (Center for Environmental Science and Policy) co-director Walter P. Falcon, FSE aims to design new approaches to solve these persistent and under-prioritized problems, expand higher education on food security and the environment at Stanford, and provide direct policy outreach.

Productive food systems and their environmental consequences are at the core of the program. While many of these systems are global in character, but they are influenced significantly by differing food objectives, income level, and instruments among nations. The program thus seeks to understand the food security issues that are of paramount interest to poor countries, the food diversification challenges that are a focus of middle-income nations, and the food safety and subsidy concerns prominent in richer nations.

Chronic hunger in a time of prosperity

Although the world's supply of basic foods has doubled over the past century, roughly 850 million people (12 percent of the world's population) suffer from chronic hunger. Food insecurity deaths during the past 20 years outnumber war deaths by a factor of at least 5 to 1. Food insecurity is particularly widespread in agricultural regions where resource scarcity and environmental degradation constrain productivity and income growth.

FSE is currently assessing the impacts of climate variability on food security in Asian rice economies. This ongoing project combines the expertise of atmospheric scientists, agricultural economists, and policy analysts to understand and mitigate the adverse effects of El Niño-related climate variability on rice production and food security under current and future global warming conditions. As a consequence of Falcon and Naylor's long-standing roles as policy advisors in Indonesia, models developed through this project have already been embedded into analytical units within Indonesia's Ministry of Agriculture, the Planning Ministry, and the Ministry of Finance.

"With such forecasts in hand, the relevant government agencies are much better equipped to mitigate the negative consequences of El Niño events on incomes and food security in the Indonesian countryside," explain Falcon and Naylor.

Food diversification and intensification

With rapid income growth, urbanization, and population growth in developing economies, priorities shift from food security to the diversification of agricultural production and consumption. "Meat production is projected to double by 2020" states Harold A. Mooney, CESP senior fellow and an author of the Millennium Ecosystem Assessment. "In China alone, meat consumption has more than doubled in the past generation." As a result, land once used to provide grains for humans now provides feed for hogs and poultry.

These trends will have major consequences on the global environment-affecting the quality of the atmosphere, water, and soil due to nutrient overloads; impacting marine fisheries both locally and globally through fish meal use; and threatening human health, as, for example, through excessive use of antibiotics.

An FSE project is looking at these trends as it relates to intensive livestock production and assessing the environmental impacts to gain a better understanding of the true costs of this resource-intensive system. A product of this work recently appeared as a Policy Forum piece in the December 9, 2005, issue of Science titled "Losing the Links Between Livestock and Land".

Numerous factors have contributed to the global growth of livestock systems, lead author Naylor notes, including declining feed-grain prices, relatively inexpensive transportation costs, and trade liberalization. "But many of the true costs remain largely unaccounted for," she says. Those costs include destruction of forests and grasslands to provide farmland for corn, soybeans, and other feed crops destined not directly for humans but for livestock; utilization of large quantities of freshwater; and nitrogen losses from croplands and animal manure.

Naylor and her research team are seeking better ways to track all costs of livestock production, especially the hidden ones related to ecosystem degradation and destruction. "What is needed is a re-coupling of crop and livestock systems," Naylor says. "If not physically, then through pricing and other policy mechanisms that reflect social costs of resource use and ecological abuse."

Such policies "should not significantly compromise the improving diets of developing countries, nor should they prohibit trade," Naylor adds. Instead, they should "focus on regulatory and incentive-based tools to encourage livestock and feed producers to internalize pollution costs, minimize nutrient run-off, and pay the true price of water."

Looking ahead

The future of the program on Food Security and the Environment looks bright, busy, and expansive. While a varied portfolio of projects is in line for the upcoming year, a strong emphasis remains in the area of food security. Building on existing research at Stanford, researchers are identifying avenues for enhancing orphan crop production in the world's least developed countries-crops with little international trade and investment, but with high local value in terms of food and nutrition security. The work seeks to identify advanced genetic and genomic strategies, along with natural resource management strategies, to improve orphan crop yields and stability, enhance crop diversity, and increase rural incomes through orphan crop production.

Another priority area of research centers on the development of biofuels. Biofuels are becoming increasingly a part of the policy set for world food and agriculture. As countries such as the United States seek energy self-reliance and look for alternatives to food and feed subsidies under WTO (World Trade Organization) rules, the conversion of corn, sugar, and soybeans to ethanol and other energy sources becomes more attractive. New extraction methods are making the technology more efficient, and crude oil prices at $60 per barrel are fundamentally changing the economics of biomass energy conversion. A large switch by key export food and feed suppliers, such as the United States and Brazil, to biofuels could fundamentally alter export prices, and hence the world food and feed situation. A team of FSE researchers will assess the true costs of these conversions.

The FSE program recently received a grant through the Presidential Fund for Innovation in International Studies to initiate new interdisciplinary research activities. One such project links ongoing research at Stanford on the environmental and resource costs of industrial livestock production and trade to assess the extent and rate of Brazil's rainforest destruction for soybean production. "Tens of millions of hectares of native grassland and rainforest are currently being cleared for soybean production to supply the global industrial livestock sector," says Naylor. A significant share of Brazil's soybeans is being shipped to China, where rapid income growth is fueling tremendous increases in meat consumption."

A team of remote-sensing experts, ecologists, agronomists, and economists will be looking at the ecological effects on the landscape through biogeochemical changes and biodiversity loss, the impacts of land clearing on the regional hydrologic cycle and climate change, the economic patterns of trade, and the role of policies to achieve an appropriate balance between agricultural commodity trade, production practices, and conservation in Brazil's rainforest states.

"I'm extremely pleased to see the rapid growth of FSE and am encouraged by the recent support provided through the Presidential Fund for Innovation in International Studies," states Naylor. "It enables the program to engage faculty members from economics, political science, biology, civil and environmental engineering, earth sciences, and medicine-as well as graduate students throughout the university-in a set of collaborative research activities that could significantly improve human well-being and the quality of the environment."

Multinational corporations (MNCs) have increasingly located research and development (R&D) in developing countries such as China and India since the 1990s. On the one hand, governments in developing countries are eager to attract R&D to their local economies; on the other hand, developed countries are concerned about losing their competitive advantage due to R&D offshoring. At the same time, intellectual property protection is a growing concern.

What are the MNC R&D labs actually doing in China? Quan noted that her 2004 survey of MNC R&D labs in information technology industries in Beijing found that these MNC R&D labs are not just providing technical support, product localization, or product development for the local market; rather, they are developing products for the global market. Her study documents an emerging spatial division of labor in R&D based on the increasing specialization of R&D activities.

Ensuring returns appropriation

Appropriating returns is essential to continuous R&D investment. However, returns appropriation is not necessarily realized through formal IP protection institutions such as the patent system. As the growing trend of globalization of R&D has evolved to this new stage characterized by MNCs locating R&D labs in developing countries, it provides a good test bed to further explore more theoretical mechanisms of IP protection. Considering the weak intellectual property rights regimes these developing countries typically have, it is crucial for MNCs to find an effective way to protect their valuable technologies thus facilitating returns appropriation from their R&D activities in host developing regions. It is in fact the effective means of IP protection that can greatly assist MNCs' location of R&D offshore, in addition to other well-known incentives such as low cost R&D labor and market attraction.

R&D specialization essential

Using evidence from MNC R&D labs in Beijing and Shanghai, Quan's study proposes that R&D is further specialized within MNCs' global R&D network. Furthermore, IP protection and returns appropriation can be realized through such R&D specialization. The key proposition is formulated as below: 'Hierarchical modular R&D structure can be an effective way for MNC R&D labs to protect their intellectual property and thus facilitate returns appropriation in weak IPR regime developing countries'. This 'hierarchy' includes 'core R&D' and 'peripheral R&D', based on two dimensions--technology value-added, desire and ease of IP protection. While 'core R&D' is mostly done in developed countries, 'peripheral R&D' is conducted in developing countries. Dr. Quan's study suggests that this hierarchical modular R&D structure facilitates the global configuration of MNC R&D labs.

Slides from this presentation can be found at the event link below.

SELECT: What is the current size of the outsourcing market? What percent of U.S. software development, call centers, etc., have already moved to developing nations? Is the amount of outsourcing still increasing?

Dossani: To provide some perspective, although the off-shoring of services has been going on for mans Nears, technology led by the widespread use of the Internet has changed things. The resulting new twist in the provision of services is that the required interaction between the seller and the consumer has been substantially limited. The advances in information technology made possible the parsing of the provision of certain services into components requiring different levels of skill and interactivity As a result, certain portions of the serviced activity that might or might not be skill-intensive, but required low levels of face-to-face interaction could be relocated offshore. The sequence of events that enabled this process is the following:

First, the digital age allowed (or, at least, revolutionized) the conversion of service flows into stocks of information, making it possible to store a service. For example, a legal opinion that earlier had to be delivered to the client in person could now be prepared as a computer document and transmitted to the client via e-mail or, better yet, encoded into software. Easy storage and transmission allowed for the physical separation of the client and vendor as well as their separation in time. It also induced the separation of services into components that were standardized and could be prepared in advance (such as a template for a legal opinion) and other components that were customized for the client (such as the opinion itself) or remained non-storable. Taking advantage of the possibility of subdividing tasks and the economies that come with the division of labor, this reduced costs by offering the possibility of preparing the standardized components with lower-cost

labor and, possibly at another location.

The second fundamental impact of digitization was the conversion of non-information service flows into information service flows. For example, the sampling of tangible goods by a buyer through visiting a showroom is increasingly being replaced by virtual samples delivered over the Internet. Once converted to an information flow, the service may also he converted into a stock of information and subjected to the above mentioned forces of cost reduction through standardization of components and remote production.

Third, the low-cost transmission of the digitized material accelerated the off-shoring of services. Services such as writing software programs which were off-shored to India in the early 1970s were enabled by digitized storage and, in the 1980s, by the standardization of programming languages. Still later, as digital transmission costs fell in

the 1990s (just as digital storage costs had fallen earlier), even nonstorable

services, such as customer care, could he handled offshore.

The offshore services outsourcing market (excluding software development) is still small and will probably be approximately $10 billion for 2005. It employs about 500,000 people, two thirds of whom are located in India. The rest are widely distributed, with developing Asia and Ireland accounting for most of the remaining employment. About 60% of the employment is in call centers. The U.S. and U.K. call-center industry together employ about five million people, so the percentage of offshore jobs is still small. It is even smaller for other services.

Offshore software development employs approximately another 500,000 people. This compares with U.S. employment of about two million. This is a larger percentage of the total software development labor market. although most of the outsourced work is programming, while work such as systems integration and design continue to be done in the U.S.

The growth rate is still high and there are concerns about whether or not this rapid growth rate will hurt the quality of work done. However. this rate will still likely he in excess of 30% in 2005 and 2006. The reason for this is the massive wage differential.

Clearly there have been massive failures as well as outstanding successes in outsourcing. What are the critical success factors for making outsourcing work?

The infrastructure (telecom. finance, power) has all been standardized, although the solutions might not he the same as in developed countries. The critical success factors are two: the quality of labor and supervision; and managing growth. Unbelievable there is a growing shortage of labor. The result is that the quality of work is declining. Project supervisory skills are also in short supply. Managing growth, especially keeping attrition

under control, training, developing new vertical skills, moving into back-office work, and offering the client turnkey packages are some of the critical managerial factors for success.

Short of being willing to work for $15,000/year, what can western IT professionals do to provide sufficient value to prevent their functions from being outsourced?

The U.S. educational system still turns out a good product. It is sufficiently ahead of the comparable Indian product so that a recent computer science/computer engineering graduate from the average U.S. university can earn a premium of at least 100% over his Indian counterpart from a good university such as the IlTs, with substantially higher premiums for graduates from schools such as MIT and Stanford. The problem occurs more with mid-career professionals. Those with older skills are unable to compete with freshly trained graduates from India. Therefore, they need to update those skills regularly and take advantage of opportunities to globalize and convert them into managerial skills. This may have to he mandated at some point, as has happened in the financial sector, where stockbrokers need to regularly sit for exams to renew their licenses.

That said, most of the offshore jobs are relatively low-skilled. For example, the single largest category of offshore services is outbound calling for the financial services industry for selling mortgages or collecting overdue receivables. The work is routine, based on scripts that pop-up on the computer screen in response to prompts.

Do these findings suggest that developed countries are likely to be only marginally threatened by the globalization of services? Even if high-end work is stays within developed countries, as has happened in the software industry, the problem is that not everyone in developed countries can readily shift to high-end work. Since the 1960s, the shift in the economies of developed nations towards service-based economies certainly increased the number of highly-skilled service workers, but there was an even greater swelling in the number of other less-skilled service workers. This is partly a consequence of the nature of many services as linked, inseparable sets of activities with different

skill levels, combined with a pyramid of labor requirements, i.e., there is more demand for lower-level work than for high-end work. In manufacturing. the unemployment created by the reduction in demand for blue collar labor in developed countries was offset by the absorption of much of the surplus labor into service industries, often with minimal training. But the shift of low-end service workers to high-end workers will require a longer period of re-education and may have significant interim consequences on unemployment rates.

The threat to developed countries is increased by the fact that, apart from software, the largest growth in off-shoring is happening in business services. These are also the sectors with the largest growth in U.S. employment.

Further, there is evidence that even higher skilled functions can be moved offshore or might evolve on their own. For example, interviews with people at a firm earlier this year revealed that they had initially been contracted by an American firm to call its clients with overdue credit card payments. The offshore company eventually purchased the receivables from its client and assumed the collection risk itself. Another firm, Wipro Spectramind, managed the radiology services of Massachusetts General Hospital for its second and third shifts. Thus, American radiologists, who earn an average of $315,000 a year were replaced by Indian radiologists, who earn $20,000 a year on average.

I understand that there is a whole subculture in Pakistan and India of people who go to work in the late afternoon or evening and then work a full day on U.S. time. What effect has outsourcing had on the cultures of the countries that are recipients of much of the outsourced work? Have labor rates dramatically increased? Is it difficult for local companies in India and Pakistan to get quality IT talent?

Indeed such a subculture now exists. It is viewed as very stressful work and not suitable for a long-term career. Companies that do such work try to ameliorate the stress by hiring psychiatric counselors to provide free counseling to stressed-out employees. They also provide free meals and transportation, sports facilities, etc.

However, labor rates have increased only, a little. This is more than offset by

the rise in productivity of this labor over time.

Outsourcing is clearly a temporary solution. As labor rates equalize, the benefit of outsourcing decreases. In Pakistan and China, there are still huge differences in labor costs, but in Turkey, rates are closer to what they are in the 11.5. and other Western states. Realistically, how long can we gain a significant benefit form outsourcing?

India and China, and to some extent, Pakistan, have large labor pools. That is why, in manufacturing, Chinese wage rates have not changed despite massive employment growth over the past three decades. I think that wage rates in India will actually fall because of increasing supply, which is being drawn into outsourcing. This would mean several more decades of benefit from outsourcing.

One way in which developed countries may retain value is if their firms control the work done, either through providing the risk capital or through subsidiaries. While it is difficult to predict which organizational types will dominate, a number of firm-specific factors that influence the liability of off-shoring and organization structure are summarized here:

The knowledge component of the activity. A higher knowledge component makes the firm more concerned about whether the quality of the service will change due to a location change or the transfer process.

The interactive components of the process.

The ability to modularize the process

Savings from concentrating an activity in one location, leading to

benefits of scale and scope.

Reengineering as part of the transfer process. To transfer a business process, it is necessary to study it intensively and script the transfer. In the process of study, often there will he aspects of the current methodology for discharging the process that do not add value. Very often these aspects are legacies of earlier methodologies that were not eliminated as the production process evolved. During the act of transfer these are easier to abandon than at an existing facility' where they have become a "natural' part of the daily routine. Our interviews identified other unexpected benefits that go beyond the efficiency effects. Simply examining the business processes may reveal previously undetected inefficiencies. During the transfer process, these inefficiencies can be addressed without disrupting work patterns. Workers in the new location then use the reengineered process which is usually more efficient.

The time-sensitive nature of the work.

SEOUL, Korea - The visit last month of North Korea's diminutive dictator Kim Jong Il to China is still making waves here in the South Korean capital.

The Chinese rolled Kim through showcases of their market reforms. The North Korean leader, who once denounced the Chinese for retreating from socialism, responded with dutiful words of praise for the Chinese model.

South Koreans applaud any evidence that Kim may be headed down a Chinese-style path. Like the Chinese, most South Koreans believe this may be the only way to ultimately persuade the North to abandon its nuclear weapons program.

But in conversations here with senior South Korean officials and others closely involved with North Korea, I detected unease, even alarm, at the growth of China's influence and presence in the North. Some talked darkly about a Chinese "takeover'' of the North.

South Korean mixed feelings about China are not new. But the Kim visit comes on top of a rapid broadening of Chinese economic ties to North Korea, described in detail in a new report issued by the International Crisis Group. Chinese trade and investment in North Korea has reached $2 billion annually. Bridges and highways in and out of North Korea are being built, making it easier to ship iron ore and other raw materials out.

Hundreds of Chinese firms are investing into North Korea, in some cases grabbing deals away from South Korean companies.

Is China willing to use this expanded influence to compel Pyongyang to give up nuclear weapons? Some in the Bush administration still cling to that hope. But the report argues strongly against that happening.

China may again drag Pyongyang back to the stalled six-party talks that it hosts. And it will move quickly to curb any North Korea provocation, such as a nuclear test, that could lead to war.

But China has an overriding interest in stability as well, opposing any attempt to destabilize the Kim government. The Chinese will cooperate to curb Pyongyang's laundering of counterfeit money through their banks, the report says, but will not shut down the North's banking operations in China.

South Koreans don't differ with China on the need to engage the North. Their own economic ties with the North are deepening. And Seoul too is consumed with the danger of triggering a war by trying to cut off the North's economic lifeline.

But South Koreans now also worry that China's deepening stake in the North will only perpetuate the division of the Korean Peninsula.

A South Korean businessman who is deeply engaged in dealings with the North argued to me privately that the North Koreans are unhappy with their dependence on Beijing and eager for an alliance with the United States. By refusing to deal directly with Kim Il Jong, he argued, "the Bush administration is pushing North Korea into the camp of China.''

We should explore such claims with a healthy dose of skepticism. The North Koreans are masters at playing the Chinese and South Koreans against each other, as they did with the Russians and Chinese during the Cold War.

More important, South Korean nervousness about China comes together with renewed interest in shoring up the strained alliance with the United States. This is partly behind a decision to negotiate a free-trade agreement (FTA) with the United States this year.

A free-trade agreement between the United States and Korea, one of the largest economies in the world, would be good for both economies. It should open more markets in Korea, removing a host of barriers such as restrictions on foreign investment. Korean officials, led by a young and ambitious American-trained trade minister, believe an FTA will spur a new round of needed internal reform and a jump in growth.

Anti-FTA protests were already taking place as I was discussing this with Korean officials. More are sure to come from those, such as farmers, most threatened by more open markets. But officials say the president and his government are committed to pushing this through.

Privately, Korean officials hope the FTA will also remind Koreans and Americans of the value of their alliance. It gives both sides something to talk about other than to dwell on their differences over North Korea. We should push hard from both sides to quickly finish an FTA deal -- and continue to talk quietly about our shared interests in maintaining a strategic balance in Northeast Asia.