Wednesday, March 8, 2000
7:00 pm

Is the United States engaged in a 'new economy' based on technology? That was the tough question even for some of the world's top economists gathered at the Milken Institute 2000 Global Conference.

Leading a panel discussion of four Nobel Laureates at the conference's opening session Wednesday evening, Michael Milken noted that the value of Oracle is now about 60 percent higher than the combined value of the nation's auto makers, including Ford, General Motors and Daimler-Chrysler. "Is there a new economy?" Milken asked.

The consensus of the four Nobel Laureates is: it's too soon to say. And they were reluctant to call the advent of computer and Internet-based companies a new economy.

"Novelty is not new. Telecommunications is not new. . . it's getting better," said Kenneth Arrow. Inventions such as the telegraph and steam engine had a profound impact on the nation's economy that wasn't felt until much later, he said, remarking that factories were redesigned about 30 years after electricity became available. "It's a digestion problem."

James M. Buchanan said today's cyberspace industry is somewhat analogous to the nascent automotive industry of the 1920s. Predicting its future direction based on past or present knowledge is difficult. "I'll leave the question open," concluded Buchanan.

"I don't know if I want to call it a new economy," Lawrence Klein said. "It has certainly changed. I wouldn't look at the equity market fluctuations. There's a lot of noise and fluff in those figures," he continued, evoking laughter among the audience. The important measure of a new or changing economy is productivity statistics, such as employment and growth, said Klein. "It's a very unusual movement to have such young companies come so far and dominate."

An emerging industry is marked by "a dominance of a small number of companies for a while," says Becker, an expert in human capital. "It's not a revolutionary change, but it's a significant change. . . No one has the answer to whether it's a new economy."

Becker agreed with Arrow that productivity often lags innovation. "The role of electricity didn't show up immediately in productivity, but after a while, there was a great boom. Larry has an important point, " he said. "We had increasing returns in the telephone industry."

In presenting a list of the nation's top 10 companies based on market value, Milken pointed out that many, such as Microsoft, Cisco and Intel, are linked to technology. In response, Arrow said, "Twenty-five years from now we'll find this list passe. There's an enormously high price-to-earnings ratio. Due to the new technology, there's a lot of sorting out [to do] in the next 25 years."

What gives Becker pause to declare a new economy, he said, is that there are very few new European companies relative to the United States.

Milken predicted that in the next 10 to 25 years the list would change dramatically to reflect the rise of biotechnology companies.

Other topics discussed by the Nobel laureates included:

  • The differing mortality rates of men and women in industrialized nations, where women outlive men, and Third World countries, where the death rates are more equal. "Women had very high death rates from giving birth to children," Becker said, describing the United States of a century ago. "What we're left with now are cancer and heart (disease). After those major killers, women are the stronger sex."
  • The ability of undeveloped nations to leapfrog to the 21st century via technology — the reason cellular telephones vastly outnumber conventional wired telephones in some poor countries. "Every country won't have to follow the same tortuous path that we did," Klein said. "They can go right to the final result."
  • How the Internet might change the delivery of higher education to the masses and whether universities will play a primary role in delivering online education. "Non-profits in general aren't good in adapting new technology to new uses," Becker said. "These big universities do well in bringing people together to interact closely and create knowledge."
  • The impact of high technology on economic forecasting and whether the past remains an indicator of the future. "Everything in the future is unknowable," Buchanan said. "History can be helpful to the extent that you can use it properly. Depending too much on history gets you into trouble."
  • Why Africa, rich in resources, remains poor. "Part of it is government interference with the economy, corruption and plain, old conflict," Arrow said. "When Rwandans are killing each other, there can't be an economy." Western Europe's move toward centralization versus a worldwide trend toward smaller governmental units. "My concern is with the discretionary authority of a single, central bank," Buchanan said. "Too much power is in Brussels. It's a residual Socialist mentality."
  • The issue of Social Security and Medicare as the nation's population ages. "We should bank more on growth," Klein said. "We have another big sector coming up, and that's biotechnology."
Moderator
Michael Milken, Chairman, Milken Institute
Speakers
Kenneth J. Arrow, Professor of Economics (Emeritus), Stanford University (Palo Alto)
Gary S. Becker, Professor of Economics and Sociology, University of Chicago
James M. Buchanan, Advisory General Director, Center for Study of Public Choice and Distinguished Professor of Economics (Emeritus), George Mason University (Fairfax, VA)
Lawrence R. Klein, Professor of Economics (Emeritus), University of Pennsylvania (Philadelphia)
Thursday, March 9, 2000
7:30 am
Calling the United States a "large but flexible market," panelists labeled the country's economy as a role model for other nations struggling to catch up. They also praised many European nations — including Sweden and Ireland — for their progressive reforms leading up to the 21st century. But panelists criticized nations such as Germany and Japan for their unwillingness to embrace immigrants, during a time when many countries are in desperate need of highly-skilled workers.

Milken Institute President Donald Straszheim asked panelists to explain why the United States economy is the "800 pound gorilla" at a time that many world economies are still losing ground.

Robert D. Hormats gave credit to the 1990s information technology boom, as well as growing capital investment and a reduction in the federal deficit. But he said the country needs to educate all Americans, not a select group. "We have not yet educated people in the lower income groups and that, I think, is the Achilles heel of this economy."

Economist Nariman Behravesh said the United States' flexible labor markets have helped spur the booming economy, but that the nation still operates with a sense of arrogance. "I think we need to be humble. I think things could go wrong," he said. "I think the key is good policies going forward."

White House assistant Robert F. Wescott predicted a slowed growth by July. And Fareed Zakaria forecasts that Latin America's economies could worsen over the next five years.

Panelists also addressed the Asian crisis of the past several years. A boost in hardware exports has helped the Asians rebound from the crisis, Behravesh said. But he fears that Asia's recovery may have occurred a little too quickly. "What we're hearing when we go to Asia is complacency," he said, noting that Asians feel that they've done enough to get back on track. Japan has also squandered its savings and the Japanese "never really sensed they're in a crisis," Hormats said.

The economic experts complimented China's leadership for its reform efforts, particularly in attempting to close down state-owned enterprises, but reiterated that fast growth comes with problems. "Chinese leadership believes that you have to change and nothing will happen on the political front," Zakaria said, noting that that premise is untrue.

Finally, panelists praised Sweden and Ireland for their progressive reforms over the past two decades, but criticized Japan and Germany for their stubbornness to allow immigrants into the country. Sweden underwent financial deregulation in the mid-1980s; Ireland lowered its unemployment rate and Chile led the world in pension reform, panelists said.

Other countries, such as India, need to deregulate their financial and telecommunications markets, Hormats noted. "We're willing to tolerate risk in our society," he said of the United States. "Many countries are not willing to do that."

Moderator
Donald Straszheim, President, Milken Institute
Speakers
Nariman Behravesh, Chief International Economist, Standard & Poor's Research Services (Lexington, MA)
Robert D. Hormats, Vice Chairman, Goldman Sachs International, Goldman, Sachs & Co. (New York)
Robert F. Wescott, Special Assistant to the President for International Economics, The White House (Washington, DC)
Fareed Zakaria, Managing Editor, Foreign Affairs (New York)
8:45 am
The rise and reach of the Internet has major implications for the financial services industry and the manner in which lenders connect with borrowers, the panel said.

The new technologies provide tremendous potential to "democratize" capital markets and offer opportunities for companies nimble and advanced enough to take advantage of them. But along with those opportunities come challenges.

The clearest example of Internet-fueled change already here has come in the retail brokerage industry. That evolution is certain to continue, said K. Blake Darcy. While there once was a divide between low-cost brokerages providing few other services and higher-cost brokerages with more services, that divide is breaking down.

"That's where the real battleground is online," Darcy said. Low-fee outfits are seeking ways to offer more services while full-service companies have been forced to cut fees. "Customers get the best of both worlds," he said.

In addition, investors are demanding greater reach globally, forcing non-stop access to financial markets. And consumers are likely to demand total financial services from a single site, adding items such as insurance and banking to more traditional financial services.

"Clearly it's headed to the point where you can go to one site and get all the information well-integrated," Darcy added.

While these changes will have a major impact on individuals, they could also have implications for national financial systems. A more global liquid mechanism is likely to mean more rapid capital flows from country to country as investors search for greater returns. "People want to be able to trade globally," Darcy said.

In addition to changing how people invest, the Internet tends to attract different kinds of investors, noted Scott Ryles. While technology makes up 28 percent of the S&P 500, 42 percent of online portfolios are in the technology sector, Ryles said. This reflects the technology bias those investors frequently have.

The Internet will also radically alter the way borrowers connect with lenders, said Jonathan Orban. With greater access to information, the need for loan brokers and market makers will decrease in favor of "neutral enablers" to provide online connections. "The obvious value is the efficiency," Orban said. "It will reduce processing time and reduce overhead."

Electronic access will also bring dramatic change to areas such as venture capital and Initial Public Offerings, said Steven Wallman. "It changes the control of bankers and institutions." One result could be Dutch auctions for IPOs.

"With the Internet, it remarkably lowers barriers to entry," Wallman said.

While a seamless, more efficient global marketplace will sound appealing to many investors, it may not unfold as rapidly as some people predict due to regulatory concerns, he added.

Accelerating innovation upsets the traditional regulatory paradigm leaving several issues to be tackled. Differing international standards make innovation and change more difficult as varying national rules bump into one another. What's more, this new technology is likely to find resistance from groups that benefit from the status quo.

"Many people in the industry have an advantage in keeping the rules as they are," he noted.

Moderator
R. Dan Brumbaugh Jr., Senior Fellow, Milken Institute
Speakers
K. Blake Darcy, Chief Executive Officer, DLJdirect Inc. (New York)
Jonathan S. Orban, Chief Executive Officer, companyfinance.com (Burlingame, CA)
Scott Ryles, President and Chief Executive Officer, Epoch Capital Partners, Inc. (San Francisco)
Steven M.H. Wallman, Senior Fellow, The Brookings Institution (Washington, DC)
10:15 am
What does it take to be a Silicon Valley, a Minneapolis or a Fairfax County, Virginia, where information technology has exploded? Joshua Cooper Ramo, world editor of Time magazine, led panelists in a discussion of these high-tech clusters, namely metro areas where savvy companies have either collaborated or competed to gain momentum at a rapid pace.

Ramo used Los Alamos, N.M., home to myriad Ph.ds but little technology, as a case study,. He asked panelists how the New Mexico town could begin to create a successful cluster of high-tech firms. Panelists, in differing disciplines, noted that clusters must be accessible and have viable transportation networks. Clusters also need talent, good role models, commercialization of research, flexibility, an attractive quality of life and access to venture capital.

"You have to create an environment where people win and lose," said Desh Deshpande "People need to realize that in this new economy failure isn't a bad thing."

Language barriers for foreign countries can inhibit the growth of high-tech clusters, said Dewang Mehta. About 14 clusters sprouted in India in the last four years, he added.

The Milken Institute's Ross DeVol said regions where a few large companies dominate are at a disadvantage. Seattle, home to Bill Gates' Microsoft, bucked that trend after many workers left the company to spin off their own firms. Microsoft eventually bought back some of these smaller ventures, DeVol said.

Ramo, in an often humorous exchange with panelists, asked them where they'd invest $1 million of venture capital, and what criteria they'd use in their decisions.

"I'd look for areas of the world that are beginning to move toward entrepreneurial venture capital development and not relying on large firms and going to banks," DeVol said. Specifically, he predicted he would invest in Finland, Sweden, Ireland and Bangalore, India.

Mehta plugged India as a wise investment, and University of North Carolina Professor John D. Kasarda said he'd "look where the momentum is" in making his decision.

Ramo offered one more hypothetical question for the session's experts: "If you were fired from your job, where would you go?" Robert J. Shapiro of the U.S. Department of Commerce said he'd look abroad.

"I probably would not stay in the United States," he said. "It seems to me the opportunities are much more fertile in companies that are a couple of years behind the U.S."

Mehta said he'd look at places that show a 50 percent annual economic growth rate. Kasarda predicted he'd leave North Carolina and head to Miami, what he calls the "capital of Latin America, conveniently located in the United States," or San Diego, which is a "dynamic, growing crossroads" to Mexico and the Far East.

DeVol chose San Diego hands down, since the Southern California city could become the biotechnology center of the country. And Deshpande said that place is irrelevant. Rather, people make the difference in whether a company succeeds.

Moderator
Joshua Cooper Ramo, World Editor, Time Magazine (New York)
Speakers
Desh Deshpande, Chairman, Sycamore Networks, Inc. (Boston)
Ross DeVol, Director of Regional and Demographic Studies, Milken Institute
John D. Kasarda, Professor and Director, Kenan Institute of Private Enterprise, University of North Carolina (Chapel Hill)
Dewang Mehta, President, National Association of Software and Service Companies (New Delhi)
Robert J. Shapiro, Under Secretary for Economic Affairs, U.S. Department of Commerce (Washington)
10:15 am
More open and liquid capital systems are crucial to international economic growth and improved living standards. That was the prevailing panel consensus at this session, but they cautioned that, several obstacles, including corruption and a resistance to reforms, stand in the way of that goal in many parts of the world.

"Increasing the functions of capital markets really does benefit a citizenry as a whole," Ross Levine stated. Levine was attempting to counter the suggestion that international financiers tend to benefit from liberalized capital markets at the expense of local citizens when markets are opened. In fact, countries with the most liquid capital markets typically enjoy the highest levels of growth, he said.

Several countries that endured severe economic downturns are now enjoying a recovery in part because of market conditions that have allowed investment to return. South Korea, for example, has benefited from its restructuring efforts, said Kenneth Courtis. That move, along with other factors such as a devalued currency, a reduction in domestic demand and lower wage and real estate costs, have allowed the country to become internationally competitive. "If you can produce cars for $7,000 and make a profit . . . you don't have a problem," he said.

Courtis predicted that much of Asia would enjoy continued success going forward. "This region has some of the best performing markets with very strong growth and strong exports," Courtis said.

While many parts of the continent will prosper, the outlook for Japan is not nearly as bright, he suggested. "Their financial system still has huge problems," he said.

Another area of the world with serious problems is Russia, several panelists agreed. The major issue there is a lack of investor confidence because of corruption, said Louise Shelley. "Why has Russia not revived as much as Asian markets have revived? It's very much a question of corruption," said Shelley who recently returned from that struggling nation.

Corruption not only siphons capital from an economy in the form of outright theft, it also kills the efforts of cash-strapped entrepreneurs, she suggested. And it tends to promote the exodus of clean money as investors head for more stable environments.

While other parts of the world may not be struggling with the level of corruption that Russia endures, they still suffer from a lack of capital for other reasons. These include a lack of transparency in banking or securities laws as well as a lack of consistent accounting standards.

Encouraging the creation of workable financial markets should be an important part of U.S. foreign policy, said Walter Russell Mead.

Picking up on the theme of differing accounting standards worldwide, Robert E. Hendricks urged investors to look beyond mere profit and loss statements when judging investment opportunities. The varying treatment of items, such as depreciation and goodwill, can make for sharply different results depending on where a country is located, he noted. Several countries that endured severe economic downturns are now enjoying a recovery in part because of market conditions that have allowed investment to return. South Korea, for example, has benefited from its restructuring efforts, said Kenneth Courtis. That move, along with other factors such as a devalued currency, a reduction in domestic demand and lower wage and real estate costs, have allowed the country to become internationally competitive. "If you can produce cars for $7,000 and make a profit . . . you don't have a problem," he said.

Courtis predicted that much of Asia would enjoy continued success going forward. "This region has some of the best performing markets with very strong growth and strong exports," Courtis said.

While many parts of the continent will prosper, the outlook for Japan is not nearly as bright, he suggested. "Their financial system still has huge problems," he said.

Another area of the world with serious problems is Russia, several panelists agreed. The major issue there is a lack of investor confidence because of corruption, said Louise Shelley. "Why has Russia not revived as much as Asian markets have revived? It's very much a question of corruption," said Shelley who recently returned from that struggling nation.

Corruption not only siphons capital from an economy in the form of outright theft, it also kills the efforts of cash-strapped entrepreneurs, she suggested. And it tends to promote the exodus of clean money as investors head for more stable environments.

While other parts of the world may not be struggling with the level of corruption that Russia endures, they still suffer from a lack of capital for other reasons. These include a lack of transparency in banking or securities laws as well as a lack of consistent accounting standards.

Encouraging the creation of workable financial markets should be an important part of U.S. foreign policy, said Walter Russell Mead.

Picking up on the theme of differing accounting standards worldwide, Robert E. Hendricks urged investors to look beyond mere profit and loss statements when judging investment opportunities. The varying treatment of items, such as depreciation and goodwill, can make for sharply different results depending on where a country is located, he noted.

The bottom line is that countries with open and transparent financial systems will receive the greatest share of investment. They, in turn, will benefit the most, Levine said. "The countries that reduce the barriers to capital flows tend to see growth in stock market liquidity," he said. "While [opening markets] might make for more volatility, it also provides for long-run growth."

The bottom line is that countries with open and transparent financial systems will receive the greatest share of investment. They, in turn, will benefit the most, Levine said. "The countries that reduce the barriers to capital flows tend to see growth in stock market liquidity," he said. "While [opening markets] might make for more volatility, it also provides for long-run growth."

Moderator
Glenn Yago, Director of Capital Studies, Milken Institute
Speakers
Kenneth Courtis, Strategist, Vice Chairman, Goldman Sachs Asia (Tokyo)
Robert E. Hendricks, Chairman and Founder, HOLT Value Associates (Chicago)
Joel Kurtzman, PricewaterhouseCoopers, Global Thought Leadership and Publishing (New York)
Ross Levine, Professor, Carlson School of Management, University of Minnesota (Minneapolis)
Walter Russell Mead, Senior Fellow, U.S. Foreign Policy, Council on Foreign Relations (New York)
Louise Shelley, Director, Center for the Study of Transnational Crime and Corruption, and Professor, American University (Washington, DC)
10:15 am
Once a model of seemingly endless growth, Japan appears to be reaching a standstill as its population ages.

"This demographic issue that Japan is struggling with right now is our own future," said Robert A. Feldman.

Japan's population is expected to shrink by five million people during the next five years, Feldman said, while its labor force will shrink by 11 million workers.

To compensate for the loss of manpower and to avoid a decline in its standard of living, Japan must increase productivity and rejuvenate both its corporate and political leadership, Feldman said.

Strengths that might help Japan overcome potential paralysis include a high level of education, literacy and adeptness at innovation, Feldman said. "Japan can absorb technology and reproduce it better than anyone else in the world."

Nonetheless, Jesper Koll predicts Japan will shift from being an industrial nation to a service-based economy during the next 15 years. With imports growing from 8 - 10 percent a year, Japan is likely to post a trade deficit in four years, Koll said.

"The key issue isn't unemployment going up to 5 percent," Koll said. "There's going to be an acute skill shortage. A labor shortage will become the key issue. The labor force will be halved in the next 25 years."

Koll joked that only 680 Japanese people will be left in Japan 400 years from now. "The new Japan will still be old," he said.

Despite its transformation from "growth prodigy" of the 1980s to "mature global player," Japan has the potential to grow from one to 1.5 percent a year, Koll said. "The road to 1 percent to 1.5 percent is going to be patchy," he said, warning Japan could experience a recession within two years.

Still, Merrill Lynch sees opportunities to profit from changes in Japan's financial-services sector.

More than 40 percent of all loans in Japan are controlled by the postal system, which is scheduled for privatization. In April, the government will securitize its mortgage portfolio, and next year it will transfer funds from the postal system and issue bonds.

"You do actually have a tremendous experiment in financial socialism. It's a politically motivated change in capital," Koll said. "Overall, I'm quite upbeat on the Japanese economy."

Takeshi Kadota expressed optimism about his nation's future amid the problems of an aging population, growing public debt and an unstable banking system. "Japan has excellent capacity to change despite profound difficulties."

Japan is an innovator and consumer of wireless communications, Kadota said. The Japanese now own 55 million mobile telephones, compared with 65 million in the United States. Kadota said Japan is playing a role in developing "i-mode technology," which connects mobile telephones to the Internet. "The Internet will become the biggest shopping mall in the world."

Relative to the other experts speaking at the session, Kadota views the Japanese work force as being flexible. "Thirty percent of university graduates are leaving their jobs after three years," he said.

Kent E. Calder said Japan represents a dualism of "a static public sector and a potentially dynamic private sector." He agreed with the other experts that fundamental change is more likely to come from corporations than from the government.

Slowly, Japan is shifting from indirect investing through banks to direct investing in stocks, Calder said.

"Foreign investment will have an important effect on the system. It will stimulate the private sector," Calder said. "Japan is an autonomous system that can operate by its own rules. There needs to be a catalyst is my point."

Eventually, the government may be forced to revamp its social welfare system as the Japanese grow older and public debt grows, Calder said. "Japan surpassed the U.S. in government bonds outstanding, which is quite a feat."

Moderator
James Fallows, Chairman, New America Foundation (Seattle)
Speakers
Kent E. Calder, Professor, Woodrow Wilson School, Princeton University
Robert A. Feldman, Managing Director, Morgan Stanley Dean Witter (Tokyo)
Takeshi Kadota, President and Chief Executive Officer, Mitsubishi Corporation Capital, Ltd. (Tokyo)
Jesper Koll, Chief Economist, Merrill Lynch Japan Inc. (Tokyo)
10:15 am
Three cosmic laws exist in the health care industry, reports Uwe E. Reinhardt. They are:

1)People will always kvetch about their heath care system, regardless of what the government spends.
2)Every country will attempt to reform its health care system.
3)Health care reform will fail in every country that attempts it.

The economist confessed that his wife is due credit for the observation, but conceded its accuracy. One reason, he said, is that "health care is a human transaction embedded in ignorance - and that drives us crazy. Typically, the suppliers have better information than we, the buyers, but they don't know what works."

That ignorance has led to enormous regional differences in medical spending over the years as evidenced by Medicare statistics, and often wasted funds on expensive, inappropriate procedures. Managed care is "a good intellectual exercise" that did reduce some spending, but it failed to manage care.

Reinhardt looks to "dot-coms" to "rearrange the flow of information among players" - the government, insurance companies, hospitals, physicians and consumers. Users need to know about their insurance and medical providers and their experiences relating to patients' specific needs. Physicians and hospitals need to know what the government is planning and how those changes would affect their budgeting. Hospitals and researchers could use data about diseases.

"But will the entrepreneurial information brokers in the new health industry be truly disinterested conduits of credible information? Or will they succumb to the many conflicts of interest?" he asked.

Meg Walsh, sees the Internet as that conduit of information. It represents the first real opportunity to pull in data from all the players in the health care industry and make it available to patients to reduce costs, and improve efficiency and medical efficacy. In fact, that's happening already, she says, and offers quantitative proof.

Yahoo! reported that 34 percent of its search requests are in health care, translating to as many as 60 million people. Seekers of health information spend 40 minutes online, reviewing information in as many as 10 sites if they have chronic diseases, in contrast to most Web users who spend seven to ten minutes at a site then venture on. Doctors are also using the Internet, but primarily for serious medical sites.

A coordinated effort by the health care industry to use the Internet has positive implications for patient care and for medical e-commerce, she said. Internet-savvy patients who visit their doctors armed with questions and potential answers about their conditions and treatments will raise the quality of their average seven-minute appointments. What's more, if they use the Internet and their computers to track their diet and medications, they can assemble their own case histories for their personal physicians and distant ones, to review.

"Care will increase. Costs will decrease," Walsh said.

The e-commerce potential is enormous if medical sites can be combined with point-of-sale opportunities, she insisted. "But no one has really addressed the e-commerce of health care."

Walsh envisions patients getting online reminders to refill their prescriptions along with a pop-up window that offers instant purchases. With such technological intervention, people will take their medicine - and then earn the rewards of discounts on their health insurance. She also sees eBay-type auctions of expensive medical equipment for hospitals that cannot otherwise afford to make new capital expenditures.

The more people take responsibility for managing their own care, the greater the potential for a positive impact on the U.S. economy, noted Robert H. Topel. The economist developed a theoretical framework for expressing the value of changes in mortality rates and/or health.

The value of increased life expectancy alone added $2.8 trillion per year to national wealth between 1970 and 1990, representing more than half the average annual GDP over the same period. More than half, $1.5 trillion, was due to the reduced mortality of heart disease.

"The potential benefits are large enough that higher expenditures on research may be justified even if they yield only small reductions in mortality," he said.

Moderator
Alec Levenson, Acting Director of Labor Markets and Human Capital Studies, Milken Institute
Speakers
Kevin M. Murphy, Professor of Business Economics and Industrial Relations, Graduate School of Business,University of Chicago
Uwe E. Reinhardt, Professor of Political Economy, Economics and Public Affairs, Woodrow Wilson School, Princeton University
Robert H. Topel, Professor of Urban and Labor Economics, Graduate School of Business, University of Chicago
Meg Walsh, President and Chief Executive Officer, Oncology.com (New York)
11:45 am
High tech blossomed between the '50s and '70s. Information technology sprouted in 1971, and continued for 25 years. And now, we're in the age of digital, which is transforming society in every possible way.

So said George Kozmetsky about today's revolutionary progress in the world of faster and better communications. "I hear a lot about IT now," he said. "IT is ancient. It's gone."

Forbes Editor Dennis Kneale led the discussion, which focused mostly on Web-based applications, future digital changes and the long-distance industry. Kneale questioned whether Web entertainment would become a powerhouse force, and how experts envision the Web as an entertainment medium.

Artisan CEO, Mark Curcio, who helped propel an interactive Web site for the "Blair Witch Project," said his company views the Web as a marketing tool and as an entertainment enhancement - not an end-all medium for consumers. "We view the Web as a marketing tool and [for] promoting things that you would not get in the movie experience," he said.

MCI Worldcom Chairman Bert C. Roberts said the Web could become a popular medium for certain kinds of entertainment, like gambling, though he doubts people will watch live movies from their PCs. Roberts also noted that thus far demand is far outpacing supply for broadband, the digital pipe going into people's homes. Over the next several years, an increasing number of companies and individuals will log on to the Web via wireless, DSL (phone line) or cable broadband services. He said the real challenge will be filling the demand for more fibers in the United States and across the ocean.

Kneale asked whether falling long-distance prices will eventually hit ground zero. Wall Street guru Jack B. Grubman stressed that long distance is not a standalone product, but rather a piece of the bandwidth pie bought by companies nationwide.

Panelists also forecast the future of the Web and the Internet start-ups across the country. "So many dot.com companies aren't going to make it," Roberts said. He questioned new companies that spent much money to advertise during this year's final pro football showdown. "It takes $300 to $500 million on an annualized basis [to create a brand]," Roberts said. "You can't do it with one Superbowl."

Less than 20 percent of the Web companies today will survive, Grubman predicted. In the future, he said, the real money will be made in business-to-business deals - not by charging individuals for using such sites such as Mapquest.

Panelists also addressed merger mania, and what's behind industry consolidations. "A lot of what you see has to do with a belief that within your scope of business you have all the arrows in your quiver necessary to compete, said MCI's Roberts. MCI Worldcom's recent acquisition of Sprint is currently under review. Still, panelists were not convinced that telecommunications companies need to buy or own content, such as the case with AOL's recent acquisition of Time Warner.

What's left to consolidate? New entrants that focus on a slice of technology will always surface, Grubman said. Plus, he predicts more changes in the telecommunications field, with top players emerging over time. The 15 to 20 top telecommunications companies in the world currently make up one-half of the global market. Eventually, only the top five or six companies will amount to 40 percent or 50 percent of the market, he said.

Moderator
Dennis Kneale, Executive Editor, Forbes (New York)
Speakers
Fred H. Cate, Professor of Law, Indiana University
Mark Curcio, Chief Executive Officer, Artisan Entertainment (Los Angeles)
Jack B. Grubman, Managing Director, Head, Global Telecom, Salomon Smith Barney (New York)
George Kozmetsky, Chairman, IC2 Institute (Austin, TX)
Bert C. Roberts, Jr., Chairman, MCI WorldCom (Washington, DC)
11:45 am
The populations of industrialized nations are getting older. The transfer to elderly dependence from child dependence will be complete in 2015. Today, in the developed world, only 4.5 people are active in the workforce for every retired person. As the number of people over age 65 increases in developed countries, the labor force will decrease. Italy is feeling the pinch now; Japan will soon follow.

A demographic solution, said Frey, is to have more immigration between developed and non-developed nations -- just as the United States has done, along with Canada, Germany, Italy and the United Kingdom.

"But culture clashes develop," he observed. In the United States, most immigrants have clustered in ten states where 30 percent of the population resides. In these "melting pot" states, the white population has declined to 50 percent - lower than the other 40 states. Immigrants dominate occupations at the lower level and those requiring less-skilled workers. At the upper end of the spectrum, long-term residents take the managerial and professional jobs. The result is a higher need for social service and educational programs.

Noting that immigration is a help, but not a solution, Richard Medley revealed his concern about the "larger tectonic forces" generated by aging populations with lower replacement rates and less adaptive populations.

"In 635 A.D., there was a massive environmental calamity that reduced the world population and caused the collapse of every civilization," he said. "History says that all civilization collapses when it cannot adapt to sudden events, such as war. The recipe for that seems to be a diminishing population that is aging at the same time."

Looking at the economic consequences of aging societies, Sylvester J. Schieber noted its vicious cycle. Retirement programs in the United States account for 12.4 percent of payroll. In Germany, it is 20 percent. "At some juncture, the cost of those programs get so high that young people cannot afford to form families," he said. "We've gotten to the dilemma where we're adding more costs to the youth of our society to support older people that we defeat the possibilities of young people creating families."

The solution of encouraging people to work longer and save further into their lifespans to create a smaller retired population also has its problems. "We've never gone through a population downsizing in modern times, so we have no track record to work through or understand." he said. "Additionally, the politics of restructuring the system so people work longer "is an extremely sticky process."

Don't expect Washington to address entitlement reforms in the next four years if one party captures the White House and another dominates the Congress. "Only by having a same-party government will there be some prospect of meaningful reform." Schieber sees the possibility of change for Social Security if no cuts are implemented for retired Americans and younger people are permitted individual accounts. But part of the fix will come from cuts in Medicare, satisfying no one, he said.

Moderator
Peter Passell, Editor, The Milken Institute Review
Speakers
William Frey, Senior Fellow, Milken Institute
Richard Hokenson, Chief Economist, Donaldson, Lufkin & Jenrette, Inc.
Richard Medley, Chairman, Medley Global Advisors, LLC
Sylvester J. Schieber, Vice President, Watson, Wyatt Worldwide
11:45 am
India, a sleeping giant in terms of economic potential, may soon awaken as the result of its fast-growing high-technology industry and internal pressures.

Although the great subcontinent of Asia holds much promise, said panel moderator Roy Prannoy, its economy has not improved in 50 years. "Will India break its shackles of the past?" he asked the five panelists who are business leaders. All agreed that the government must relinquish control for business to flourish.

Deregulation and privatization will free India to realize its full power as an economic force, they said. However, a crisis may be required to trigger such change, which the government has mostly avoided or ignored for decades. "The government is already becoming irrelevant in media," Prannoy said. "It will happen in other industries."

Kamath, an expert in Internet banking and financial services, said the government's growing fiscal deficit is likely to force a crisis soon. "There are several states (within government) that can't pay salaries today," Kamath said. "For people who have been watching the government for the last three years, this frog is at full boil."

The emergence of India's computer software and information technology industries has placed additional pressure on the government. Availability of information on the Internet, ranging from real estate transactions to stock prices, helps combat corruption and provides "transparency" of government, as well as corporate activities, Prannoy said.

As a result, people can easily compare the efficiencies of free enterprise ventures versus their government-sponsored counterparts, Malhotra said. The Internet consultant noted that Air India has a bloated work force for its small fleet relative to Delta Airlines. An Air India employee in the audience challenged Malhotra's comparison and some of his numbers by saying the carrier has reduced its staff. But Malhotra held fast, responding, "The point is, there are too many people for too few aircraft."

Entrepreneurial ingenuity has enabled some high technology companies to bypass government, said Iyengar, who advises foreign corporations on doing business in India. He pointed to Malhotra as an example of that. In 1977, when Malhotra sought permission to sell computers, the government agency regulating electronics instructed him to wait four years for a taxation policy. Malhotra avoided the delay by approaching another agency, one that governs "accounting devices."

During the question-and-answer session, one person in the audience marveled that India, one of the world's poorest nations burdened with an illiteracy rate of 40 percent, produces more computer scientists and software professionals than almost any other country.

Iyengar attributed that phenomenon to well-established career and educational paths. Many Indians recognize accounting, engineering and information technology as areas of opportunity, he explained, and there is an educational system centered on information technology. Inyengar said the collaborative spirit of India's young workers reminds him of the atmosphere in California's Silicon Valley. "We have started to build intellectual capital," Iyengar said. "That will ensure a larger rate of growth."

Although India has exported workers to other nations during the past 1,000 years, Kohli said, some of its computer scientists have returned home in recent years. The estimated 20 million Indians living abroad are far wealthier than those remaining in their homeland.

"The ability to sell the mind is a productive process. It's the process of globalization," said Kohli, an electrical engineer who is an expert in computers. "If you send people out and bring them back, they return with a lot more knowledge than they started with. They share that with the people."

Although corruption is part of the daily routine, evidenced by bribes to bureaucrats for train tickets and telephone connections, Malhotra said, attitudes are starting to change. "People in India are realizing they can make more money from business than from taking commissions," he declared.

Other positive signs for India's future include:

  • The economy is growing at an annual rate of 6.5 percent.
  • The Nasscom-McKinsey Report projects the software industry will balloon from $2 billion to $87 billion in 2008.
  • Five-to-six year old software companies are becoming increasingly sophisticated.
  • Privatization of the petroleum, telecommunications and media industries alone could reduce the government's $250 billion debt by $200 billion.
  • Throughout the '90s, foreign investors have found it easier to launch new projects in the subcontinent.
  • Thousands of Indian entrepreneurs are seeking venture capital to start new businesses.

"India is like the Wild West," Malhotra said enthusiastically. "There's lots of people ready to fire with their guns, staking their territory."

Moderator
Prannoy Roy, President, New Delhi Television
Speakers
Sridar Iyengar, Chief Executive Officer, KPMG India
K. V. Kamath, Managing Director and Chief Executive Officer, ICICI Limited
Faquir C. Kohli, Deputy Chairman, Tata Consultancy Services
Arjun Malhotra, Chairman and Chief Executive Officer, TechSpan
Phaneesh Murthy, Senior Vice President and Head of Sales and Marketing, Infosys Technologies, Ltd.
1:15 pm
Michael Milken urged an audience of 1,400 to harness the remarkable strides the biotechnology industry has made during the past decade to eliminate diseases that kill millions of Americans annually, including cancer and heart disease.

In a 45-minute speech entitled "The Promise," which was part science lesson and part call to action, Milken said discovering medical solutions could be this generation's gift to the future.

"Why do we have this commitment to future generations?" he asked. "Because of our humanity and love and caring for other human beings that makes life worth living."

While talk of eliminating cancer or heart disease would once be dismissed as little more than a pipe dream, tremendous advances by the biotech industry now make this realistic, he suggested.

More than 56 percent of the deaths of women aged 45 to 64 and 61 percent of men in the same age group are attributable to cancer and heart disease. "It's a large market - a large problem to solve," Milken said.

Milken, himself a cancer survivor, is Chairman of CaP CURE, the Association for the Cure of Cancer of the Prostate, the largest non-governmental funder of prostrate cancer research in the world.

While biotechnology firms have tremendous potential, investors had virtually ignored this sector until recent months. After peaking in 1992, the value of biotech indexes languished virtually unchanged for more than seven years - making venture capital hard to find.

Until last year, the total value of the top 80 biotech companies had a lower market value than pharmaceutical giant Merck & Co. But that all changed last fall when those biotech companies began skyrocketing. Their value has now jumped from $150 billion to $350 billion.

"For the decade of the 1990s biotech outperformed the pharmaceuticals and that all occurred during the past four or five months," Milken said.

The reason for the recent explosion is that much of the science, which was more than a decade in the making, is finally coming to fruition.

"There's a realization that technology allowing the mapping of the human genome is on the verge of occurring during the next few months," he explained. "An information base that will tell us some secrets of 3.7 billion years of evolution."

Unlike traditional medicines that deal with symptoms, biotechnology drugs and vaccines offer much greater potential. "The focus is on the cure, not just treating the symptoms," he said. "These are products that actually eliminate disease rather than products to take because of the disease."

More than 80 drugs and vaccines have already been approved, while another 350 are being tested on humans.

The breakthroughs could have profound financial implications. "There's a potential value of $40 to $50 trillion for solving problems of cancer and heart disease."

While biotechnology could eventually eliminate these killers, Milken urged his audience to take measures of their own in the meantime. "One thing to do is to change our diet," he said, urging a reduction of fatty foods and increased intake of fruits and vegetables.

"Fifty-four percent of Americans are overweight while 12 percent of the world is starving," he said.

And while Milken lauded the opportunity that the new sciences offered, he warned that dangers inevitably come with new discoveries. He pointed out that just $1 worth of a deadly biological agent could be used to cover a 1-square kilometer area. "It will take all of our collective wisdom to determine what [this science] can be used for."

Despite those concerns, the emphasis was clearly on biotechnology's promise. "[We can] use technology wisely to eliminate cancer and heart disease for future generations," he said. "Just like smallpox, that claimed more than 2 million lives around the planet in the 1960s, has been eliminated."

Speaker
Michael Milken, Chairman, Milken Institute
2:45 pm
Real-estate markets throughout the world will continue to have their booms and busts, panelists said. But some speculate the perception of volatility will be greater than reality because experts are now better able to measure a market's ups and downs.

"I am an investor in international real estate because you can find opportunities where you can do a cash-flow deal," said Philadelphia real-estate Professor Peter D. Linneman, when asked whether he would invest in real-estate holdings abroad.

Panelists outlined several global markets where real-estate investments have struggled over the past decade. John F. Tsui expressed much concern over Asia, which was hardest hit by the world's real-estate crisis. Throughout Asia, real-estate deals have crumbled and foreign investors have often stayed away. Marriott and other chains recently visited the region. "How many deals were done? Zero," Tsui said.

"For what people paid for Pebble Beach, today, with that money, you can pick up 150 to 250 golf courses" in the Pacific region," he said.

Problems in Asia run the gamut. In 1998, nonresidential construction orders in Japan dropped from about 12 percent to 7 percent, though they rebounded slightly to 8 percent last year. Only three Thailand banks remain out of 15, and more than $80 billion worth of assets are log-jammed in the Indonesian system, Tsui said. The "easy money" days in Hong Kong and Singapore are over. And he predicted land values in Japan would continue to plummet.

Jean-Michel Paul stressed that the highly indebted Japan, which has done very little reform over the past decade, has two main options to cure its ills. Japan could stop paying interest on its debt, or print enough money to get rid of it, he said. Paul called the latter method the "most likely prospect" for the Asian country.

Real-estate hounds can make good deals in Europe, panelists said, but not all countries are the same, and Europe has more barriers than other parts of the world. "Europe is a little like a roach motel," Linneman said. "It's not so hard to get in, but it's hard to get out."

Panelists noted that rapid economic and technology changes are fueling changes in global real-estate markets as well. In 1900, one country - the United Kingdom - boasted 50 percent urbanization. Today, more than half the countries in the world are more than 50 percent urban, said Bertrand M. Renaud, a World Bank advisor.

Panelists also addressed how the Internet would affect today's volatile real-estate markets. "Very soon you will have video tours of all the apartments you want on a high speed datalink," Paul said of searching for housing in Singapore, where he is based.

Linneman quelled any fears that cyberspace companies will eventually eliminate the need for office or warehouse space. Square footage of technology companies is much higher than that of non-technology-based companies, he said.

"And this notion that everyone is going to work at home... I can barely get my employees to work at work," he said. "[At home], they've got the dog, the cat and Oprah."

At least two panelists said they would invest abroad, and three of four speakers said they predict less violent booms and busts in future real-estate markets as ties between banking and real estate are weakened.

Moderator
Robert H. Edelstein, Co-chairman, Fisher Center for Real Estate, University of California, Berkeley
Speakers
Peter D. Linneman, Professor of Real Estate, Finance, and Public Policy and Management, The Wharton School, University of Pennsylvania (Philadelphia)
Jean-Michel Paul, Head of Research Asia-Pacific, Rabobank International (Singapore)
Bertrand M. Renaud, Advisor, Capital Markets Development Department, The World Bank (Washington, DC)
John F. Tsui, President, Peninsula House, Inc. (New York)
2:45 pm
Countering the perception of Europe as an economic laggard, the continent is actually enjoying steady growth fueled by technological advances and a growing entrepreneurial spirit, a panel of experts suggested.

"This is the beginning of a growth period that is not all that different from the beginning of the U.S.'s growth period," said Klaus Friedrich. "This is not just a cyclical upswing. There are structural reasons for this to be sustained." Those reasons include the adoption of many of the technological advances that first appeared on this side of the Atlantic, trade advantages of a single currency and a commitment to control the inflation that frequently haunted the region.

But perhaps most important is a widespread change in European culture to welcome entrepreneurs. Fast-growing start-up firms are becoming a larger part of many countries' economic fabric, and U.S.-style incentives, such as stock option awards, are becoming more accepted.

"Two and a half years ago, shareholder value was a dirty word in Germany," Friedrich said. "Today it is unchallenged that our corporations will do anything for shareholder value and the public will applaud." Germany is not the only nation to welcome those ideas.

"The ability to accelerate the rate of change is huge and the opportunities are enormous," said Jeff Watson, who is based in Ireland, Europe's fastest growing economy. Watson noted that Ireland has embraced high-technology education and provided corporate tax incentives to become a magnet for many computer and Internet companies.

Despite the generally upbeat predictions for Europe, some challenges still remain, noted Mustafa V. Koc. Several governments continue to subsidize dying industries in what he perceives as a misguided attempt to save jobs. And though technology has been embraced, there remains a sizable gap with American competitors, he noted.

What's more, Europeans have been slow to take full advantage of the trade opportunities that the European Union and its Euro currency present, said Stephan-Goetz Richter. He noted that it's much easier to find German-American or British-American trade organizations, for example, than to find an Irish-French group. He also noted a reluctance to adopt American-style solutions to retirement issues. Europe's aging population will soon be making huge financial demands on many European pension systems.

"[European governments] are resisting ideas such as 401(k) plans," he said. Despite those concerns, there are more positives in Europe than negatives, noted moderator William Emmott. Over the past decade, Europe's economy has grown at a respectable rate of 2 to 3 percent and some forecasters expect that to accelerate. Mergers and acquisition activity is starting to increase and that is expected to continue. "There's a lot going on in Europe," he said.

The upbeat times are spilling over to provide more than merely financial benefits. Long simmering tensions between Turkey and Greece have been reduced as Turkey eyes entrance into the European Union, a prospect that is likely to come to fruition within a decade, Koc said.

"Turkey and Greece have realized that they must co-exist," Koc said. "There is so much synergy between the countries. Currently trade volume between the countries is only $400 to $500 million annually. If that could be increased to $2 to $3 billion it would be very difficult for politicians to use those tensions for political use."

Moderator
William Emmott, Editor, The Economist (London)
Speakers
Klaus Friedrich, Chief Economist, General Manager Group Economics, Dresdner Bank Group (Frankfurt)
Mustafa V. Koc, Chairman, Turkish-U.S. Business Council/DEIK (Istanbul)
Stephan-Göetz Richter, President, TheGlobalist.com (Washington, DC)
Jeff Watson, Chief Information Officer, ENBA.com (Dublin)
2:45 pm
Destruction of the traditional control system is in the works in China and the central government's role in the economy is shrinking, said Richard Paul Margolis. Today, the average person can shop in the free markets and buy daily family necessities. Even health care and housing are moving toward economic pricing. These facts, certainly not the case 20 years ago when the nation had a government-controlled, non-monetary economy, best sum up the biggest changes in China. But, Chinese leaders face monumental problems.

"There is a divide in China," he said. On one side is the grass roots; people who do well by what's good about China. Then there are those who do well by what's bad about China. The government is positioning itself as an ally against the latter - and that is the impetus behind the current push to fight corruption.

"I believe that the alliance of the grass roots and the central government is one of convenience, driven by necessity," Margolis said. "Over time, this alliance will win out, but not without a fight."

Minxin Pei believes that China will be able to maintain its political stability, but sees long-term problems.

"Political capital is eroding. The long-term institutions to sustain stability are not there," he said. "The gap between the political and economic situations has never been as wide as it is today." In the next five years if China misses the opportunity for reform, the "China miracle" may disappear.

Pei is worried by four developments.

Corruption is the first. "Part of the ruling elite is so entrenched in the current system, and they are enriching themselves at the expense of the future of the country," he said. Corruption costs China 45 percent of its GDP, with higher indirect costs. Financial systems are at risk and the high corruption tax imposed on businesses in the form of higher costs is stifling growth.

"The government is totally incapable of fighting corruption," he said. The punishment rate among convicted government officials is alarmingly low and few members of the deeply entrenched Communist Party are ever expelled.

Second, China lacks the necessary legal and regulatory systems to serve a more integrated economy. Property rights are weak and markets are threatened.

Third, the environment is at risk. Nearly 80 percent of the water is polluted and the land has been denuded of resources.

Finally, Pei cited the growing gap between the government and the people. Legal and political reforms over the past 20 years have given people some voice in the political systems, "but the current legal system does not have the necessary political participatory processes for people to have their voices heard by the political regime."

Still, he noted, China has a window of opportunity to start the reform process for several reasons. The leadership will change in three years. Newcomers are more risk averse and have strong reform tendencies. Opposition forces are weak and divided. The people still give their government "some slack." The government enjoys "legitimacy by default" because there is no credible alternative.

The World Trade Organization is also a factor. China's entry, if successful "will reduce the linkage between the state and the economy and, thus, the Communist Party."

Regarding the WTO, Randall Peerenboom noted that the organization will impose some requirements for the government to make its laws more public. But China still must address the problem of inconsistent laws that affect authority throughout the country. "The WTO is not likely to address that type of institutional problem," he said.

Peerenboom predicts that the WTO will lead to economic reform, if passed. "But the WTO and human rights issues should be kept separate."

Moderator
Frank B. Gibney, President, Pacific Basin Institute
Speakers
Richard Paul Margolis, First Vice President, China Strategy, Merill Lynch (Asia Pacific) Ltd. (Hong Kong)
Randall Peerenboom, Acting Professor of Law, University of California, Los Angeles
Minxin Pei, Senior Associate, Carnegie Endowment for International Peace (Washington, DC)
Richard Tan, Chief Executive Officer, Pacific Millennium Corporation (Hong Kong)
2:45 pm
Part of understanding the "U.S.-Mexico Connection" is unraveling some of the stereotypes people have about Mexicans, Mexican-Americans and their activities.

Millicent Cox, an economist in San Diego, said the vast majority of Mexicans who enter the United States do so to work, shop, buy groceries and visit friends — all on a legal basis. "Crossing the border isn't about illegal entries," she said. "Fewer than one percent are denied or are undocumented."

Oddly enough, Imperial County, which borders Mexico east of San Diego, is considered to be among California's poorest counties, Cox said. Yet Imperial County collects a high amount of retail sales taxes because it attracts shoppers from Mexico. About 40 percent of the county's workers commute from their homes in Mexico, Cox said. "They're contributing to both sides of the economy very strongly."

In another twist outlined by Cox, many residents of Imperial County go to Baja California for training in such fields as engineering and high technology. "They don't go to San Diego or Yuma. They go to Mexicali," she said. "Baja has the highest level of training and education in all of Mexico."

Albert C. Zapanta, said results of the NAFTA trade agreement and the proliferation of "maquiladoras," or U.S. factories, just south of the border are helping improve the standard of living of some Mexicans.

"The Delphis and General Motors are actually building housing for their workers," Zapanta said. In some cases, U.S. companies are providing education, medical clinics, specialized training and infrastructure, such as sewage and water, he said.

NAFTA, the treaty that helps deregulate trade and commerce between the United States and Mexico, has greatly benefited the economies of both nations, said Harvey Rosenblum.

About 85 percent of Texans supported NAFTA versus only 58 percent of Californians, making California "neutral" in Rosenblum's mind. "Texas has viewed Mexico as an important economic partner for some time," he said. Although Rosenblum acknowledged NAFTA hasn't resulted in pure free trade, it has eliminated many economic barriers between Mexico and the United States. "The nation's automotive industry would be dead if it weren't for NAFTA."

Zapanta said some industries, such as textiles, that abandoned the United States to find cheap labor in Asia are now returning to the Americas and setting up factories in Mexico. "This return to Mexico is helping U.S. companies," he said.

Maquiladoras now employ 1.1 million people, up from 212,000 in 1985. If the maquiladoras were to form a separate state, Rosenblum said, the resulting economy would be the second largest behind California. "Now the two economies (of Mexico and the United States) are integrated."

Richard Santos, a voice of caution among the experts, said, "The integration has been uneven. I think NAFTA is one-sided."

He contends that the case of Mexican Americans living in New Mexico is far different. "We have the highest poverty rate in the nation," he said. He also described the region of Texas south of San Antonio as having one of the nation's highest poverty rates. "I call it the Mexican-Dixon line." In addition, New Mexico's unemployment rate - 9.9 percent - is among the highest in the United States.

Santos stressed the disparity of wealth between Mexicans who work for U.S. companies in Mexico and Mexican Americans who are unemployed and underemployed in the United States. "Some basic necessities aren't being met," Santos said, describing regions of the Southwest that woefully lack economic opportunities. "You're still in an environment where about 35 percent of Latino children are poor, where about 25 percent of Latino youth drops out of school."

Many young Latino men are faced with the same choice whether or not they complete high school, Santos said. "If young Latino men drop out of school, they can work for Wal-Mart for $5.25 an hour. Or if they finish school, they can work for Wal-Mart for $5.25 an hour."

Zapanta acknowledged that border relations are far from perfect, given the smuggling of drugs and undocumented aliens, some of whom might be HIV-positive. And Mexico itself is coping with many problems. "Yes, there's corruption. Yes, the legal system is in a state of flux. Yes, their banks are broke. It's not perfect, but it's in the right movement," Zapanta said, praising governmental leadership that favors free enterprise.

While many people focus on the growing population of Mexican Americans within California, Arizona, New Mexico and Texas, Zapanta and Rosenblum challenged the theory that "demographics is destiny."

Labor shortages mark the U.S. economy throughout history, Rosenblum said. "It's across the board in every skill, from engineers to gardeners. We're a magnet for human capital and financial capital," he said, noting the United States has a unique way of doing commerce. "We're even off-loading jobs -- so a health-care company in Boston can send its bill-processing to Ireland and India, and the company can postmark their bills in Boston."

Sometimes the pattern of Mexican migration is surprising. Zapanta said hog farms in the Carolinas and construction companies in the Southeast are importing workers from Mexico. "I joke that there are more Mexicans in Chicago than in New Mexico," Zapanta said, thanks to that city's railroad and meatpacking industries.

Moderator
Ross DeVol, Director of Regional and Demographic Studies, Milken Institute
Speakers
Millicent Cox, Consulting Economist (San Diego, CA)
Harvey Rosenblum, Senior Vice President and Director of Research, Federal Reserve Bank of Dallas
Richard Santos, Associate Professor of Economics, University of New Mexico (Albuquerque)
Albert C. Zapanta, President and Chief Executive Officer, U.S.-Mexico Chamber of Commerce (Washington, DC)
4:15 pm
"Things are going well," said James D. Atwell, a partner at Summit Partners, a venture-capital firm in Palo Alto, CA.

That statement summed up the mood of five panelists, all of whom are involved in some way with the growing - or glowing - venture-capital industry, which has gained constant attention with the creation of technology-based companies in California and elsewhere. At the outset of the more than hour-long session, speakers outlined several trends relating to venture capital.

Brenda Gavin, President of S.R. One, Limited, a financial subsidiary of SmithKline Beecham near Philadelphia, said venture capital is everywhere - across the United States and abroad. "There's definitely life beyond Silicon Valley and Route 28," she said. Venture-capital firms have also become more competitive and less collegial, with more money to handle.

Mark Heeson of the National Venture Capital Association that represents 370 professional venture-capital firms in the United States, noted that the biggest change is in the amount of money these firms are raising -- $8 billion in 1994, $29 billion in 1998 and $43 billion in 1999. Still, there is little change in the number of venture-capital companies. Additionally, he said, foreign and state government representatives contact Heeson's office daily seeking advice on how to acquire venture monies. Heeson said many just "don't get it" - the fact that they have to create entrepreneurs and infrastructure before seeking capital to back them.

Former Intel financial whiz, Avram Miller, noted that people are more important than companies. Venture capitalists, he said, are allowing new businesses to grow and new talents to emerge. And Alan Patricof, whose company has worked in Europe for years, has noticed a strong venture-capital push toward Europe over the past six months. "Global is the word today," he said. He's also seen a boost in angel investing and corporations becoming more active in the venture-capital business.

"We're seeing an enormous wave of entrepreneurial energy in this country, the likes of which I don't think we've ever seen," he said.

Corporations represent 16 percent of the entire venture-capital industry, Heeson said. "I think the corporate investors this time have a much better view of the future and are much more patient," he added.

Moderator Anthony B. Perkins asked panelists if venture capitalists will ever run out of money. Heeson replied that 2000 will mark another record year for venture-capital fund-raising. In addition, angel - or individual - investors typically offer five to six times the funds of professional venture-capital firms. That angel amount would total $250 billion, Heeson said.

Panelists recommended that investors focus on long-term returns. Venture capitalists share responsibilities with investors, Heeson said. "They are not going to go out and do something stupid because they have this responsibility. The reality is that venture capitalists are highly educated people in very specialized technical areas."

Some panelists advised start-up companies to create respectable, workable business models for the future, in order to survive. Patricof said that the world can no longer avoid the information superhighway. "Ignore the Internet and you're in peril," he said.

Avram asked venture capitalists to "use [their] creativity and intelligence for something other than making money."

"There are lots of problems can be solved in the world because of the entrepreneurial spirit," he said. "We all have responsibility to use this for us to do some good."

Moderator
Anthony B. Perkins, Chairman and Editor-in-Chief, Red Herring (San Francisco)
Speakers
James D. Atwell, Partner, Summit Partners (Palo Alto)
Brenda Gavin, President, S.R. One, Limited (West Conshohocken, PA)
Mark Heeson, President, National Venture Capital Association (Arlington, VA)
Avram Miller, Chief Executive Officer, The Avram Miller Company (San Francisco)
Alan Patricof, Chairman, Patricof & Co. Ventures, Inc. (New York)
4:15 pm
Russia remains the developed world's biggest economic headache as it struggles with massive structural and cultural problems, panelists said. But a closer look at the nation reveals some small reasons to be hopeful for the future, more optimistic panel members suggested.

"You can be hopeful or disgusted or depressed, depending on how you want to look at the picture," said Stephen Kotkin.

While the hopeful part may take some searching, the disgusting and depressing evidence is easier to find. Russia's GDP has shrunk by a staggering 50 percent since 1992 and unemployment is rampant. Much of the industrial base is hopelessly outdated and foreign investment has virtually dried up.

High on the list of business complaints is a lack of contract enforcement which makes doing business there perilous. The tax system is opaque and accounting standards are lacking. But the biggest problem, according to Kotkin, is a corrupt state bureaucracy. "The Russian state bureaucracy is the biggest parasite," he said. "It's a Mafia — a bribe-collecting apparatus. The Russian State, which is supposed to be a solution, is the problem."

While no one disputed Kotkin's assessment, said Boris Berezovsky, Russian people are finally starting to adapt to the rigors of a market-based economy even if it is steeped in problems. After decades of counting on the Communist State for jobs, education, housing and virtually everything else, a new spirit of self-reliance can be found among younger Russians, Berezovsky said. "Now, young people realize that they must take care of themselves," he said. "This new mentality is the biggest hope for Russia."

As the owner of a 9 year old telecommunications company in Moscow, American Frederick Andresen has seen that spirit among his own employees.

"We employ 70 people in Moscow and I've never seen a more dedicated, resourceful and loyal group of people in my life," he said. "Russia's greatest asset is not oil or gas. It's the people."

Given the opportunity, many Russian businesses could flourish, Andresen suggested. "The small business sector is yearning to be free," he said. But some basics must change before that can happen, he added, mentioning a transparent legal system and a banking system to provide badly needed credit.

These microeconomic problems are being played out against larger changes in Russia, some of which offer hope, said Ian Bremmer. After a decade, Russians are committed to democratic elections and the Communists are literally dying off, Bremmer said. But elections alone won't solve Russia's structural economic problems that date back decades, Kotkin said. Dated state enterprise frequently relies on 1930s technology. "They have a time warp economy from a different era," he said.

This "Rust Belt" industry needs triage, he said. Hopelessly outdated factories should be shuttered and the remainder should be updated, he said. So far, less than 35 percent of the "old dinosaurs of the old economy" have been restructured, he continued. Looking forward to upcoming elections, the expected re-election of President Putin is unlikely to radically alter the landscape. Whoever emerges as leader faces virtually unsolvable challenges, Kotkin said.

But Berezovsky urged the United States to provide assistance during Russia's transformation. "Russia by itself can't overcome centuries [of problems] to become like a Western country. It needs help."

Andresen also supported an active American role in Russia, in part due to geographical concerns.

"It's very important to work closely with Russia," he said. "Remember, after Mexico and Canada, they are our closest neighbor."

Moderator
Michael Intriligator, Senior Fellow, Milken Institute
Speakers
Frederick Andresen, Chairman, DirectNet Telecommunications (Moscow)
Boris Berezovsky, Member, Russian Parliament (Moscow)
Ian Bremmer, President, Eurasia Group (New York)
Stephen Kotkin, Director of Russian Studies, Princeton University
4:15 pm
The question on policy makers' minds, from Alan Greenspan to presidential candidates, is how to sustain the current economic boom. With concern about tight labor markets high, the American minority workforce represents a solution.

"Unless this workforce can be tapped, the lack of labor will act as a brake on economic growth," predicted Glenn Yago.

He also noted that the much-heralded prosperity is not universally shared. Minorities represent 26 percent of the population, yet only 12 percent of the nation's businesses, and they receive only 6 percent of the economy's total sales. These statistics reveal the inequality of economic growth.

Phil Angelides concurs. "The story of Silicon Valley is not the story of the San Joaquin Valley." California is the most vibrant state in the richest nation, yet it has the fourth greatest gap between rich and poor. And just three months ago, 72 percent of Californians said they expected the income gap to widen.

"Upside-down" federal policies created some of the problem by denying capital to urban areas, Yago reported. Banks are expected to lend money, but rules against risky lending restrict them from giving entrepreneurs a chance. Federal subsidy programs are directed toward places, not people. Of 90 programs across 14 federal departments, $9 billion per year is targeted at inner cities with only 9 percent directed to capital-structure development.

Despite disadvantages, the size of minority business markets is huge: Black-owned firms account for $32.2 billion in sales; Hispanics, $72.8 billion; and Asians, $99.7 billion. Their numbers are growing and their sales are increasing.

When compared with emerging international markets, emerging domestic markets have lower risk factors, with no political or legal contract or currency risks.

One key to success is to increase lending and use securitization techniques to increase liquidity to loan originators.

Angelides has been trying to use his office to try to direct $6 billion in public programs toward communities that still struggle with capital. "We are trying to target those funds like a laser where there is an absence of capital."

His office agreed to buy $1 billion in CRA funds to provide more money for home ownership. It has increased deposits in community banks so they can create economic activity where the markets have passed them by. He hopes to securitize SBA loans with the first sales of $50 million this year.

"I believe opportunities exist, but finding them will take great effort. That's where public and private leaders have a role to play," he said.

Echoing the sentiment that prosperity is not universal, Daniel Villanueva noted that in addition to access to capital, information and new skills are needed. "Networking is critical, but the possibilities do not exist in the inner city," he said. People must also learn to be entrepreneurial. "You can bring in investors, but as fast as they come in, they can leave."

Marianne Camille Spraggins sees the initiative. A new class of minority employees working in major corporations are perfectly poised to buy their divisions and run major businesses. "But the question returns to capital. They are lonely people. And the talent is there."

Nell Merlino hopes to generate that needed capital for another overlooked population segment: women. The originator of the successful "Take Our Daughters To Work" campaign that opened the eyes of girls about their mothers' economic contributions, Merlino hopes to use the Internet to inspire men and women to contribute as little as $5 to create a multimillion fund to distribute as small loans and scholarships. She pointed out that of $12 billion in venture capital that poured into new businesses in 1998, only 1.7 percent went to women. She also wants to rewrite credit-scoring rules to make information about borrowers more available so discrimination can be addressed.

Time to make changes is running out, noted Spraggins. "The magic year is 2050 when who is majority and who is minority is reversed."

Moderator
Glenn Yago, Director of Capital Studies, Milken Institute
Speakers
Philip Angelides, Treasurer, State of California (Sacramento)
Nell Merlino, President and Co-founder, Count Me In For Women's Economic Independence (New York)
Marianne Camille Spraggins, Senior Managing Director, Smith Wiley & Co. (New York)
K. Robert Turner, Managing Partner, Canyon Capital Realty Advisors LLC (Los Angeles)
Daniel Villanueva, Chairman and President, Bastion Capital Corporation (Los Angeles)
4:15 pm
The conclusion of some of the world's top economists that Africa remains poor because it "didn't listen to the West," is a typical, but understandable outsider's view. To insiders, native African financial experts, the reasons for their great continent's lack of industrial development and persistent poverty, are far more complex.

"In many respects Africa listened too much to the West," said Adebayo A. Alade-Loba. In accepting the advice of the World Bank and International Monetary Fund to reduce their exchange rates during the 1980s, many African nations badly damaged their mostly agricultural economies, which are at the mercy of fluctuating commodity prices.

"This advice reduced income per capita. It reduced economic growth," Alade-Loba said.

George B.N. Ayittey agreed that Western-style financial advice compounded Africa's problems.

"We have to be extremely careful when we use the word 'African.' We have to make a distinction between African government leaders and the African people," Ayittey said. "African leaders are the problem, not the people. The West should not be speaking to the leaders, but should be speaking to the people."

Roger B. Jantio said Africa didn't fail economically for want of listening to the West or following advice. "The West couldn't have understood Africa. The African problem is pretty much structural."

During a recent trip to Chad, one of the world's poorest nations, Jantio said, he was overwhelmed by the hot climate and lack of infrastructure, such as clean water and passable roads. He was also shocked by the country's limited productivity. "If we gave Chad to the West to run for 10 years, I don't think they could have done better."

Frank McCoy who moderated the African experts' discussion, said he would like to see the question mark removed from the panel's title, "African Dawn?"

"Too often, the news out of Africa is bad," McCoy said, citing a list of dire problems, such as famine, the AIDS epidemic, tribal warfare, poverty and political instability. In contrast, the good news goes unreported, he said, noting that floods in Mozambique made headlines recently, while its 10 percent rate of economic growth for 1999 was virtually ignored.

"We hear about all the disasters," McCoy said, "but many states have achieved positive growth rates in the last few years." What gives him hope for Africa's future, McCoy said, is the desire of some Africans who have worked and studied in the United States, to return to their homeland to start businesses.

Ayittey cautions against such action unless entrepreneurs fully research the obstacles they might face and identify constraints. Many governments don't respect property rights, enforce existing laws, offer political stability or fight corruption, he said. "There are 60,000 African professionals who have left Africa," Ayittey said. "It's a good sign that some are returning . . . but there isn't an enabling environment in a vast majority of African nations."

Jantio said he knows entrepreneurs who are thriving in Africa despite the constraints. "I agree that the environment is difficult," he said. But "unless we have a positive outlook, this growth won't come in."

Alade-Loba noted that even nations in the industrialized West can't claim to have judicial systems and other institutions that are free of cliques and special interest groups. "We want to encourage young entrepreneurs to return to Africa and work with an imperfect system," he said. "Maybe they'll meet other like-minded people and form an alliance that will forge change."

With their democratic governments, South Africa and Nigeria may be the two nations that lead the continent toward economic renewal, Alade-Loba said. South Africa's stock market is the strongest, accounting for about 75 percent of all the trading among the continent's 17 stock markets. Combined, those equities markets accommodate more than 2,000 listings, and a new regional market has emerged.

"There have been more than 2,000 privatizations in Africa in the last seven years. Those companies are going to be the bedrock of the market," Alade-Loba said. In addition, more privatizing during the next five years will boost the market.

As far as African debt is concerned, Alade-Loba suggested that the World Bank and International Monetary Fund consider relieving the poorest nations of their obligations while restructuring loan terms for the slightly richer countries.

Ayittey said debt elimination or restructuring should be considered only for those nations that have democracies and provide a full, public accounting for how the money was spent. He also recommended that those African leaders who stole money be forced to repay it, a condition that, he acknowledged, may not be practical.

Moderator
Frank McCoy, Senior Editor, U.S. News & World Report (Washington, DC)
Speakers
George Ayittey, Professor of Economics, American University (Washington, DC)
Roger B. Jantio, Managing Director, Sterling International Group, Inc. (Washington, DC)
Adebayo Ogunlesi, Managing Director, Credit Suisse First Boston (New York)
7:00 pm
Technology is the thing you want to make disappear. You want people to buy services and products and not think about technology," declared George Vradenburg III.

But most people cannot ignore the fact that technology has spawned exciting innovations that are changing a lifetime of habits.

"I'm particularly interested in the hundreds and thousands of way that technology will change our lives that we cannot yet imagine," said Jeffrey Cole. For example, the long-term memories of our lives will change, based on the images that we are preserving. Digital camera makers have discovered that their customers use the instant-image camera primarily to photograph other people. They use traditional cameras to capture landscapes and other still-life images.

Interestingly, he noted, many capabilities created by the Internet can be regarded both positively and negatively. It allows people to find each other; but it brings together bad people. It allows anyone to be a journalist in a time of decreasing newspaper ownership, but it makes almost anyone a journalist.

Bill Owens looks forward to sharing technological developments with "half the world that has never even seen a telephone." While Americans speak about global opportunities, we usually concentrate commercial efforts in the domestic marketplace. "I think we can use knowledge-sharing to crosscut global issues and contribute broadly to many of the problems facing mankind."

Peter W. Huber looks forward to the "elimination of transactional friction" and the new ease in completing two-way interactions.

Noting the huge gap between lofty uses of technology and how the bulk of the nation uses the Internet, Peter Chernin cited the "silly effects" of technology, "the extraordinary amount of time that people spend chatting online and, not surprisingly, the amount of time people spend in pornographic sites.

AOL's Vrandenburg concurred, noting that one-quarter of his subscribers' use is chat-room activity. (And not pornography, he noted.) Much of it is centered around health care.

"The single biggest change from a consumer perspective is the death of the middle," he said. Chernin noted that Americans have historically participated in mass experiences - the Super Bowl and "Titanic" type movies. That's still the case, but many have also migrated to the tiny niche events, such as online adventures. "The whole middle ground is just gone, and gone forever."

Technology is a powerful influence on other societies. "The single biggest change is the power it has put in the hands of the individual," reported Cole. "We see information being used against repressive governments" such as Indonesia and the downfall of Suharto. He noted the evolution of attitudinal changes toward technology and politics.

While consumers and businesses are embracing technology and the Internet, the government has failed to keep pace. The worst example, said Vrandenburg, is in the educational system. "Classrooms look like they did 50 and 100 years ago." He predicted that schools will eventually be wired, but then the hard part will be changing teaching styles, curriculum and getting people comfortable with technology. "We can change technology faster than we can change people. We'll need a more comprehensive and holistic approach to introducing technology into the educational system."

The government has also failed to invest in technology for defensive purposes, Owens said. "Defense budgets are still based on ships and planes. The amount of money going into information technology as a percentage is decreasing as the budget is decreasing. If you want to worry about something, worry about that."

Moderator
Donald Straszheim, President, Milken Institute
Speakers
Peter Chernin, President and Chief Operating Officer, News Corporation, (Los Angeles)
Jeffrey Cole, Director, UCLA Center for Communication Policy
Peter W. Huber, Senior Fellow, Manhattan Institute for Policy Research (New York)
Bill Owens, Co-Chief Executive Officer and Vice Chairman, Teledesic LLC (Bellevue, WA)
George Vradenburg III, Senior Vice President of Global and Strategic Policy for America Online, Inc. (Dulles, VA)
Friday, March 10, 2000
7:30 am
Although the United States is still coasting on what experts call an "extraordinary" nine-year economic expansion, the ride could get bumpy. Rising interest rates, a stock market crash, increases in oil prices and other commodities could threaten the current growth environment, several economists and business leaders said Friday at this session, "United States Overview 2000."

Despite their concerns, Martin N. Baily, Jerry J. Jasinowski and David Milton Jones foresee some stumbles in the current expansion path.

While Baily, Jasinowski and Jones relied on statistics and economic indicators to anticipate problems, Henry Cisneros cautioned that the United States could be blindsided by external events and psychological forces.

Cisneros reminded the audience that turmoil in Mexico, Asia and Russia has disrupted progress at home in recent years. A breakdown in Middle Eastern peace talks "has the potential to intrude on this period [of expansion]," he said. "Over the long term, this period could be impacted by social issues, aging, health costs and Social Security."

There is also danger in underestimating how higher commodity prices affect average workers, Cisneros said. "Oil prices seep through to the old economy. It affects things we buy like plastic and transportation." Even the perception of price increases for daily necessities or the possibility of an energy crisis could curtail consumer confidence and spending, he warned.

Jasinowski, an economist who represents manufacturers, expressed the most concern about commodity prices, and he opposes an increase in interest rates. "Real interest rates are now at six percent. That's the highest in 18 years," he said. "Most of our recessions are caused by inflation and interest rates getting out of control. High energy prices are a drag on the economy. That could slow growth. That could impact earnings."

Baily called the increase in oil prices "a bump in the road." Thanks to previous energy crises, which shocked manufacturers as well as consumers during the 1970s, U.S. industry adapted. Oil now accounts for 3.5 percent of gross domestic product, he said, down from 8 percent 20 years ago. "We'll see a peak in oil prices. It will show up in inflation at the wholesale and retail levels during the next several months," Baily predicted. "Then they'll come down."

The combination of low unemployment, about 4 percent, and low inflation, just under 2 percent, Baily said, makes the current economy unique. "Most expansions have ended because of rising inflation which leads to higher interest rates." Productivity is now growing at an average annual rate of 2.9 percent, up from 1.4 percent in 1995.

This increased productivity and greater prosperity among workers is reminiscent of the period following World War II, Baily said. Although inflation remains low, the Federal Reserve is likely to raise interest rates to maintain that trend, he said.

So-called full employment and improved wages have enhanced consumer confidence. "That has given us strong supply and even stronger demand," Baily said. "We've had extraordinary investment growth." Another reason the Federal Reserve may boost interest rates is to ensure demand won't outrun supply, thus driving up prices. "That will help cool off the economy," he continued, "but the fundamentals are very strong."

Jones said, "We have high returns on investments. That's why we have high interest rates." If interest rates rise too high, which would slow the economy, the stock market could tumble further, with the biggest losers being some of the "old economy" stocks, which already have been badly battered, Jones said. At the same time, the "new economy" stocks pertaining to computers and the Internet, might decline to more realistic values within what has become a two-tiered stock market.

Consequently, Alan Greenspan faces a challenging year ahead as he embarks on his fourth term as Federal Reserve Chairman, Jones said. "We do have an asset bubble of sorts. Greenspan can take a chance and let the economy boom and then let it bust next year or try to moderate that growth," he said. "How do you stick a pin in a balloon and let a little bit of air out?"

The experts were troubled by the so-called two-tiered stock market, which seems to punish older blue chip corporations while inflating the values of high tech companies. But they are optimistic the gap will narrow. Old companies such as Goodyear and Bethlehem Steel still generate greater revenue and employ more people than current market leaders like Microsoft and Intel. "You have to remember that old companies are big users of high technology," Baily said. "There's a great interdependence. Our economy is inextricably linked."

Moderator
Donald Straszheim, President, Milken Institute
Speakers
Martin N. Baily, Chairman, Council of Economic Advisors (Washington, DC)
Henry Cisneros, President and Chief Operating Officer, Univision Communications, Inc. (Los Angeles)
Jerry J. Jasinowski, President, National Association of Manufacturers (Washington, DC)
David Milton Jones, Vice Chairman, Aubrey G. Lanston & Co., Inc. (New York)
8:45 am
"The Internet is an awesome catalyst for creativity and growth and for defining new business models," said Marc R. Benioff. "Ten years ago we all philosophized at conferences on the future of the information superhighway, but we had no idea this would happen. I really think no one has any idea what will happen. It will be overwhelming and will dramatically touch each of our lives personally and professionally."

Uncertainties aside, thousands of companies are moving onto the Internet from traditional bases and thousands more are springing forth fully formed as Internet-only enterprises. For the generation of established business owners, the idea of an Internet presence came as epiphanies. Their stories are both compelling and indicative of the breadth and depth of ecommerce.

For William S. Elkus, the event was a 1994 diagnosis that his seven-year-old son was suffering a genetic disorder. "I read about the Internet and I'd used e-mail, so I decided to form a discussion group so other people could benefit from the information I had gathered about my son," he said. His experience with his Internet discussion group, where people could share experiences, emotions and information anonymously, made him realize that "the Internet was not a toy and would change the world in many significant ways."

Today, Elkus is responsible for turning ideas into an Internet presence. After years of managing other people's money, he got into the venture capital business. His company raised $100 million in its first year and just closed a second fund for $350 million.

Jeff Arnold ran a medical telecommunications company that used faxes as a primary piece of equipment to disseminate information. Today, Healtheon/WebMD is one of the most respected heath care sites on the Internet, bringing doctors, patients and information sources together. Like many other growing online companies, his firm has its specific challenges. Integration is one. Arnold's company is an asset acquirer and has grown to 5,000 employees from 200 in eight months. Adopting technology that is cost efficient is another challenge. Third, he must deal with the problem of fragmentation. In health care, he said, parties often fail to communicate and share information. The result can be wrongful death. "Our challenge is to convince hospitals, labs, doctors and consumers to work together to eliminate fragmentation, reduce costs and improve care."

In Israel, Yossi Vardi humored his long-haired, high-school-dropout son and his friends by taking a look at their Internet project. They were seeking capital. Vardi watched a demonstration of the first instant messenger. "I literally sat down on the sofa, then told my wife this is the biggest thing I ever saw in my life. I predicted that it would take out telephones in a matter of weeks," recalled the founding investor of ICQ, now owned by American Online and used by 66 million people.

Moderator
Martin Greenberger, Senior Fellow, Milken Institute
Speakers
Jeff Arnold, Chief Executive Officer, Healtheon/WebMD (Atlanta)
Marc R. Benioff, Chairman, salesforce.com (San Francisco)
William S. Elkus, Senior Managing Partner, idealab Capital Partners (Pasadena)
Leonard Riggio, Chairman, Chief Executive Officer, Barnes & Noble (New York)
Yossi Vardi, President and Founding Investor, International Technologies/ICQ, Ltd. (Tel Aviv)
10:15 am
Radical change is shaking the underpinnings of traditional financial institutions. To bring this transformation into focus, moderator James Barth asked each of the four panelists to address electronic banking in the U.S. and abroad, the banking crises that have struck 130 countries, the Graham-Leech-Bliley Act, allowing greater interaction between banks, insurance companies and other financial institutions and bank merger mania.

In his discussion of online banking, Eugene Ludwig contended that the banking industry, always in a state of evolution, is undergoing a revolution. But before answering the question of where it is going, he addressed the issue of what is causing the revolution. The answer, not surprisingly, was technology.

Technology is creating a "new financial economy," Ludwig said. He believes that we are on the threshold of an online explosion. In 1999, five million households engaged in online banking. That figure is expected to be between 23-33 million by 2003.

Where is this revolution going? Pressure on financial institutions to innovate is intense. The stone buildings, pillars and metal vaults that represented institutional security are a thing of the past. The future belongs to financial services firms that do business on the web, Ludwig said.

Virtual banks today are few and far between, though they do exist. And panelists believe it's only a matter of time until e-banking becomes more commonplace. In truth, banks were some of the first to enter the electronic age decades ago, foreseeing an opportunity, Eugene Ludwig said. But bad experiences have made the banking industry gun shy. Plus, their products are complex, and the regulatory environment has toughened banks' online entry. And then there's the physical component: Exactly how do banks handle deposits and withdrawals if they go virtual? These things have to be ironed out over time.

In the next decade, Ludwig sees 75% of the world's banking assets being held by 10-12 banks. Coincident with that, technology is giving smaller organizations the power compete with larger ones. This means that bigger institutions will now also have to perform better. Larger entities will sell off businesses that cannot meet the bottom line to smaller companies who can provide better services at a lower price.

"All these three things are changing," Ludwig said. "Banks know that they have to commit themselves to virtual and the fact that they had a bad experience before doesn't matter." Regulators are becoming more hospitable, and in time consumers will witness an increasingly virtual environment for financial transactions.

How will virtual banking affect the Community Reinvestment Act? This legislation, enacted in 1977, encourages banks to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods. Financial alternatives are on the table, said the government's James A. Wilcox. Virtual banks - which operate in a cyberspace neighborhood rather than a physical community - would be asked to undertake some financial education program to help their virtual users.

Panelists raised some eyebrows over whether increasing regulator specialization for currencies, securities, futures and insurance - may be "like a pack of jackals that are incredibly inefficient," Ludwig said. "Things are likely to fall through the cracks." He predicted that the U.S. Congress will revisit this approach later because of an increasing burden on the financial systems. Foreign countries may offer some other regulatory models. The United Kingdom, for example, has a single financial regulator, though different departments within the regulatory arm "have the same communication problems," Caprio said.

The experts failed to close the door on any type of acquisition, implying that anything is possible under the new law. Panelists said a limited number of banks will acquire insurance companies, particularly those in the asset-management business. Some insurance companies may buy small banks. In Europe, cross-border mergers could happen, though France has been hesitant in that regard, said Ronald I. Mandle. And bank mergers across state and country borders could occur, despite the fact that investors disapprove of 60 percent of all mergers, and buyers statistically have inflated expectations of what consolidations will bring. Wilcox forecast that most mergers will happen across products.

In addition, U.S. banks will continue to operate abroad. Bank profits frequently stem from "places where you can't drink the water," Ludwig said. "Profits come from developing nations." Banc Boston and Citigroup have both been successful overseas, he added.

"We will see several very large institutions that will have their fingers in many pies in the world," Ludwig said. Some banks, like ABN Amro in Europe, will likely expand, experts said.

Overall, the World Bank's Gerard Caprio, Jr. predicted much greater consolidation in the years ahead, though poor infrastructure in some emerging markets could slow things down.

And, like Newton's third law of motion states, every action will trigger an equal reaction, Wilcox said. "There will be some losers in all of this, but there will be far more winners," he said. In his discussion of online banking, Eugene Ludwig contended that the banking industry, always in a state of evolution, is undergoing a revolution. But before answering the question of where it is going, he addressed the issue of what is causing the revolution. The answer, not surprisingly, was technology.

Technology is creating a "new financial economy," Ludwig said. He believes that we are on the threshold of an online explosion. In 1999, five million households engaged in online banking. That figure is expected to be between 23-33 million by 2003.

Where is this revolution going? Pressure on financial institutions to innovate is intense. The stone buildings, pillars and metal vaults that represented institutional security are a thing of the past. The future belongs to financial services firms that do business on the web, Ludwig said.

Virtual banks today are few and far between, though they do exist. And panelists believe it's only a matter of time until e-banking becomes more commonplace. In truth, banks were some of the first to enter the electronic age decades ago, foreseeing an opportunity, Eugene Ludwig said. But bad experiences have made the banking industry gun shy. Plus, their products are complex, and the regulatory environment has toughened banks' online entry. And then there's the physical component: Exactly how do banks handle deposits and withdrawals if they go virtual? These things have to be ironed out over time.

In the next decade, Ludwig sees 75% of the world's banking assets being held by 10-12 banks. Coincident with that, technology is giving smaller organizations the power compete with larger ones. This means that bigger institutions will now also have to perform better. Larger entities will sell off businesses that cannot meet the bottom line to smaller companies who can provide better services at a lower price.

"All these three things are changing," Ludwig said. "Banks know that they have to commit themselves to virtual and the fact that they had a bad experience before doesn't matter." Regulators are becoming more hospitable, and in time consumers will witness an increasingly virtual environment for financial transactions.

How will virtual banking affect the Community Reinvestment Act? This legislation, enacted in 1977, encourages banks to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods. Financial alternatives are on the table, said the government's James A. Wilcox. Virtual banks - which operate in a cyberspace neighborhood rather than a physical community - would be asked to undertake some financial education program to help their virtual users.

Panelists raised some eyebrows over whether increasing regulator specialization for currencies, securities, futures and insurance - may be "like a pack of jackals that are incredibly inefficient," Ludwig said. "Things are likely to fall through the cracks." He predicted that the U.S. Congress will revisit this approach later because of an increasing burden on the financial systems. Foreign countries may offer some other regulatory models. The United Kingdom, for example, has a single financial regulator, though different departments within the regulatory arm "have the same communication problems," Caprio said.

The experts failed to close the door on any type of acquisition, implying that anything is possible under the new law. Panelists said a limited number of banks will acquire insurance companies, particularly those in the asset-management business. Some insurance companies may buy small banks. In Europe, cross-border mergers could happen, though France has been hesitant in that regard, said Ronald I. Mandle. And bank mergers across state and country borders could occur, despite the fact that investors disapprove of 60 percent of all mergers, and buyers statistically have inflated expectations of what consolidations will bring. Wilcox forecast that most mergers will happen across products.

In addition, U.S. banks will continue to operate abroad. Bank profits frequently stem from "places where you can't drink the water," Ludwig said. "Profits come from developing nations." Banc Boston and Citigroup have both been successful overseas, he added.

"We will see several very large institutions that will have their fingers in many pies in the world," Ludwig said. Some banks, like ABN Amro in Europe, will likely expand, experts said.

Overall, the World Bank's Gerard Caprio, Jr. predicted much greater consolidation in the years ahead, though poor infrastructure in some emerging markets could slow things down.

And, like Newton's third law of motion states, every action will trigger an equal reaction, Wilcox said. "There will be some losers in all of this, but there will be far more winners," he said.

Moderator
James Barth, Senior Fellow, Milken Institute
Speakers
Gerard Caprio, Jr., Director, Financial Sector Policy and Head, Financial Sector Research, The World Bank (Washington, DC)
Eugene A. Ludwig, Vice Chairman, Deutsche Bank (New York)
Ronald I. Mandle, Partner and Senior Research Analyst, Sanford C. Bernstein & Company, Inc. (New York)
James A. Wilcox, Chief Economist, Office of the Comptroller of the Currency, U.S. Treasury Department (Washington, DC)
10:15 am
Some Asian countries have made a solid comeback from their 1997 financial meltdown but additional fundamental changes are required to prevent a repeat of that misadventure, the panelists said.

"The jury is still very much out on Asia," said Steven C. Clemons, who warned against complacency in the region. "The opportunity for [economic] shocks ahead are still very high."

Much of the discussion focused on South Korea, the nation that has taken the most significant strides in recovery. But even here, major issues have yet to be addressed, Hilton Root said.

The level of debt among the largest South Korean conglomerates remains dangerously high, he noted, pointing to the likes of Daewoo whose debt to equity ratio is 588 percent, Hyundai whose ratio is 341 percent and Samsung whose debt to equity ratio is 193 percent. Other problems include a very rigid labor market, lack of shareholder and creditor rights and only limited judicial improvements. The huge South Korean conglomerates also have balked at spinning off subsidiaries that would be run more efficiently by other managers, he said.

Kap-Soo Oh acknowledged that there is still some distance to go but insisted that the reform effort is well underway and irreversible. "The changes in South Korea are very much fundamental," he said. "I admit that we still have a large number of non-performing loans but they are at a level that is quite manageable."

Oh said the conglomerates, known as chaebols, are in fact shrinking. "We've been telling the chaebols to spin off unrelated businesses and they've been selling quite aggressively," he said.

Linda Tsao Yang said South Korea does deserve credit for being the most willing nation in Asia to tackle its problems. "It's almost unimaginable that South Korea could recover in such a short period of time," she said. "[South] Korea has come the furthest while Thailand and other countries have the further to go."

Other countries with serious problems remaining include the Philippines, Pakistan and Indonesia. Reforms in those countries have come slowly or not at all.

While much of the discussion focused on economic issues such as Gross Domestic Product and debt levels, Yang said the human impact should not be overlooked. "Don't underestimate the pain that has been felt by many of the most vulnerable people who are still suffering," she warned. The episode, which saw many people lose businesses, jobs and homes, "may have planted the seeds for future social unrest."

Picking up on that theme, Clemons said the situation remained so dire in some Asian countries that children were being forced from the classroom in a search for work. "There are no kids in Indonesian schools," he said. "They are on the streets, in factories and in fields, working."

This could have a profound impact later as a generation of uneducated children become adults, he said. A focus needs to be kept on reform, even though some economies are showing signs of strength. "There's been some progress with dealing with 'crony capitalism' but not nearly enough," he said. He noted that if America's free-spending ways were to suddenly stop, killing the demand for Asian goods, the region could be back in the same dire situation it faced just three years ago.

Moderator
Thomas Gordon Plate, Professor, Policy and Communications Studies, University of California, Los Angeles; Contributing Editor and Columnist, Los Angeles Times; and Founder, Asia Pacific Media Network
Speakers
Cliff Cheung, Chief Investment Officer, Prudential Asset Management Asia (Hong Kong)
Steven C. Clemons, Senior Vice President, New American Foundation (Washington, DC)
Kap-Soo Oh, Assistant Governor, Financial Supervisory Service (Seoul)
Hilton L. Root, Acting Director of Global Studies, Milken Institute
Linda Tsao Yang, former U.S. Executive Director, Asian Development Bank (Manila)
10:15 am
Latin America still suffers from its reputation as a region beset by currency crises, high inflation, military coups, drug wars, poverty and widespread instability. On country by country examination, however, a different picture emerges - or, at the very least, individual tiles stand out in the mosaic. Argentina, Brazil, Chile and Mexico are showing signs of financial strength.

"You really have to distinguish among the countries," said Susan Kaufman Purcell. The trend toward democracy and choosing governmental leaders who are more open to free enterprise is part of "the good news" about Latin America that goes unreported, Purcell said. "Mexico is a striking example of political evolution that has gone in a good direction."

Liliana Rojas-Suarez acknowledged that sometimes the public's pessimistic perception of the region sways the experts themselves. She noted that last year her own predictions underestimated the resilience, as well as the growth, of some countries.

"We were forecasting a deep recession in Brazil and a much deeper, slow downturn in economic growth throughout Latin America," Rojas-Suarez said. "Mexico has grown much faster than we expected."

She identified lack of access to capital markets as the biggest obstacle hindering the region's economic growth. Any crisis that hits -- be it Argentina's hyperinflation of the 1980s or the so-called Asian flu depressing commodity prices -- deters any foreign investment. "There was shock after shock."

As governments move toward free trade and commit to making their currency exchange rates more flexible, they can attract private investors and gain access to capital, Rojas-Suarez said. "Policy-makers have to show commitment. The region is divided, but I'm optimistic."

Albert Fishlow said he is encouraged by the momentum to privatize utilities, telecommunications networks and other enterprises during the past 10 years. "Latin America today is very different from Latin America of five years ago," Fishlow said. "The average rate of inflation is less than 10 percent, whereas 10 years ago it was in the four digits."

A strong banking system, which many Latin American nations lack, is crucial to economic stability, Fishlow said. "After every crisis you see reconstruction of the banking system." With a savings rate of 25 percent, Chile is a model of domestic savings that other countries should emulate to strengthen their economies, Fishlow said.

The concept of "dollarization," or adopting the U.S. dollar as a standard of currency, could serve to open up trade and encourage foreign investment in Latin America, Purcell said. But that move may not be practical. Fishlow said dollarization makes the most sense for Canada and Mexico because they are important trading partners of the United States.

More immediate developments -- such as increased use of the Internet and cellular telephones -- may go a long way toward improving the economic and social climate throughout Latin America, Purcell said. "The relative isolation of Latin America has been a curse. This had started to break down with transistor radios, television and fax machines," she said. "The Internet will blow it apart and help strengthen democracy and social justice."

Moderator
John Sweeney, Co-host, Choque de Opiniones, CNN en Espaol (Fairfax, VA)
Speakers
Albert Fishlow, Senior Economist, Violy, Byorum & Partners Holdings, LLC (New York)
Susan Kaufman Purcell, Vice President, Americas Society/Council of the Americas (New York)
Liliana Rojas-Suarez, Managing Director and Chief Economist for Latin America, Deutsche Bank (New York)
10:15 am
Forecasting the weather and the economy have a lot in common. Both are non-experimental scholarly activities that cannot be replicated in laboratory experiments. Both benefit from the speed and quality of new data now available in the Internet age. Best case, pointed out Lawrence R. Klein, meteorologists could extend their forecasts by a half hour. Economists could extend their forecast horizons by a month or two.

Forget time-share models and the validity of extrapolating source data. After all, when the Federal Reserve looks at potential economic growth, its projections can be off by as much as $130 billion depending on the numbers it uses.

The really sexy use information to make forecasts in the Information Age is in predicting where people will be going on the Internet.

"The action is following the mouse and forecasting where it is going," declared Larry J. Kimbell.

He recalled that for 25 years, the business of forecasting was mostly using Gross Domestic Product data and analyzing it from a macro-econometric perspective. In those days, he said, corporate economists would take their conclusions to the chief executive officer who, in turn, would hand it to the company strategists. Company product managers were out of the loop. Some weren't even aware their employers had chief economists.

"That's not happening today," Kimbell said. Instead, product managers are well in the loop, receiving highly specific information about their customers, none of which is related to the GDP at all."

The goal today is to use economic intelligence to tailor prices and product descriptions at the micro level; to reach consumers at their desktops with product descriptions and presentations specific to that consumer based on personal information "whether you like it or not - and I doubt you'll like it," he said. The pricing will be precise enough to wring your last discretionary cent.

Kimbell is hardly overwhelmed by the Internet. "It's not new technology. I bought my first computer in 1968." What's new is the diffusion of technology into people's homes. He looks for radical changes in the years to come. For example, mass literacy came to Europe decades after Guttenberg invented the printing press.

"The day is coming when your mousing around the Internet will be integrated with a database of personal information" including your shopping history, online and through your bank card. He foresees a system in which companies will refuse to waste time with people they suspect to be non-customers. A robot could determine if you're entitled to see the next screen of information and will boot out the losers in the selection process. On the positive side, real shoppers will be guided to their areas of interest.

The day is coming when economic intelligence will build algorithms to help people in their online activities, he said.

Privacy will become an even larger issue. "Someone will make a fortune by getting the key to assuring consumers that their privacy will not be invaded," he said. "In my opinion, this technology is on verge of being unbelievably invasive."

In some sense, he added, revealed preference could be something nice to have. Amazon.com already uses it in recommending books to their customers. That's the start of the trend to forecasting where the mouse can go.

Moderator
Michael Intriligator, Senior Fellow, Milken Institute
Speakers
Larry J. Kimbell, Professor of Business Economics (Emeritus), Anderson School of Management, University of California, Los Angeles
Lawrence R. Klein, Professor of Economics (Emeritus), University of Pennsylvania (Philadelphia)
Allen Sinai, President and Chief Global Economist, Primark Decision Economics (New York)
11:45 am
Michael Milken engaged a group of Nobel Laureates - the second of the conference - in a wide ranging discussion that touched on issues ranging from the government's proper role in medical research and the future of the European Union to the real motivation behind many mergers and acquisitions.

Using the example of the public-private construction of the Erie Canal in the 1830s that transformed New York City into America's largest port, Milken suggested that government should have a role in other important efforts, such as finding cancer cures. "Are we missing out on current public-private partnerships?" he questioned.

While curing cancer could save the country more than $46 trillion, the American government has thus far funded just $40 billion in research in the past 60 years, he said. Such a high potential return justifies additional funding, he suggested. But Douglass C. North noted that spending more money would not necessarily guarantee finding cures.

"There's enormous uncertainty about the outcome (of research)," he said. And Myron Scholes questioned whether government would be the best candidate for such an undertaking. He raised the possibility of leaving the effort to private foundations that might manage the campaign more efficiently.

"Maybe it's best to allow them to do it," he said.

Turning to Europe, Reinhard Selten said pulling several countries together would prove to be an extremely beneficial undertaking. Rather than adding a cumbersome layer of government, the creation of the European Union would prove to be liberating for the countries involved, he suggested.

"Europe is moving in the right direction," he said. "It is not creating a centralist state or federation." Instead, he characterized it as more of a contractual agreement that would liberate interaction between the participating nations. The experiment would prove so successful, he predicted, that several new members, such as Hungary, Croatia and the Baltic States would join in coming years.

Jumping from the future of the Europe to the future of the insurance industry, Milken noted many major insurance firms have seen their values slide sharply.

"What are the implications? What is the market telling us," Milken questioned. The answer, according to Scholes, is that "they have too much capital," he said. "The market is telling them they should repurchase shares or become private companies."

John Nash noted that the stock decline might simply be reflecting an increasingly competitive landscape, fueled in part by the Internet. He noted the proliferation of insurance companies urging customers to log on to get the best quote. "A level of competition has come in that wasn't there before."

On another corporate issue, Selten questioned the true motivation behind many corporate acquisitions. Rather than being a sophisticated quest for greater shareholder value, they may merely be an attempt by management to avoid being on the wrong end of the next merger, he argued.

"They want to be a big fish so that they are not eaten by bigger fish," he said. "Most mergers and takeovers are not profitable."

Scholes rejected that suggestion, arguing that that evidence did, in fact, show that most transactions are in the best interests of shareholders.

While the group was willing to accept good-natured barbs about the value of economists, Nash suggested that Western economists have something to be proud of as he looked back at the past century. In their role as advisors, economists counseled for market-based economies, in opposition to the Soviet Union's Communism. "As advisors, maybe (economists) are responsible for the fall of Russian Communism," Nash said.

Moderator
Michael Milken, Chairman, Milken Institute
Speakers
John F. Nash, Senior Research Mathematician, Princeton University
Douglass C. North, Professor in Arts and Sciences, Washington University (St. Louis)
Myron S. Scholes, Partner, Oak Hill Capital Partners, Inc., and Professor of Finance (Emeritus), Graduate School of Business, Stanford University (Palo Alto)
Reinhard Selten, Professor (Emeritus), University of Bonn