R.I. officials hope location, size will actually aid efforts
By Carolyn Y. Johnson, Globe Staff February 27, 2008
PROVIDENCE - Lee Hower lived the quintessential Internet start-up life as an early employee at PayPal and part of the founding team of LinkedIn, the social network for professionals. But three years ago, Hower left Silicon Valley's heady entrepreneurial scene for what might seem the outer reaches of the tech universe.
Last week, when Hower - now a venture capitalist - mingled with entrepreneurs hatching new websites, tech company founders looking to hire, and about 100 self-identified geeks, he wasn't in Palo Alto or even Boston - he was in an art gallery in downtown Providence.
"Five years ago, all of us thought we were doing this alone," said Soren Ryherd, president of Working Planet Marketing Group, a Providence tech company that had intended to set up shop in Boston or New York five years ago, but chose more affordable Rhode Island and now is profitable and growing, with a dozen employees.
Many areas compete to be tech hubs, trying to attract the high-wage jobs of a knowledge economy - whether it is Governor Deval Patrick's proposed $1 billion life sciences initiative, or New Hampshire's drive to develop a new tech park in Nashua and rebrand the state as a tech hotspot as well as a bucolic getaway.
Now, the smallest state is trying to position itself as an entrepreneurial hub, offering tax incentives and playing off its location between New York and Boston, its size, its universities, and Providence's urban renaissance.
"This is central to our economic development strategy - we're trying to create an innovation economy," said Saul Kaplan, executive director of the Rhode Island Economic Development Corporation. "The whole state is 1,000 square miles with 1 million people in it and we all know each other - in an innovation economy, that's a huge ad vantage. Connecting the dots across sectors and silos is what innovation is all about, and we have the perfect real world test bed."
Last year, the first companies signed up for a new "innovation tax credit" of up to $100,000 for investors and entrepreneurs who invest and build high-tech companies in the state. In January, the state officially launched RINexus.com, a community site for techies to share news, job openings, and events - from computer science colloquia at universities to hacker fests. And Providence Geeks began as a small monthly gathering over a year and a half ago, but has blossomed into a full-scale geek gala.
That adds to other ongoing efforts. The state grants $3 million each year to the Slater Technology Fund, a nonprofit seed-stage venture capital fund. This is the fourth year of the Business Innovation Factory, an organization that brings together entrepreneurs and innovators for multi- disciplinary brainstorming sessions that could help Rhode Island play a key role in creating new products and innovations.
About 15,000 employees worked in the information technology and digital media sector in 2006, or 3.6 percent of the state's private employment workforce. Kaplan hopes to double the number of jobs within five years, and points to good news like Neurotech Pharmaceuticals, a local biotech company that announced in January it would build a manufacturing facility in Cumberland.
Other areas outside well-known tech hotspots have tried to cultivate a reputation for innovation, with varying levels of success. Portsmouth, N.H., branded itself the "eCoast." Wannabe tech corridors all over have aspired to the Silicon prefix at one time or another, whether it is Silicon Mountain in Colorado, Silicon Sandbar in Cape Cod, or Silicon Hills in Texas.
"It's different for Providence, than say 10 years ago - a lot has been done internally to Providence to position the city better to attract entrepreneurs," said Ross Gittell, a professor at the University of New Hampshire's Whittemore School of Business and Economics. "The development of culture and downtown life. There's buzz around Providence." And unlike a Silicon Prairie or Silicon Snowbank, Providence does have the unique benefit of proximity to New York City and Boston.
"Since I've been here, the tech start-up scene has started to flourish," Hower said. "It's exciting; still relatively early, still a fairly tight-knit community . . . but it's quietly bubbling up here, a grass-roots industry of people working on Web 2.0 stuff, and state and government agencies fostering an environment for innovation."
In 2000, when Charlie Kroll began working on a Web development firm out of his dorm room at Brown University, the tech scene in Providence was nearly invisible. The office space he rented initially for Andera was near a needle exchange; today the company is surrounded by designer boutiques, has grown to 40 employees, and will bring in $6.5 million in revenue this year, and Kroll attends geek events looking to recruit new employees.
Close proximity to Boston also means tech companies have access to vast networks of venture capital, but the close-knit community also fosters small businesses.
"You're nobody in a big pond for a very long time" in Boston or Silicon Valley, said John Zib, an entrepreneur who is building a digital signage company, Memo. "Here, they see you."
Recruiting is also more challenging when the local talent pool is smaller. But Pamela O'Hara, president of BatchBlue Software, an eight-person software company made up mainly of ex-Amazon people, said that there were advantages.
"For us it's nice to be outside of the Silicon Valley world where everyone is taking their computer apart on the weekend and putting it back together," O'Hara said. "We're a little more in touch with the real world."
Still, brain drain isn't uncommon. In the last few years, Spherics Inc., a biotech firm, moved from Lincoln, R.I., to Mansfield, Mass. A mobile firm, Teleractive, now known as Zoove, left Newport, R.I., for Silicon Valley when it landed venture capital money.
But Andrew Schiller went the opposite route, moving his company, Location Inc., from Worcester to Woonsocket. At the geek night, he showed off NeighborhoodScout.com, a website that uses data to help people find the Beacon Hill of Dallas or the Beverly Hills of Providence.
To demonstrate his service, he asked the audience to describe their ideal location.
What about the neighbors, Schiller asked. "Occupations?"
"Geeks!" someone shouted.
Carolyn Y. Johnson can be reached at cjohnson@globe.com.
Wednesday, February 27, 2008
Friday, February 01, 2008
The Geopolitics of Dope
January 29, 2008By George Friedman
Over recent months, the level of violence along the U.S.-Mexican border has begun to rise substantially, with some of it spilling into the United States. Last week, the Mexican government began military operations on its side of the border against Mexican gangs engaged in smuggling drugs into the United States. The action apparently pushed some of the gang members north into the United States in a bid for sanctuary. Low-level violence is endemic to the border region. But while not without precedent, movement of organized, armed cadres into the United States on this scale goes beyond what has become accepted practice. The dynamics in the borderland are shifting and must be understood in a broader, geopolitical context.
Related Links
Borderlands and Immigrants
The Geopolitics of Immigration
Related Special Topic Page
Tracking Mexico's Drug Cartels
The U.S. border with Mexico has been intermittently turbulent since the U.S. occupation of northern Mexico. The annexation of Texas following its anti-Mexican revolution and the Mexican-American War created a borderland, an area in which the political border is clearly delineated but the cultural and economic borders are less clear and more dynamic. This is the case with many borders, including the U.S.-Canadian one, but the Mexican border has gone through periods of turbulence in the past and is going through one right now.
There always have been uncontrolled economic transactions and movements along the border. Both sides understood that the cost of controlling and monitoring these transactions outstripped the benefit. Long before NAFTA came into existence, social and economic movement in both directions - but particularly from Mexico to the United States - were fairly uncontrolled. Borderland transactions in particular, local transactions in proximity to the border region (retail shopping, agricultural transfers and so on), were uncontrolled. So was smuggling. Trade in stolen U.S. cars and parts shipped into Mexico, labor from Mexico shipped into the United States, etc., were seen as tolerable costs for an open border.
A low-friction border, one that easily could be traversed at low cost - without extended waits - was important to both sides. In 2006, the United States imported $198 billion in goods from Mexico and exported $134 billion to Mexico. This makes Mexico the third-largest trading partner of the United States and also makes it one of the more balanced major trade relationships the United States has. Loss of Mexican markets would hurt the U.S. economy substantially. The U.S. advantage in selling to Mexico is low-cost transport. Lose that through time delays at the border and the Mexican market becomes competitive for other countries. About 13 percent of all U.S. exports are bought by Mexico.
Not disrupting this trade and not raising its cost has been a fundamental principle of U.S.-Mexican relations, one long predating NAFTA. Leaving aside the contentious issue of whether illegal immigration hurts or helps the United States, the steps required to control that immigration would impede bilateral trade. The United States therefore has been loath to impose effective measures, since any measures that would be effective against population movement also would impose friction on trade.
The United States has been willing to tolerate levels of criminality along the border. The only time when the United States shifted its position was when organized groups in Mexico both established themselves north of the political border and engaged in significant violence. Thus, in 1916, when the Mexican revolutionary Pancho Villa began operations north of the border, the U.S. Army moved into Mexico to try to destroy his base of operations. This has been the line that, when crossed, motivated the United States to take action, regardless of the economic cost. The current upsurge in violence is now pushing that line.
The United States has built-in demand for a range of illegal drugs, including heroin, cocaine, methamphetamines and marijuana. Regardless of decades of efforts, the United States has not been able to eradicate or even qualitatively reduce this demand. As an advanced industrial country, the United States has a great deal of money available to satisfy the demand for illegal drugs. This makes the supply of narcotics to a large market attractive. In fact, it almost doesn't matter how large demand is. Regardless of how it varies, the economics are such that even a fraction of the current market will attract sellers.
Even after processing, the cost of the product is quite low. What makes it an attractive product is the differential between the cost of production and the price it commands. In less-developed countries, supplying the American narcotics market creates huge income differentials. From the standpoint of a poor peasant, the differential between growing a product illegal in the United States compared with a legal product is enormous. From the standpoint of the processor, shippers and distributors, every step in the value chain creates tremendous incentives to engage in this activity over others.
There are several factors governing price. The addictive nature of the product creates an inelastic demand curve in a market with high discretionary income. People will buy at whatever the price and somehow will find the money for the purchase. Illegality suppresses competition and drives cartelization. Processing, smuggling and distributing the drugs requires a complex supply chain. Businesses not prepared to engage in high-risk illegal activities are frozen out of the market. The cost of market entry is high, since the end-to-end system (from the fields to the users) both is a relationship business (strangers are not welcome) and requires substantial expertise, particularly in covert logistics. Finally, there is a built-in cost for protecting the supply chain once created.
Because they are involved in an illegal business, drug dealers cannot take recourse to the courts or police to protect their assets. Protecting the supply chain and excluding competition are opposite sides of the same coin. Protecting assets is major cost of running a drug ring. It suppresses competition, both by killing it and by raising the cost of entry into the market. The illegality of the business requires that it be large enough to manage the supply chain and absorb the cost of protecting it. It gives high incentives to eliminate potential competitors and new entrants into the market. In the end, it creates a monopoly or small oligopoly in the business, where the comparative advantage ultimately devolves into the effectiveness of the supply chain and the efficiency of the private police force protecting it.
That means that drug organizations evolve in several predictable ways. They have huge amounts of money flowing in from the U.S. market by selling relatively low-cost products at monopolistic prices into markets with inelastic demand curves. Second, they have unique expertise in covert logistics, expertise that can be transferred to the movement of other goods. Third, they develop substantial security capabilities, which can grow over time into full-blown paramilitary forces to protect the supply chain. Fourth, they are huge capital pools, investing in the domestic economy and manipulating the political system.
Cartels can challenge - and supplant - governments. Between huge amounts of money available to bribe officials, and covert armies better equipped, trained and motivated than national police and military forces, the cartels can become the government - if in fact they didn't originate in the government. Getting the government to deploy armed forces against the cartel can become a contradiction in terms. In their most extreme form, cartels are the government.
Drug cartels have two weaknesses. First, they can be shattered in conflicts with challengers within the oligopoly or by splits within the cartels. Second, their supply chains can be broken from the outside. U.S. policy has historically been to attack the supply chains from the fields to the street distributors. Drug cartels have proven extremely robust and resilient in modifying the supply chains under pressure. When conflict occurs within and among cartels and systematic attacks against the supply chain take place, however, specific cartels can be broken - although the long-term result is the emergence of a new cartel system.
In the 1980s, the United States manipulated various Colombian cartels into internal conflict. More important, the United States attacked the Colombian supply chain in the Caribbean as it moved from Colombia through Panama along various air and sea routes to the United States. The weakness of the Colombian cartel was its exposed supply chain from South America to the United States. U.S. military operations raised the cost so high that the route became uneconomic.
The main route to American markets shifted from the Caribbean to the U.S.-Mexican border. It began as an alliance between sophisticated Colombian cartels and still-primitive Mexican gangs, but the balance of power inevitably shifted over time. Owning the supply link into the United States, the Mexicans increased their wealth and power until they absorbed more and more of the entire supply chain. Eventually, the Colombians were minimized and the Mexicans became the decisive power.
The Americans fought the battle against the Colombians primarily in the Caribbean and southern Florida. The battle against the Mexican drug lords must be fought in the U.S.-Mexican borderland. And while the fight against the Colombians did not involve major disruptions to other economic patterns, the fight against the Mexican cartels involves potentially huge disruptions. In addition, the battle is going to be fought in a region that is already tense because of the immigration issue, and at least partly on U.S. soil.
The cartel's supply chain is embedded in the huge legal bilateral trade between the United States and Mexico. Remember that Mexico exports $198 billion to the United States and - according to the Mexican Economy Ministry - $1.6 billion to Japan and $1.7 billion to China, its next biggest markets. Mexico is just behind Canada as a U.S. trading partner and is a huge market running both ways. Disrupting the drug trade cannot be done without disrupting this other trade. With that much trade going on, you are not going to find the drugs. It isn't going to happen.
Police action, or action within each country's legal procedures and protections, will not succeed. The cartels' ability to evade, corrupt and absorb the losses is simply too great. Another solution is to allow easy access to the drug market for other producers, flooding the market, reducing the cost and eliminating the economic incentive and technical advantage of the cartel. That would mean legalizing drugs. That is simply not going to happen in the United States. It is a political impossibility.
This leaves the option of treating the issue as a military rather than police action. That would mean attacking the cartels as if they were a military force rather than a criminal group. It would mean that procedural rules would not be in place, and that the cartels would be treated as an enemy army. Leaving aside the complexities of U.S.-Mexican relations, cartels flourish by being hard to distinguish from the general population. This strategy not only would turn the cartels into a guerrilla force, it would treat northern Mexico as hostile occupied territory. Don't even think of that possibility, absent a draft under which college-age Americans from upper-middle-class families would be sent to patrol Mexico - and be killed and wounded. The United States does not need a Gaza Strip on its southern border, so this won't happen.
The current efforts by the Mexican government might impede the various gangs, but they won't break the cartel system. The supply chain along the border is simply too diffuse and too plastic. It shifts too easily under pressure. The border can't be sealed, and the level of economic activity shields smuggling too well. Farmers in Mexico can't be persuaded to stop growing illegal drugs for the same reason that Bolivians and Afghans can't. Market demand is too high and alternatives too bleak. The Mexican supply chain is too robust - and too profitable - to break easily.
The likely course is a multigenerational pattern of instability along the border. More important, there will be a substantial transfer of wealth from the United States to Mexico in return for an intrinsically low-cost consumable product - drugs. This will be one of the sources of capital that will build the Mexican economy, which today is 14th largest in the world. The accumulation of drug money is and will continue finding its way into the Mexican economy, creating a pool of investment capital. The children and grandchildren of the Zetas will be running banks, running for president, building art museums and telling amusing anecdotes about how grandpa made his money running blow into Nuevo Laredo.
It will also destabilize the U.S. Southwest while grandpa makes his pile. As is frequently the case, it is a problem for which there are no good solutions, or for which the solution is one without real support.
Over recent months, the level of violence along the U.S.-Mexican border has begun to rise substantially, with some of it spilling into the United States. Last week, the Mexican government began military operations on its side of the border against Mexican gangs engaged in smuggling drugs into the United States. The action apparently pushed some of the gang members north into the United States in a bid for sanctuary. Low-level violence is endemic to the border region. But while not without precedent, movement of organized, armed cadres into the United States on this scale goes beyond what has become accepted practice. The dynamics in the borderland are shifting and must be understood in a broader, geopolitical context.
Related Links
Related Special Topic Page
The U.S. border with Mexico has been intermittently turbulent since the U.S. occupation of northern Mexico. The annexation of Texas following its anti-Mexican revolution and the Mexican-American War created a borderland, an area in which the political border is clearly delineated but the cultural and economic borders are less clear and more dynamic. This is the case with many borders, including the U.S.-Canadian one, but the Mexican border has gone through periods of turbulence in the past and is going through one right now.
There always have been uncontrolled economic transactions and movements along the border. Both sides understood that the cost of controlling and monitoring these transactions outstripped the benefit. Long before NAFTA came into existence, social and economic movement in both directions - but particularly from Mexico to the United States - were fairly uncontrolled. Borderland transactions in particular, local transactions in proximity to the border region (retail shopping, agricultural transfers and so on), were uncontrolled. So was smuggling. Trade in stolen U.S. cars and parts shipped into Mexico, labor from Mexico shipped into the United States, etc., were seen as tolerable costs for an open border.
A low-friction border, one that easily could be traversed at low cost - without extended waits - was important to both sides. In 2006, the United States imported $198 billion in goods from Mexico and exported $134 billion to Mexico. This makes Mexico the third-largest trading partner of the United States and also makes it one of the more balanced major trade relationships the United States has. Loss of Mexican markets would hurt the U.S. economy substantially. The U.S. advantage in selling to Mexico is low-cost transport. Lose that through time delays at the border and the Mexican market becomes competitive for other countries. About 13 percent of all U.S. exports are bought by Mexico.
Not disrupting this trade and not raising its cost has been a fundamental principle of U.S.-Mexican relations, one long predating NAFTA. Leaving aside the contentious issue of whether illegal immigration hurts or helps the United States, the steps required to control that immigration would impede bilateral trade. The United States therefore has been loath to impose effective measures, since any measures that would be effective against population movement also would impose friction on trade.
The United States has been willing to tolerate levels of criminality along the border. The only time when the United States shifted its position was when organized groups in Mexico both established themselves north of the political border and engaged in significant violence. Thus, in 1916, when the Mexican revolutionary Pancho Villa began operations north of the border, the U.S. Army moved into Mexico to try to destroy his base of operations. This has been the line that, when crossed, motivated the United States to take action, regardless of the economic cost. The current upsurge in violence is now pushing that line.
The United States has built-in demand for a range of illegal drugs, including heroin, cocaine, methamphetamines and marijuana. Regardless of decades of efforts, the United States has not been able to eradicate or even qualitatively reduce this demand. As an advanced industrial country, the United States has a great deal of money available to satisfy the demand for illegal drugs. This makes the supply of narcotics to a large market attractive. In fact, it almost doesn't matter how large demand is. Regardless of how it varies, the economics are such that even a fraction of the current market will attract sellers.
Even after processing, the cost of the product is quite low. What makes it an attractive product is the differential between the cost of production and the price it commands. In less-developed countries, supplying the American narcotics market creates huge income differentials. From the standpoint of a poor peasant, the differential between growing a product illegal in the United States compared with a legal product is enormous. From the standpoint of the processor, shippers and distributors, every step in the value chain creates tremendous incentives to engage in this activity over others.
There are several factors governing price. The addictive nature of the product creates an inelastic demand curve in a market with high discretionary income. People will buy at whatever the price and somehow will find the money for the purchase. Illegality suppresses competition and drives cartelization. Processing, smuggling and distributing the drugs requires a complex supply chain. Businesses not prepared to engage in high-risk illegal activities are frozen out of the market. The cost of market entry is high, since the end-to-end system (from the fields to the users) both is a relationship business (strangers are not welcome) and requires substantial expertise, particularly in covert logistics. Finally, there is a built-in cost for protecting the supply chain once created.
Because they are involved in an illegal business, drug dealers cannot take recourse to the courts or police to protect their assets. Protecting the supply chain and excluding competition are opposite sides of the same coin. Protecting assets is major cost of running a drug ring. It suppresses competition, both by killing it and by raising the cost of entry into the market. The illegality of the business requires that it be large enough to manage the supply chain and absorb the cost of protecting it. It gives high incentives to eliminate potential competitors and new entrants into the market. In the end, it creates a monopoly or small oligopoly in the business, where the comparative advantage ultimately devolves into the effectiveness of the supply chain and the efficiency of the private police force protecting it.
That means that drug organizations evolve in several predictable ways. They have huge amounts of money flowing in from the U.S. market by selling relatively low-cost products at monopolistic prices into markets with inelastic demand curves. Second, they have unique expertise in covert logistics, expertise that can be transferred to the movement of other goods. Third, they develop substantial security capabilities, which can grow over time into full-blown paramilitary forces to protect the supply chain. Fourth, they are huge capital pools, investing in the domestic economy and manipulating the political system.
Cartels can challenge - and supplant - governments. Between huge amounts of money available to bribe officials, and covert armies better equipped, trained and motivated than national police and military forces, the cartels can become the government - if in fact they didn't originate in the government. Getting the government to deploy armed forces against the cartel can become a contradiction in terms. In their most extreme form, cartels are the government.
Drug cartels have two weaknesses. First, they can be shattered in conflicts with challengers within the oligopoly or by splits within the cartels. Second, their supply chains can be broken from the outside. U.S. policy has historically been to attack the supply chains from the fields to the street distributors. Drug cartels have proven extremely robust and resilient in modifying the supply chains under pressure. When conflict occurs within and among cartels and systematic attacks against the supply chain take place, however, specific cartels can be broken - although the long-term result is the emergence of a new cartel system.
In the 1980s, the United States manipulated various Colombian cartels into internal conflict. More important, the United States attacked the Colombian supply chain in the Caribbean as it moved from Colombia through Panama along various air and sea routes to the United States. The weakness of the Colombian cartel was its exposed supply chain from South America to the United States. U.S. military operations raised the cost so high that the route became uneconomic.
The main route to American markets shifted from the Caribbean to the U.S.-Mexican border. It began as an alliance between sophisticated Colombian cartels and still-primitive Mexican gangs, but the balance of power inevitably shifted over time. Owning the supply link into the United States, the Mexicans increased their wealth and power until they absorbed more and more of the entire supply chain. Eventually, the Colombians were minimized and the Mexicans became the decisive power.
The Americans fought the battle against the Colombians primarily in the Caribbean and southern Florida. The battle against the Mexican drug lords must be fought in the U.S.-Mexican borderland. And while the fight against the Colombians did not involve major disruptions to other economic patterns, the fight against the Mexican cartels involves potentially huge disruptions. In addition, the battle is going to be fought in a region that is already tense because of the immigration issue, and at least partly on U.S. soil.
The cartel's supply chain is embedded in the huge legal bilateral trade between the United States and Mexico. Remember that Mexico exports $198 billion to the United States and - according to the Mexican Economy Ministry - $1.6 billion to Japan and $1.7 billion to China, its next biggest markets. Mexico is just behind Canada as a U.S. trading partner and is a huge market running both ways. Disrupting the drug trade cannot be done without disrupting this other trade. With that much trade going on, you are not going to find the drugs. It isn't going to happen.
Police action, or action within each country's legal procedures and protections, will not succeed. The cartels' ability to evade, corrupt and absorb the losses is simply too great. Another solution is to allow easy access to the drug market for other producers, flooding the market, reducing the cost and eliminating the economic incentive and technical advantage of the cartel. That would mean legalizing drugs. That is simply not going to happen in the United States. It is a political impossibility.
This leaves the option of treating the issue as a military rather than police action. That would mean attacking the cartels as if they were a military force rather than a criminal group. It would mean that procedural rules would not be in place, and that the cartels would be treated as an enemy army. Leaving aside the complexities of U.S.-Mexican relations, cartels flourish by being hard to distinguish from the general population. This strategy not only would turn the cartels into a guerrilla force, it would treat northern Mexico as hostile occupied territory. Don't even think of that possibility, absent a draft under which college-age Americans from upper-middle-class families would be sent to patrol Mexico - and be killed and wounded. The United States does not need a Gaza Strip on its southern border, so this won't happen.
The current efforts by the Mexican government might impede the various gangs, but they won't break the cartel system. The supply chain along the border is simply too diffuse and too plastic. It shifts too easily under pressure. The border can't be sealed, and the level of economic activity shields smuggling too well. Farmers in Mexico can't be persuaded to stop growing illegal drugs for the same reason that Bolivians and Afghans can't. Market demand is too high and alternatives too bleak. The Mexican supply chain is too robust - and too profitable - to break easily.
The likely course is a multigenerational pattern of instability along the border. More important, there will be a substantial transfer of wealth from the United States to Mexico in return for an intrinsically low-cost consumable product - drugs. This will be one of the sources of capital that will build the Mexican economy, which today is 14th largest in the world. The accumulation of drug money is and will continue finding its way into the Mexican economy, creating a pool of investment capital. The children and grandchildren of the Zetas will be running banks, running for president, building art museums and telling amusing anecdotes about how grandpa made his money running blow into Nuevo Laredo.
It will also destabilize the U.S. Southwest while grandpa makes his pile. As is frequently the case, it is a problem for which there are no good solutions, or for which the solution is one without real support.
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