Some in Silicon Valley Begin to Sour on India

PAGE ONE

SECOND THOUGHTS
Some in Silicon Valley
Begin to Sour on India

A Few Bring Jobs Back
As Pay of Top Engineers
In Bangalore Skyrockets

By PUI-WING TAM and JACKIE RANGE
July 3, 2007; Page A1

Silicon Valley has helped power India's outsourcing boom by shifting technology jobs to that country. Three months ago, Munjal Shah reversed a bit of that shift.

Mr. Shah, who leads a California start-up called Riya Inc., had opened an office in India's technology capital of Bangalore in 2005, hiring about 20 skilled software developers. The lure was the wage level: just a quarter of what experienced Silicon Valley computer engineers make.

RETURN TO THE VALLEY

• The Background: Small tech firms were leaders in sending work to be done by computer engineers in India.

• The News: Demand for India's top computer engineers has driven their pay so high that some other countries are cheaper now.

• The Upshot: A few Silicon Valley firms are bringing jobs home. And the rise in costs poses a challenge for a tech-job-fueled Indian economy.

Then Indian salaries soared. Last year, Mr. Shah paid his engineers in India about half of Silicon Valley levels. By early this year, it was 75%. "Taking into account the time difference with India," he says, "we weren't saving any money by being there anymore." In April, Mr. Shah shut down the Bangalore office and offered half of its engineers a chance to move to San Mateo, Calif., with work visas.

Across Silicon Valley, some technology companies, particularly start-up and midsize ones, are beginning to turn away from India for low-cost labor to do sophisticated tech work. Kana Software Inc. of Menlo Park, Calif., eliminated 100 software-development jobs in India in late 2005 and expanded its U.S. hiring instead. Teneros Inc. shut down a 30-member India office and brought 12 of the people to its headquarters in Mountain View, Calif. Some tech start-ups are choosing other low-wage foreign locales, such as Romania and Poland.

Overall, India's tech and outsourced-services industries continue to boom. The industries' revenues rose by almost a third to $39.6 billion in the fiscal year ended in March, says the country's National Association of Software and Service Companies, or Nasscom. U.S. tech companies continue to shift basic work like software coding to India, where big outsourcing companies such as Infosys Technologies Ltd. and Wipro Ltd., hire tens of thousands of new Indian employees each year. Silicon Valley giants Cisco Systems Inc., Google Inc. and Adobe Systems Inc. are expanding their staffs in India.

They often have other reasons besides pay to be there, such as to be closer to customers. But even some of the large tech companies are reconsidering India. Apple Inc. shelved plans to build a technical-support center in India last year; a spokesman declined to say why. Intel Corp. is stepping up hiring in Vietnam -- which has cheaper labor than India -- and says it isn't significantly adding to its Bangalore staff of about 2,400. "The wage inflation rate for engineers in India is four times what it is here" in America, says Intel's chief executive, Paul Otellini.

It's a new twist on the globalization debate. Around the century's turn, when U.S. companies first began flooding to India for its cheap labor, pundits warned that the subcontinent could increasingly rob the U.S. of high-end white-collar jobs. Debate was especially sharp in Silicon Valley, then in a slump, because India annually turns out nearly 500,000 engineering graduates.

Forces of Globalization

Several years on, the forces of globalization are starting to even things out between the U.S. and India, in sophisticated technology work. As more U.S. tech companies poured in, they soaked up the pool of high-end engineers qualified to work at global companies, belying the notion of an unlimited supply of top Indian engineering talent. In a 2005 study, McKinsey & Co. estimated that just a quarter of India's computer engineers had the language proficiency, cultural fit and practical skills to work at multinational companies.

The result is increasing competition for the most skilled Indian computer engineers and a narrowing U.S.-India gap in their compensation. India's software-and-service association puts wage inflation in its industry at 10% to 15% a year. Some tech executives say it's closer to 50%. In the U.S., wage inflation in the software sector is under 3%, according to Moody's Economy.com.

Rafiq Dossani, a scholar at Stanford University's Asia-Pacific Research Center who recently studied the Indian market, found that while most Indian technology workers' wages remain low -- an average $5,000 a year for a new engineer with little experience -- the experienced engineers Silicon Valley companies covet can now cost $60,000 to $100,000 a year. "For the top-level talent, there's an equalization," he says.

That means that for a large swath of Silicon Valley -- start-ups and midsize companies that do sophisticated tech work -- India is no longer the premier outsourcing destination. While such companies make up just a fraction of India's outsourcing work, they had been an early catalyst for the growth of India's information-technology business and helped the country attract other outsourcing clients.

Their rethinking of India raises red flags for the country. India's tech industry has been a powerhouse for the economy. Alongside almost 1.6 million Indians directly employed, the industry supports a further six million jobs or so, according to Nasscom, the trade group.

Against a backdrop of rising wages and international competition, it's important for India's economy that its tech giants expand into higher margin business, in order to sustain their growth rates and gain market share. Large Indian outsourcing companies are trying to expand into higher-margin programming and design work, rather than just basic call-center outsourcing and tech maintenance, which now may be done more cheaply in countries such as the Philippines and Vietnam.

Wipro's main tech arm, Wipro Technologies, now does consulting for its clients and can take over a clients' entire IT system -- work that was previously the preserve of companies like International Business Machines Corp. Tata Group's Tata Consultancy Services Ltd. is helping Italy's Scuderia Ferrari design traction-control systems and create software to improve the performance of its Formula One cars.

Yet while India's tech sector has come a long way from basic services such as software coding and tech maintenance and support, the majority of its business still derives from that type of work. At Wipro Technologies, 55% of revenue comes from basic services. At India's other large tech companies, such as Infosys and TCS, 50% to 60% of revenue still comes from such tasks, analysts say.

Some Indian outsourcing companies are themselves looking to other countries -- mostly as a response to the globalizing nature of their business, but also to tap new labor pools amid a tight hiring situation at home. TCS recently opened a center in Mexico and is planning to move into Morocco. Wipro has two centers in China and is thinking about adding one in the Philippines.

'Dirt Cheap'

For Mr. Shah, 33 years old, opening a Bangalore office for Riya was a natural move. An Indian native who came to the U.S. at age 7, he had led another tech start-up in 2001 that had engineering and customer-service operations in Bangalore. "It was dirt cheap," he says. "It completely worked for us."

Riya is a "visual search" company, building technology to search through images and identify faces or other features. The company has launched an online photo site and a visual-search engine called Like.com and will change its name to that later this month. Mr. Shah opened a Bangalore office in early 2005 to help find the engineers he needed.

It was a challenge. Riya, which remains closely held, was unknown in India, while global tech giants were staffing up there and competing for talent. Cisco, for instance, is building a million-square-foot Bangalore campus that will hold 10,000 workers. U.S. venture capitalists have flooded in as well, looking to fund engineers who want to turn entrepreneur.

Mr. Shah spoke to the local Bangalore news media to try to get the company name out. His vice president of engineering, Azhar Khan, held recruiting sessions where he asked candidates to take a technical test to weed out unsuitable applicants. To hire Riya's first six engineers, Mr. Khan says he had to interview 50 to 70 people.

Riya approached Navneet Dalal, who was about to graduate with a doctorate from a computer-science research institute in France, INRIA Rhone-Alpes. Mr. Dalal says he was also talking with Google and Microsoft Corp. about jobs. Riya felt it had to move fast. After interviewing with Google in Mountain View early last year, Mr. Dalal met a Riya executive at a coffee shop. Riya quickly offered him a lucrative package for a job in India.

"The initial incentive was good enough for me not to think about Google, in terms of stock and salary," says Mr. Dalal, now 29, who declines to disclose his pay. (Someone with his experience and qualifications typically earns around $75,000 in India.) Mr. Dalal joined Riya as a computer-vision researcher in Bangalore in May 2006. Within a year, he says, he got a better stock-options deal and a 25% raise.

Increases like that have spurred a lot of job-hopping in India. Pervasive Software Inc. of Austin, Texas, opened a Bangalore unit in 2004 and hired 45 people. But soon its turnover was more than 25% a year, says the company's CEO, John Farr. The company kept having to invest in training workers, only to see them leave. A year ago, it shut its Bangalore unit.

Hidden outsourcing costs surfaced for other tech companies as well. To bridge the geographic and time gaps, some have found they need to hire more U.S. managers to handle their Indian teams. Kana Software in Menlo Park has one engineering manager for every 25 to 50 engineers, but it found it needed one for every five to 10 engineers it employed in the Indian city of Chennai. In December 2005, Kana decided to close its Indian operation.

Mr. Khan, Riya's California-based vice president of engineering, says he often stayed up until 4 a.m. so he could talk with the team in Bangalore. Mr. Shah, the chief executive, flew to India six times a year to make sure things were running smoothly.

Straddling time zones slowed development work. Sometimes a researcher gets stuck on a problem. "It's not really a good thing to keep bugging people at midnight every day, so that introduces some delays," says Mr. Dalal. He also felt cut off. "For us sitting here in India, it's hard to get the business aspect of the problem," he says.

Mr. Shah commissioned a yearly survey of salary trends among top computer engineers in Bangalore. They showed wages jumping 30% a year. To keep people, "we needed to match the increases." In January, Riya gave its Bangalore crew raises of 25% to 40% each.

But it was also having trouble filling open job slots. "I realized price expectations were too high," Mr. Khan says. "I thought, "Wait, why are we paying a junior guy $50,000 or $60,000 over there when I can get a guy [in California] for $80,000?"

In April, he and Mr. Shah decided to shutter the Bangalore operation and bring key staffers to the U.S. After getting board approval, they flew to Bangalore and assembled the 20 engineers to break the news. "They were all upset," says Sowmya Karnad, Riya's human-resources director in Bangalore. But given the soaring wages, it didn't come as a surprise. Messrs. Shah and Khan offered 10 engineers a chance to move to Riya's U.S. office. Eight, including Mr. Dalal, accepted.

Few Job Worries

Those who stayed behind have few job worries. Sandeep Gain, a 28-year-old lead engineer for Riya, declined a U.S. transfer, partly to stay close to his family but also because he likes his opportunities in India. He says he has received two offers, from a large U.S. conglomerate and from a Nasdaq-listed company. Both involve pay increases.

Shutting down in India isn't cheap. Teneros, which closed a 30-person operation in New Delhi in late 2005, says it spent $2 million to do so. It had to get out of contracts, and it brought 12 of its Indian workers over to the U.S. on work visas, incurring immigration fees. Teneros left partly because of wage inflation and a lack of information-technology infrastructure that was slowing its work, says its CEO, Steve Lewis. Mr. Shah says Riya's shutdown costs, such as immigration charges and a broken lease, will be in six figures.

He has cleared eight desks in San Mateo for the eight Indian engineers coming over and is waiting for their paperwork to clear, hoping they'll be in Silicon Valley by the end of the year. "I thought I understood India," Mr. Shah says, "but now I know it's so much more effort to have a remote office as a start-up."

--Don Clark and Vibhuti Agarwal contributed to this article.

Write to Pui-Wing Tam at pui-wing.tam@wsj.com and Jackie Range at jackie.range@dowjones.com

Link: http://online.wsj.com

In Some Places, U.S. Money Isn't As Sound as a Dollar

Madagascar Likes Bills Signed
By Snow; Rubin Series
Trades at a Discount

By MICHAEL M. PHILLIPS
November 2, 2006

ANTANANARIVO, Madagascar -- Once a month, Jean Yves, a cabin attendant on an Italian cruise ship, gets in line at the purser's office to collect his pay -- seven $100 bills.

If he's lucky, the bills will indeed be worth $700 when he arrives in port and tries to spend them. If he isn't, they'll be worth closer to $600. The difference? The good bills are new ones that bear Treasury Secretary John W. Snow's signature. The bad ones are signed by Treasury Secretary Robert E. Rubin.

"Whoever goes first gets the new money," Jean Yves complained recently after returning home to Madagascar at the end of his cruise. Those at the back of the line get an instant pay cut, because in many of the countries the ship visits, old U.S. bills just aren't worth as much as new ones.

Americans are accustomed to the idea that the dollar -- the world's No. 1 reserve currency -- is good anywhere. After all, it's a point of principle that the U.S. never invalidates its notes. The government may add watermarks, insert security threads or enlarge Ben Franklin's face on the $100 dollar bill, but old bills are still legal tender.

Overseas, however, that guarantee carries less weight. In many countries, from Russia to Singapore, the dollar's value depends not just on global economic forces that move international currency markets, but also on the age, condition and denomination of the bills themselves. Some money changers and banks worry that big U.S. notes are counterfeit. Some can't be bothered to deal with small bills. Some don't want to take the risk that they won't be able to pass old or damaged bills onto the next person. And some just don't like the looks of them.

The imam who runs an unmarked money exchange out of his religious-supplies store in Foumban, Cameroon, won't accept anything but $100 bills. Tens and twenties "are too small -- they're not worth my time," he says. The Moscow souvenir store called "Souvenir" won't accept 1996 series Rubin $20 bills as payment for vodka or nesting dolls. The Rubins are too old, the clerk says. The Stella Matutina Lodge in Goma, Democratic Republic of Congo, accepts 2001 series C-notes -- the ones with Treasury Secretary Paul H. O'Neill's signature -- but says they're only worth $90. The hotel accepts the 2003 Snow bills at face value.

"Money is valuable only if people accept it," says Stanford University economist John Taylor, who helped Iraq figure out how to replace the dinar notes that bore Saddam Hussein's portrait with more politically neutral currency. Federal Reserve notes are, in effect, little more than scraps of paper if businesses refuse to take them.

THE NEW CURRENCY

See an animated tutorial of the security and design features of the series 2004 $10, $20 and $50 notes.

The $100 bills, which have a reputation for being vulnerable to counterfeiting, also appear to be the notes most often rejected or discounted in the marketplace. Roughly 75% of the 5.5 billion $100 bills in print are circulating abroad, where local bankers and currency dealers sometimes refuse to accept them. The $100 bill is the largest note in print. The Fed stopped issuing $500, $1,000, $5,000 and $10,000 notes in 1969.

The U.S. Secret Service estimates that less than 1/100th of 1% of the $760 billion in American cash in circulation is counterfeit. Each time the U.S. issues a new currency design, the Secret Service, the Federal Reserve Board, the Treasury Department, and the Bureau of Engraving and Printing sponsor a global public-awareness campaign to ensure that the notes are widely accepted. When the peach-and-pink-tinted $10 bills were issued in March, the agencies distributed posters and pamphlets in Uzbek, Vietnamese, Polish and 21 other languages, highlighting the new look and anticounterfeiting features of the bills.

The posters also noted that "both new and old designs of U.S. currency will circulate together and will maintain their full face value."

The 2003 $100 bills, the most recent series, have no additional safety features and are no more or less susceptible to counterfeiting than the 1996 Rubin bills are, according to Michael Lambert, assistant director for cash at the Fed.

"Although we have heard reports that some discounting of older designs for U.S. currency has occurred in localized markets, the dollar remains a stable currency backed by a highly productive economy with low inflation and by the assurance that it will not be demonetized, recalled, or devalued," said Mr. Lambert, who went to Russia two years ago to promote the new $50 note.

Jean Yves, the Malagasy cruise-ship employee, finds that in many ports, the 1996 series bills are discounted by as much as 15%, if they're accepted at all. He and his fellow crewmen complain to their bosses, he says, but to no avail. "They say to me, 'This is your pay -- take it or don't,'" said Jean Yves, who, for fear of losing his job, spoke on the condition that neither his family name nor his employer's name be published.

Robert Rubin, now chairman of the executive committee at Citigroup Inc., doesn't take it personally that his bills sell at a discount. "If people are paying 85 cents on the dollar, I'll pay them a lot more than that -- and I'll make the difference," the former Wall Street trader said.

Jean Yves and his shipmates don't see the arbitrage opportunity. So, to keep the peace, the purser pays the crew of 700 by nationality, according to Jean Yves. One month the Filipinos get paid first and get the newest bills. Another month it's the Indians or the Indonesians or the Malagasy.

The day after he returned from nine months at sea, Jean Yves took one of the 1996 $100 bills from his pay and went downtown to Antananarivo's Liberation Avenue, where the illegal money-changers troll for customers. One dealer offered 2,080 ariary per dollar for new bills and 2,040 for old bills -- not a bad spread. But he got even luckier and found a changer willing to pay the top rate for his 1996 note if he promised to change his new bills with the same dealer.

Jean Yves would likely have fared far worse at the city's legal money-changers. The currency-exchange window at the Banque Malgache de l'Océan Indien, part of Groupe BNP Paribas, doesn't take $100 bills at all. "If we take it here, the goal is to resell it," says Hanitra Rasoanaivo, a customer-service manager. "But the Malagasy and foreign tourists don't want $100 bills."

BFV-SG, a Malagasy bank majority-owned by Société Générale, will change $100 bills only for clients who have accounts there. Even then, bank officers write down the serial number of each bill exchanged.

Down the street, the State Bank of Mauritius branch won't accept any U.S. bill smaller than a fifty. A manager there says small bills are too hard to resell. And the bank won't take any U.S. bills from the 1996 Rubin series or older, whatever the denomination. The manager says the bank is simply following the rules set by the Malagasy central bank.

But Vonimanitra Razafimbelo, director of foreign services at the Central Bank of Madagascar, denies that the authorities have any such rule. "That's crazy," she says. "The rules of American currency aren't made by the Malagasy Central Bank. That's up to the Federal Reserve." Each commercial bank in the country decides what foreign exchange it is willing to buy and sell, she says.

She should know. Prior to a work trip to Southeast Asia two years ago, Ms. Razafimbelo went to her own bank and withdrew $800 in $100 bills. Four of the bills were from the 1996 series, and she was surprised to find that many hotels, restaurants and shops wouldn't accept them, especially in Indonesia. "The Indonesians are very serious about their bills," she says.

She says she had to borrow money from friends to get through the trip. "I've learned my lesson," Ms. Razafimbelo says. "If I'm going to Europe or the U.S., I don't worry. But in Africa or Asia I take precautions and make sure my $100 bills are new and in perfect condition."

According to U.S. law, any bill that is more than 50% intact is legal tender. But in Singapore, currency dealers often pay less for imperfect bills.

Ziyaudeen, manager of Bismi Money Changer, accepts $100 bills of any age. But if the serial number is missing on either the right or the left, he'll only pay $50 for it. Then he sells the note for $80 or $90 to a dealer who redeems it for $100 on a trip to the U.S.

Ahmed Maricar, who trades foreign exchange from a green metal cage in a fabric store in Singapore's Little India section, knocks a percentage point or two off the price if a U.S. bill is slightly ripped. But "if the serial number is gone, I won't take it," he says.

It's not that he thinks such damaged bills are fakes; it's just that they aren't money to him.

Write to Michael M. Phillips at michael.phillips@wsj.com

link: http://online.wsj.com

The Stuff of Democratic Life

By ALLEN GUELZO
November 22, 2006

On Nov. 19, 1863, Abraham Lincoln delivered the dedication remarks at the opening ceremonies of a cemetery for soldiers of the Civil War in Gettysburg, Pa. This "Gettysburg Address" -- a gem-like model of conciseness, passion and political eloquence -- quickly became a fixed feature of McGuffey's Eclectic Readers and triple-decker Fourth of July orations, even the soundtrack of the first "talking" motion picture in 1922. It was read once again to dedicate a block of burnt earth in Manhattan during the solemn first anniversary of 9/11 at Ground Zero.

Lincoln wrote a great many other memorable speeches, from his two inaugural addresses to the proclamation that, a week after the Gettysburg Address, made Thanksgiving a national holiday. Why was the Gettysburg speech so much more important? The answer would be easier if his words had not become so worn with familiarity. Time has done more than just heal the wounds of the Civil War. It has grown moss over prose that captured, in a shorter compass and with greater power than any others, the three fundamental challenges of the American experiment.

In 1863, the United States was the only significant democracy in the world. The French Revolution had drowned itself in blood; the democratic uprisings of the 1820s and 1840s had been easily and successfully repressed by kings and emperors; and everywhere, it was power and hierarchy rather than liberty and equality which seemed the best guarantee of peace and plenty. Americans remained the one people who defined themselves by a natural proposition, that all men are created equal, so that no one was born with a superior entitlement to command.

But this republic of equal citizens had two basic weaknesses. The first was its tolerance of slavery, which drew the line of race across the line of equality. The second weakness was the question of authority in a democracy. In a society where every citizen's opinion carried equal weight, decisions would have to be made by majority rule. But a citizen whose opinion carries such weight might find it difficult to submit to the countervailing vote of a majority which thinks differently, and the result is likely to be a simple truculent refusal to go along. Refusals make for resistance, and resistance makes for civil war. Is there, Lincoln asked in 1861, some deep flaw in popular government, some weird centripetal force, which inevitably condemns popular government to whirl itself into pieces "and thus practically put an end to free government upon the earth"?

To that question, every king and autocrat in 1861 -- and every fuehrer, duce and president-for-life since -- has answered, smirkingly, yes. And the American Civil War looked like the chief evidence that this was so. Which is why, as Lincoln looked out across the thousands who had gathered on that November day, it seemed to him that what he was viewing was more than just another noteworthy battlefield. It had fallen to him to argue that the Civil War signaled not a failure, but a test, to determine once and for all whether that nation or any nation so conceived and so dedicated can long endure.

We pass this test, Lincoln said, not by dedicating cemeteries, but by dedicating ourselves. That dedication lies first in seeing that equality is an imposition of self-restraint. It means refusing to lay upon the backs of others the burdens we do not wish laid on our own. Slavery was an outrage on the notion of equality, not just because it treated members of a different race as unequal, but because it allowed one race to exploit another without any restraint at all. "As I would not be a slave, so I would not be a master," Lincoln explained in 1858. "This expresses my idea of democracy." Popular government is not about what we want, or about our demands for ourselves, but what we should not want and not demand of others.

Dedication lies, second, in the enforcement of self-restraint. Democracy is a discipline. One cannot opt out on the plea of liberty whenever the political score goes against us. The Southern secessionists imagined that they were protecting their liberty by seceding from the Union, but they were in fact negating it. Secession, Lincoln argued, was the essence of anarchy, not liberty, since the only liberty the secessionists had in mind was the liberty to do what they pleased, without restraint, and to people whom they deemed unequal. Against that, a democracy must take up the sword, or cease to be a democracy at all.

But dedication also comes, third, in understanding how to sustain a fervor for democracy's defense. It was the complaint of Francis Fukuyama that the triumph of democracy had only managed to produce a "last man" who had no other reason for being free than the satisfaction of his own interests. It was Lincoln's words at Gettysburg which invested the triumph of democracy with a transcendent meaning, as a good based on natural law rather than on personal comfort. It was because these honored dead were witnesses to that kind of democracy that we could take increased devotion to that cause for which they gave the last full measure of devotion.

The turn of the 9/11 ceremonies to the Gettysburg Address was instinctively correct. But Lincoln's words are more than just a tonic for crises. Self-restraint, self-enforcement and the recollection that democracy has a transcendent core arching far above our poor power to add or detract -- these are the stuff of democratic life, and the Gettysburg Address is the reminder of Lincoln's prescription for government of the people, by the people and for the people. If we forget it, it may be because we have forgotten all the other things that democracy demands.

Mr. Guelzo is the Henry R. Luce Professor of the Civil War Era at Gettysburg College and the author, inter alia, of "Lincoln's Emancipation Proclamation: The End of Slavery in America" (Simon and Schuster, 2004).

link: http://online.wsj.com/

Russian Venom

By BORIS VOLODARSKY
November 22, 2006

On the evening of Feb. 18, 1954, in Frankfurt, a man called on Georgy Okolovich, a leader of an anti-Soviet émigré union. The business at hand was murder. But things took a different turn when Okolovich opened the door. "I'm a captain in the Ministry of State Security and I have been sent from Moscow to organize your assassination," the visitor told him straight out. "I don't want to carry the order out and I need your help." His name was Nikolai Khokhlov. He defected to the U.S. and revealed that the Soviets used assassination as a political instrument.

Three years later, Mr. Khokhlov was at a conference in Germany when, while with friends, he drank a cup of coffee and collapsed hours later. The doctors called it simple food poisoning, but his condition deteriorated until, 10 days into his illness, his hair began to fall out; his bone marrow was found to be severely damaged and his body showed an almost total loss of the white cells that are vital to the proper functioning of the immune system. Later tests uncovered the culprit: deliberate poisoning by a new and previously unknown form of thallium. He lived to tell the tale.

Fast forward to November 1998, in Moscow, when Col. Alexander Litvinenko of the Russian Ministry of State Security -- the old KGB that today goes by FSB -- publicly accused his superiors of ordering him to assassinate Russian tycoon Boris Berezovsky. He was soon arrested and put in the infamous Lefortovo prison. The head of the FSB at the time was Vladimir Putin. A court cleared Mr. Litvinenko the following year of all accusations, including service misconduct and assorted others, but he was rearrested and retried the following year, and cleared again. In 2000, he and his family went to live in exile in Britain. There, Mr. Litvinenko published a book that tied the 1999 bombings of Moscow apartment buildings -- which justified Russia's reinvasion of Chechnya -- to the Putin presidential election campaign, which was successfully propelled by that war.

Early this November, Mr. Litvinenko was invited to tea at a London hotel with a Russian man who was familiar to him from his Moscow days. Some hours later, he had a sushi lunch at Piccadilly Circus with an Italian acquaintance, Mario Scaramella, who wanted to give him documents purportedly throwing light on the recent assassination in Moscow of the opposition journalist Anna Politkovskaya, shot dead last month in her apartment building.

That night, he became violently ill. At first, doctors suspected food poisoning. It was only on the 10th day in hospital, when his hair began to fall out, that toxicology tests were performed. His body contained, these tests showed, three times the fatal dose of thallium. John Henry, a clinical toxicologist who was the first to pinpoint the dioxin poisoning of Ukrainian President Viktor Yushchenko, examined Mr. Litvinenko this Saturday and told the BBC, "There's no doubt that he's been poisoned by thallium." According to my sources close to Alexander, whom I've known for a couple years, investigators now suspect that he was poisoned at the tea, not the lunch. The name of the Russian suspect hasn't been made public by the police.

When I heard the other day that Alexander's condition was worsening, I thought that the doctors perhaps made the same mistake as in the Khokhlov case. Thallium has never been known to attack the blood stream, but that's what's happening to Alexander Litvinenko. Specialists at the U.S. military hospital in Frankfurt only later discovered that Mr. Khokhlov was exposed to radioactivated thallium, which initially only results in non-specific gastrointestinal symptoms; and only later did they observe a moderate elevation of blood lipids, leukocytosis and anemia that occurs in most high-level intoxications. By the time the symptoms known to be after-effects of radiation began to appear, the radioactivated thallium had already disintegrated, making it very hard for doctors to find, and for investigators to confirm, the poisoning. The same scenario may be playing out with Mr. Litvinenko. Yesterday the London hospital treating him said it could not confirm that the poison was thallium -- a diagnosis that in the Khokhlov case was only made by a special U.S. military hospital.

I last met Alexander at London's Connaught Hotel to discuss the Khokhlov case, about which I'd published a monograph. He was investigating the death of Yury Shchekochikhin, an opposition Russian parliamentarian and journalist, who died in suspicious circumstances in 2003 after a two-week illness. His symptoms were similar to President Yushchenko's, pointing clearly to exposure to a toxic agent. After his death, no autopsy was performed and access to medical records wasn't allowed.

Mr. Litvinenko is a small thorn in the side of the current Russian regime. He lives abroad and holds a British passport. That didn't protect him, but nor did it Georgi Markov, the Bulgarian dissident who in 1978 was killed by a KGB ricin-tipped umbrella near Waterloo station.

It is perhaps too early to discuss how and why Mr. Litvinenko was poisoned. Some things are clear. This was likely the work of the Russian secret service that had been after him for years. Whether the Russian president, who was often the object of Mr. Litvinenko's fierce and fearless mockery, is involved is open to doubt. I wonder if Mr. Putin is in control of his squabbling entourage. Whatever the truth, this poisoning also looks to be directed against Boris Berezovsky, now in exile in London and campaigning for regime change in Russia. Mr. Litvinenko is one of his advisers.

Russian foreign intelligence denies any involvement in his poisoning. It cannot deny, however, its long history of using poison as a weapon. The "Kamera," or as KGB veterans might remember it, "Laboratory No. 12," was founded in 1921 in a corner of Lenin's Cheka. This office innovated biological and chemical agents as advancing science and the Kremlin dictated. But one thing in their design has stayed constant: To make the victim's death or illness appear natural, or at least produce symptoms that will baffle doctors long enough to delay proper treatment. The Chechen rebel Khattab was poisoned in 2004, as was Trotsky's secretary Wolfgang Salus in 1957. Countless other victims were never identified as such.

Before the Litvinenko case, the most prominent poisoning involved Mr. Yushchenko, whose digestive tract and once-chiseled face were destroyed by a complex, dioxin-based compound during a meal with the top officials of his country's security service. Mr. Yushchenko was an unwelcome candidate for Moscow in Ukraine's 2004 elections. Like Khokhlov, he survived; all leads in that case point to the Kamera. The investigation has been hindered by overt pressure on Mr. Yushchenko's doctors at home and in Austria, where he was treated, and Ukrainian politicians.

At this hour, Alexander Litvinenko is fighting for his life in a London hospital.

Mr. Volodarsky, a former Soviet military intelligence officer who lives in London, is the author, with Oleg Gordievsky, of the forthcoming "KGB: The West Side Story."

link: http://online.wsj.com/

Can the New-Look Malibu
Help Jump-Start Chevy?

By JOSEPH B. WHITE
January 2, 2007

Say "Chevy Malibu," and some Americans think of a 1960s muscle car. Unfortunately for General Motors Corp., many more think, "rent-a-car."

Now, GM is unveiling a revamped look for the Malibu sedan, as part of a broad effort to convince people shopping for a car priced below $30,000 to pause on their march to Toyota Motor Corp. or Honda Motor Co. dealerships.

Today, GM officially takes the wraps off the complete design for the 2008 Chevrolet Malibu -- almost a year before the first production models are scheduled to hit showrooms. (Part of the car has been seen in teaser photos) GM is trying to generate as much early buzz as possible for the redesigned car, in part to build investor confidence in its turnaround strategy. Chevrolet, GM's highest-volume division, plans a significant launch in early 2008 that GM officials say will compare to the image overhaul executed several years ago for Cadillac.

The new Malibu "will be the beginning of a very big transformation for our car lineup," says Cheryl Catton, general director of marketing for Chevrolet cars.

GM hopes the 2008 Malibu will excite bored car buyers and leery investors.

GM's Vice Chairman for product development Robert Lutz says the new Malibu's more refined looks, improved ride and quieter interior are a milestone in the company's multiyear effort to upgrade the look and feel of its sedans and coupes. Now Chevy is going for a more international feel -- a European look with an inside that borrows from 1960s American style.

"It's a poster boy for what we are trying to do," says Mr. Lutz, who joined GM in 2001 with a mandate to lead a revitalization of its vehicle design.

The Malibu faces a difficult assignment that has overwhelmed a series of new GM cars over the past decade. GM retired the Malibu name in the 1980s and then brought it back in 1997 and slapped it on a midsize, front-wheel drive sedan nothing like the brawny rear-drive muscle cars that bore that name during the 1960s and 1970s.

Starting in the late 1990s, Chevrolet tried to position the car as an alternative to the conservatively styled Japanese sedans that dominate the midsize segment. GM engineers carefully tried to match the functions, features and specifications of the Toyota Camry and Honda Accord. As for styling, Mr. Lutz says, the thinking was "if the Camry is doing so well and it's bland, it means they like bland. Unfortunately, bland only works for the Camry."

Although Chevrolet has thousands more dealers than Toyota, Malibu's retail sales volume of about 100,000 to 125,000 cars a year is less than a third the Camry's total annual sales. As of December, the Malibu sold for an average of $17,939, after an average customer cash rebate of $2,438, according to transaction data collected from dealers by the Power Information Network. The Accord and Camry had no customer cash rebates, and were selling for an average $22,402 and $23,441 respectively. Ford Motor Co.'s Fusion midsize sedan was selling for an average $20,081 with a customer rebate of $1,069.

GM won't try to outsell the Camry with the new Malibu, in part because GM also positions its larger Impala sedan as a Camry fighter. But GM does want to close the pricing and profitability gap. Mr. Lutz says that's where better design comes in.

On the outside, the 2008 Malibu looks German, with an exterior profile and proportions similar to a Volkswagen Passat.

Mr. Lutz and GM vice president for design Ed Welburn point to what makes the 2008 Malibu different from the current car: Wheels that are pushed to the edges of the sheet metal, to avoid the look of a bulky car balanced on roller skates; a chrome molding around the side glass; European-style small turn signals, or "markers" on the fenders. The wheelbase -- the distance between the front and rear wheels -- is about 6 inches longer than the current sedan.

The new Malibu's interior is a more dramatic departure. The new dashboard has a "dual cockpit" look. "It's almost a direct lift from the '58-59 Corvette interiors," says Mr. Lutz.

John Mack, who led the Malibu's interior design team, says most versions of the Malibu will come with two-tone interiors, such as "cocoa and cashmere." Besides color, the Malibu will offer such features as a storage bin under the center arm rest big enough for a purse.

All these touches cost money, as do the materials and engineering that will make the Malibu quieter inside and new standard safety equipment such as side curtain airbags and stability control. GM engineers have tried to offset the added costs by using more parts from the prior model, sharing parts with other cars such as the Saturn Aura, and redesigning the body to reduce the use of expensive steels. Mr. Lutz says if by putting $200 into features that make the car look better GM can cut a $4,000 rebate to $1,800 "you are $2,000 ahead."

GM wants to sell fewer Malibus to one kind of customer: Rental car agencies. Those sales almost always return lower profits than sales to individuals. Instead of selling about 34% of Malibus to fleets, GM hopes to sell only about a quarter of the redesigned Malibus that way. Mr. Lutz says done right, rental sales could help GM. By selling better looking cars -- without "gray rat's fur upholstery and dark gray plastic parts" -- renting a GM car "becomes a national demonstration program where people actually pay to drive a GM car, and they say, 'Holy smokes, it's fabulous.' "

--Gina Chon contributed to this article.

Write to Joseph B. White at joseph.white@wsj.com

link: http://online.wsj.com/

Milton Friedman @ Rest
January 22, 2007

In July last year, the late Milton Friedman, Nobel laureate in economics in 1976, granted an interview to The Wall Street Journal. Today we publish material from a question-and-answer exchange he had by email -- shortly after their meeting -- with his interviewer, Tunku Varadarajan, the Journal's editorial features editor.

* * *

Should China float the yuan?

Milton Friedman: Yes. Pegging the Chinese currency to the U.S. dollar requires that China follow a policy which over time yields an inflation rate that is compatible with, though not necessarily equal to, the U.S. inflation rate. When that is not the case, maintaining the peg will require control over foreign exchange transactions both current and capital. But China's future depends on their eliminating such exchange controls, on their opening the market as much as they can and as having essentially a free price system. Hence it is in their own interest to move to institutions which enable them to have as free a market as possible both internally and externally.

If they do insist on pegging the yuan, they will sooner or later run into a situation in which they are either accumulating an excessive amount of U.S. dollars or they are in debt for an excessive amount of U.S. dollars and they will have a foreign exchange crisis. Far better to have a floating exchange rate and let the market do the adjusting that is necessary to render developments in China economically compatible with those in the rest of the world.

Are you still a strong supporter of flexible exchange rates, even for developing countries?

Friedman: Yes. Economic forces affecting different countries are not always the same. The right exchange rate for a country in general may be one thing one time and another thing another time. A country that pegs the exchange rate is essentially committing itself to adopt the economic policies of the country whose currency it is pegged to. If it does that by pegging the exchange rate, it will always be under pressure as circumstances change to take advantage of the pegged exchange rate when they can and get into a position which is untenable.

The case of Argentina is the most dramatic and clearest case about that. Either a country should explicitly become part of the economic system of another country, as it could by dollarizing its currency as Panama has done, or else it seems to me it is best off by allowing the market to determine the value of its currency and in that way adjust to changes in the relative economic pressures on different countries. But flexible exchange rates are not a panacea for all evils. Governments can follow bad economic policies with either flexible or fixed exchange rates.

Do you still think it would be a good idea to have a computer run monetary policy?

Friedman: Yes. Of course it depends very much on how the computer is programmed. I am not saying that any computer program would do. In speaking of that, I have had in mind the idea that a computer would produce, for example, a constant rate of growth in the quantity of money as defined, let us say, by M2, something like 3% to 5% per year. There are certainly occasions in which discretionary changes in policy guided by a wise and talented manager of monetary policy would do better than the fixed rate, but they would be rare.

In any event, the computer program would certainly prevent any major disasters either way, any major inflation or any major depressions. One of the great defects of our kind of monetary system is that its performance depends so much on the quality of the people who are put in charge. We have seen that in the history of our own Federal Reserve System. Surely a computer would have produced far better results during the 1930s and during both world wars.

That raises a question about the desirability of our present monetary system. It is one in which a group of unelected people have enormous power, power which can lead to a great depression or which can lead to a great inflation. Is it wise to have that power in those hands?

An alternative would be to eliminate the Federal Reserve System; to reduce the monetary activities of the federal government to the provision of high-powered money, that is, currency and bank reserves, and to constitutionalize, as it were, what is to be done with high-powered money. My preference is simply to hold it constant and let financial developments produce the growth in the quantity of money in the form of bank deposits, a process that has been going on for many decades. But that is, of course, politically impossible.

Do tax cuts pay for themselves?

Friedman: Occasionally. But revenue loss is almost always less than static prediction.

Do you have any favorite candidates for president in 2008?

Friedman: No.

Is inflation-targeting the right medicine for monetary policy? If so, how would you do it?

Friedman: It is a good medicine with the present institutions. And recent experience suggests that it is doable. Targeting central banks have been able to hit their targets. Basic way to do it is to keep quantity of money growing at a rate equal to target plus trend rate of real growth. Full discussion beyond the scope of email.

What is the biggest risk to the world economy: America's deficits? Energy insecurity? Environment? Terrorism? None of the above?

Friedman: Islamofascism, with terrorism as its weapon.

What are your thoughts on the low U.S. savings rate?

Friedman: The right saving rate is whatever satisfies the tastes and preferences of the public in a free and unbiased capital market. Market can adjust to any rate. This is a very complicated question. Present estimates probably understate actual savings because of treatment of capital gains. In any event, the present situation does not raise any problems for the economy.

India -- how do you assess its prospects?

Friedman: Fifty years ago, as a consultant to the Indian minister of finance, I wrote a memo in which I said that India had a great potential but was stagnating because of collectivist economic policies. India has finally started to disband those collectivist policies and is reaping its reward. If they can continue dismantling the collectivist policies, their prospects are very bright.

Any thoughts on a China versus India comparison?

Friedman: Yes. Note the contrast. China has maintained political and human collectivism while gradually freeing the economic market. This has so far been very successful but is heading for a clash, since economic freedom and political collectivism are not compatible. India maintained political democracy while running a collectivist economy. It is now unwinding the latter, which will strengthen freedom of all kinds, so in that respect it is in a better position than China.

Milton Friedman died on Nov. 16, 2006, age 94. There is a memorial for him today at Stanford University.

link: http://online.wsj.com/

The Conservative Mind

By PETER BERKOWITZ
May 29, 2007; Page A15

The left prides itself on, and frequently boasts of, its superior appreciation of the complexity and depth of moral and political life. But political debate in America today tells a different story.

On a variety of issues that currently divide the nation, those to the left of center seem to be converging, their ranks increasingly untroubled by debate or dissent, except on daily tactics and long-term strategy. Meanwhile, those to the right of center are engaged in an intense intra-party struggle to balance competing principles and goods.

One source of the divisions evident today is the tension in modern conservatism between its commitment to individual liberty, and its lively appreciation of the need to preserve the beliefs, practices, associations and institutions that form citizens capable of preserving liberty. The conservative reflex to resist change must often be overcome, because prudent change is necessary to defend liberty. Yet the tension within often compels conservatives to wrestle with the consequences of change more fully than progressives -- for whom change itself is often seen as good, and change that contributes to the equalization of social conditions as a very important good.

F.A. Hayek

To be sure, some standard-order issues remain easy for both sides. Democrats instinctively want to repeal the Bush tax cuts, establish government supervised universal healthcare, and impose greater regulation on trade. Just as instinctively Republicans wish to extend the Bush tax cuts, find market mechanisms to broaden health care coverage and reduce limitations on trade.

But on non-standard issues -- involving dramatic changes in national security and foreign affairs, the power of medicine and technology to intervene at the early stages of life, and the social meaning of marriage and family, the partisans show a clear difference: the left is more and more of one mind while divisions on the right deepen.

Consider Iraq. The split among conservatives has widened since Saddam was toppled in the spring of 2003. Traditional realists continue to put their trust in containment, and reject nation-building on the grounds that we lack both a moral obligation and the requisite knowledge of Arabic, Iraqi culture and politics, and Islam. Supporters of the war still argue that, in an age of mega-terror, planting the seeds of liberty and democracy in the Muslim Middle East is a reasonable response to the poverty, illiteracy, authoritarianism, violence and religious fanaticism that plagues the region.

In contrast, Democrats today are nearly united in the belief that the invasion has been a fiasco and that we must withdraw promptly. Indeed, rare is the Democrat (Sen. Joe Lieberman was compelled to run as an Independent) who does not sound like a traditional realist denying both America's moral obligation to remain in Iraq and its capacity to bring order to the country.

Consider also abortion rights and embryonic stem-cell research. Here too, the right is torn, with the social conservative wing opposed to both, and the small government, libertarian wing supporting both. No such major divisions are in evidence on the left. Rare is the progressive man or woman who opposes abortion rights, or who regards the destruction of embryos as the taking of human life, or even as a dangerous precedent corroding our respect for the most vulnerable among us.

And look at same-sex marriage. Again, the right is rent by serious difference of opinion. A crucial segment of those who voted for Bush in 2000 and 2004 think that the Constitution should be amended to protect the traditional understanding of marriage as a union between one man and one woman. Another crucial segment of the Republican coalition rejects alteration of the Constitution to advance debatable social policy, preferring that states function as laboratories of innovation.

Meanwhile, on the left, despite ambivalence among the rank and file, all that remains to be decided at the elite level is how and in what ways to endorse same-sex marriage. Few doubt that presidential candidate John Kerry's opposition to same-sex marriage in 2004 was driven more by political calculation than moral conviction. And rare is the man or woman of the left who, in public debate, identifies competing principles and goods that ought to cause hesitation or doubt about same-sex marriage's justice or benefits to the nation.

This absence on the left of debate or dissent about moral and political ends has been aided and abetted by many of the party's foremost intellectuals, who have reveled in denouncing George W. Bush as a dictator, in declaring democracy in 21st-century America all but illegitimate, and in diagnosing conservatism in America as in the grips of fascist sentiments and opinions.

A few months ago, Hoover Institution research fellow Dinesh D'Souza published a highly polemical book, "The Enemy at Home," which held the cultural left responsible for causing 9/11 and contended that American conservatives should repudiate fellow citizens on the left and instead form alliances with traditional Muslims around the world. Conservatives of many stripes leapt into the fray to criticize it. But rare is the voice on the left that has criticized Boston College professor and New Republic contributing editor Alan Wolfe, former secretary of labor and Berkeley professor Robert Reich, New Republic editor-at-large and Council on Foreign Relations senior fellow Peter Beinart, Berkeley professor George Lakoff, and New York University law professor Ronald Dworkin -- all of whom have publicly argued in the last several years that conservatives form an enemy at home.

One explanation of the unity on the left is its belief that today's divisive political questions have easy answers -- but because of their illiberal opinions and aims, conservatives are unable to see this and, in a mere six years, have brought democracy in America to the brink. This explanation, however, contradicts the vital lesson of John Stuart Mill's liberalism that political questions, as opposed to mathematical questions, tend by their very nature to be many-sided. Indeed, it contradicts the left's celebration of its own appreciation of the complexity and depth of politics.

Another explanation is that blinded by rage at the Bush administration and resentment over its own lack of power, the left has betrayed its commitment to grasp the many-sidedness of politics, and, in the process, has lost appreciation of modern conservatism's distinctive contribution to the defense of a good, liberty, which the left also prizes. Indeed, the widespread ignorance among the highly educated of the conservative tradition in America is appalling.

In contrast to much European conservatism, which harks back to premodern times and the political preeminence of religion and royalty, in America -- which lacked a feudal past to preserve or recover -- conservatism has always revolved around the preservation of individual liberty. Of course modern conservatism generally admires virtues embodied in religious faith and the aristocratic devotion to excellence. It also tends to emphasize the weaknesses of human nature, the ironies and tragedies of history, and the limitations of reason and politics. At the same time, it wishes to put these virtues and this knowledge in liberty's service.

Balancing the claims of liberty and tradition, or showing how liberty depends on tradition, is the very essence of modern conservatism, the founding text for which was provided by Whig orator and statesman Edmund Burke in his 1790 polemic, "Reflections on the Revolution in France." The divisions within contemporary American conservatism -- social conservatives, libertarians, and neoconservatives -- arise from differences over which goods most urgently need to be preserved, to what extent, and with what role for government.

The varieties of conservatism are poorly understood today not only because of the bitterness of current political battles but also because the books that have played a key role in forming the several schools go largely untaught at our universities and largely unread by our professors. Indeed, perhaps one cause of the polarization that afflicts our political and intellectual class is the failure of our universities to teach, and in many cases to note the existence of, the conservative dimensions of American political thought.

Rare is the political scientist, to say nothing of other faculty, who can sketch the argument, or articulate the point of view, of such influential works as Russell Kirk's "The Conservative Mind" (1953), F. A. Hayek's "The Road to Serfdom" (1944) or Leo Strauss's "Natural Right and History" (1953). Yet these works, and the schools they helped launch, are essential to understanding not only where we come from but where we should head.

Kirk identified six elements that make the conservative mind: belief in a transcendent order that "rules society as well as conscience"; attachment to "the proliferating variety and mystery of human existence" as against the routinizing and leveling forces of modern society; the assumption that "civilized society requires orders and classes"; the conviction that "freedom and property are closely linked"; faith in custom and convention and consequently a "distrust of the 'sophisters, calculators, and economists' who would reconstruct society upon abstract designs"; and a wariness of innovation coupled with a recognition that "prudent innovation is the means of social preservation." The leading role in this mix that Kirk attaches to religion marks him as a social conservative; his insistence that religion provides the indispensable ground for individual liberty marks him as a modern conservative.

Famously, at least in libertarian circles, Hayek, an Austrian-born economist who became a British citizen and then immigrated to the U.S. in 1950, wrote a postscript to "The Constitution of Liberty" (1960), explaining why he was not a conservative. For him, "true conservatism" -- which he confused with European reaction -- was characterized by "opposition to drastic change" and a complacent embrace of established authority. Because his overriding goal was to preserve liberty, Hayek considered himself a liberal, but he recognized that in the face of the challenges presented mid-century by socialism, he would often find himself in alliance with conservatives. As a staunch member of the party of liberty, Hayek was keen to identify the political arrangements that would allow for "free growth" and "spontaneous change," which, he argued, brought economic prosperity and created the conditions for individual development. This meant preserving the tradition of classical liberalism, and defending limited, constitutional government against encroachments by the welfare state and paternalistic legislation.

For Strauss, what was most urgently in need in preservation was an idea, the idea of natural right. Like Kirk, Strauss believed that modern doctrines of natural right derived support from biblical faith. Like Hayek, Strauss taught that limited, constitutional government was indispensable to our freedom. But Strauss also saw that modern doctrines of natural right contained debilitating tendencies, which, increasingly, provided support for stupefying and intolerant dogmas. To arrest the decay, he turned to the classical natural right teachings of Plato and Aristotle, who were neither liberals nor democrats, but whose reflections on knowledge, politics and virtue, Strauss concluded, provided liberal democracy sturdier foundations.

There can not be a conservative soul today in the way one can speak of a liberal soul or spirit. Whereas the latter revolves around the paramount good of freedom, modern conservatives, while loving liberty, differ over its position in the hierarchy of goods most in need of preservation, and indeed differ over the paramount good. Yet the writings of Kirk, Hayek and Strauss do form a family. All developed their ideas with a view to the 20th century totalitarian temptations of fascism and communism. All agreed that liberal democracy constituted the last best hope of modern man. And all showed that defending liberty involves a delicate balancing act.

Conservatives, facing uncertainty about George W. Bush's legacy, and the reality of their own errors and excesses, have good reason just now to read and ponder Kirk, Hayek and Strauss. Progressives, too prone these days to perceive difficult moral and political questions as one-sided and too keen to characterize their allies at home in the defense of liberty as enemies, have good reason to do so themselves.

Mr. Berkowitz is a senior fellow at Stanford University's Hoover Institution.

link: http://online.wsj.com/

Pepper . . . and Salt

June 6, 2007; Page A18

June 8, 2007; Page A16

June 14, 2007; Page A14

link: http://online.wsj.com/