Dan Malone writes extensively on using telecommunications for Economic Development. He serves on the Boards of the World Teleport Association, and George Marshall International Center and is involved with numerous Virginia activities. He lives in Williamsburg.
THE OLD DOMINION AND THE NEW ECONOMY
The world is approaching the eye of the storm of the Information Revolution and the fundamental nature of the economy is transforming. Called variously the Information Economy, the Global Economy, the Knowledge Based Economy; the descriptor most in the forefront seems to be simply the “New Economy.”
The question: where is Virginia in all of this?
Actually, the Old Dominion is in the center of many elements of the New Economy and at the epicenter of some of the most important. It is hoped this NewsLetter will provide a better understanding of why; and whither it will lead.
Realization that a new kind of economic activity was taking hold came slowly, and that Virginia was leading it even more slowly. Among the first hints came from an article in Fortune Magazine, in March of 1994. The author described the people and companies wiring the world’s computers together or creating products for those networks. He called the cluster of those companies along the Dulles Airport Toll Road as the “new Silicon Valley,” and he gave the place a name: the Netplex.
Business and political leadership decided these trends needed to be quantified. In 1993 the Institute for Public Policy at George Mason University was funded to produce the first analysis, followed by refinements in subsequent years. According to the Institute’s 1997 report, although only 4% of northern Virginia companies were classed as “technology industries” they accounted directly or indirectly for 45.2% of all employment and 46.7% of all incomes.
Virginia’s Center for Innovative Technology (CIT) commissioned the College of William and Mary to track multi-year trends. In July 1997, it published “The 1991-1996 Performance of Virginia High Tech Industries.”
The dynamics were amazing. Although technology industries accounted for only 13% of the state job growth, that growth contributed:
40% of total real (inflation adjusted) gain in compensation
29% of real growth in total personal income
and a whopping 63% of the increase in real Gross State Product.
Technology incomes climbed from a 54% premium over all other incomes to a 66% premium in 1996. The average high tech income rose more than double the inflationary growth during the same period.
Another independent study by the American Electronic Association in 1997 confirmed the earlier works. The AEA ranked Virginia as the #2 cyberstate with 42,000 software jobs; right behind Silicon Valley. Technology incomes averaged $52,000, double the income of Virginia workers in every other industry sector.
A RURAL EXAMPLE
The impact of the Information Revolution is not limited to Northern Virginia. What happened in the Shenandoah Valley lends significant insight to the impact of this New Economy.
Throughout the end of the 1980’s and beginning 1990’s, thousands of new manufacturing jobs were created in the Lord Fairfax Planning District in the Northern Shenandoah. According to all the textbooks, these jobs and their multipliers should have brought higher incomes and greater wealth. But something was going wrong.
Analysis beyond the level of just job creation showed that, after rising significantly compared to Virginia’s in the 1980’s, Per Capita Incomes in the Planning District had plummeted nearly 10% compared to Virginia’s PCI in the early 1990’s. This was indeed the last hurrah of the Industrial Revolution.
To the east of Winchester, in Northern Virginia, a new economy of the Information Revolution was being forged, along with fast climbing incomes, but no information age jobs were being created in the rural Shenandoah Valley. As in most rural areas, no Internet provider believed that providing a node – a computer connection to enable access – could pay its way. Neither was local telecommunications capacity, or bandwidth, sufficient to carry the kinds of products the information age was beginning to produce.
In response, in what has become a classic success story, the political, economic, and technical leadership of the region developed and implemented a strategy which turned the economy around, and brought hundreds of “infoworker” jobs to the region, and tens of millions in new income.
The strategy is summarized in three sentences.
Deploy an Internet node in the Northern Shenandoah Valley.
Educate the population on its importance.
Improve the infrastructure to connect every home, office and institution with as much bandwidth as possible.
This may seem simplistic today when it is easy for almost anyone to plug into an ethernet port in lab, dorm, or office but it took 2 ½ years of hard work just to get to step one. Along the way, Winchester established the first of a ring of “Telecommuting Centers” ringing Washington DC, a project which became a White House Reinvention Laboratory. These were established under a federal appropriation but required unique kinds of cooperation with local governments to implement. Federal workers with offices in Washington were then able to work from a telecommuting center one or more days a week instead of driving the 75 miles each way.
Winchester’s Cyberstreet project set the stage for revitalization of a traditional downtown and for becoming the first Technology Zone in Virginia. The existing pedestrian zone in the old town, with its cafes and surviving retail shops was the area chosen for the hoped-for jobs. Calling it a “Cyberstreet” got public attention. When the Virginia General Assembly authorized Technology Zones, akin to Enterprise Zones and their tax advantages, Winchester used Cyberstreet as the center of the zone. It was a novel way to encourage Information Technology industry development.
It took a major effort by committees and task forces in the public and private sectors. The northern Shenandoah, describing itself today as a 21st Century Tele-Region, was perhaps the first to apply the general theories of the Information Revolution to a specific region and the first to use the Internet specifically for Economic Development. What was done was to enable citizens to get a job in the Netplex – the cluster of businesses along the Dulles Toll Road - but do the job from the Valley.
An insight into how this new economy will work can be gleaned from the telecommuters and teleworkers. A telecommuter is someone who normally works in a traditional office but, using e-mail and other computer and communication services, works from home or a center a few days a week. The teleworker works from home or a center nearly all the time.
In the United States 11 million Americans now telecommute. That's a 30 percent increase from two years ago and a 175 percent increase from 1990. The number should top 14 million by the year 2000.1 European nations are experiencing similar though less rapid adoption of telework, clocking some 1.5 million telecommuters in 1997. The number varies from 3.8 percent of the workforce in Sweden to 0.25 percent in Austria with an EU average of 0.1 percent compared to 4.5 percent in the United States.2 Put this in historical perspective. In the first 200 years of America’s existence, over 90 percent of the population lived on family farms and produced most of their own food. Today less than 3 percent live that way, and farm employment continues to fall. The Industrial Revolution brought offices and factories. Today, however, why drive through death defying traffic only to work at a computer all day; then repeat the commute at day’s end?
IT’S JUST THE BEGINNING
But telework and telecommuting on its present scale is just the beginning. Today, Virginia and the world are at the start of deployment of another great network infrastructure. Like the railroads and canals of the Industrial Revolution, the deployment of broadband, multimedia networks of the Global Information Infrastructure (GII) foreshadows huge changes in the economy and, if past is prologue, a surge in wealth and prosperity. Much of Virginia’s stunning business transformation is wrapped up in this process.
Nor is infrastructure the only comparison. Books on the Industrial Revolution read like an agenda of meetings about technology issues in Virginia today. Shortages of skilled workers and venture capital; a surge of innovation and in entrepreneurial activity; higher capital investment to “buy in;” and a fast growing gap of incomes between the workers of the new economy of those times and the workers of the old.3 Also similarly, earlier network deployments occurred in short surges of construction; maybe a decade at a time. The same thing is happening again with the surge of deployment of the satellite and submarine optical fiber of the GII.
During the next few years, before the first decade of the new century ends, the world will deploy some $500 Billion in additional telecommunications infrastructure.4 Besides continental deployment, much of this new infrastructure will comprise satellites and submarine cable.
Capital Investment this vast, altering the economic landscape yet again, will create, according to Dr. Pekka Tarjanne, Secretary General of the International Telecommunications Union, yet “another Continent.”5 It is a continent where billions of dollars of business and jobs await the ambitious, and even the not too ambitious.
Some of the investment in the New Economy will come from pubic institutions. For example, the University of Virginia and Virginia Tech participate fully in the Internet2 project to provide a more powerful research network. More important for the masses of citizens, however, are the commercial ventures into this uncharted continent.
Between now and 2002, entire fleets of Low Earth Orbit (LEO) communications satellites will be coming into service. Similarly, a surge of laying submarine fiber optic cable, another GII component, is also just getting underway. A WorldCom consortium is linking Australia, New Zealand, Hawaii, and the US West Coast.6 It joins another new WorldCom Atlantic link to Europe. The Pan American cable (June 1998) carries voice, data, and images from the Caribbean to South and Central America.7 Most use 3d generation systems with capacities so huge that satellites cannot back them up. And these are just a few, all of which have vast capacity not even imagined when the first cables were laid.
The point is not the technicalities of satellites and submarine cable. Rather, it is the huge size of this totally new multimedia capability which has already changed business and economic activity, and which is contributing to Virginia’s emergence as a new Silicon Valley.
Political and business leaders need to be aware of the size and scope and speed of deployment of this new infrastructure. Like the railroads and canals, the Global Information Infrastructure can, if policies are properly supportive, lead to another take off in prosperity and economic well-being just as did the infrastructure deployments of the 19th and 20th centuries.
New technologies raise many political issues. Universal Service is a good example. In the 1920s and 1930s, telephone service was provided to remote rural areas as well as in populous cities. Fees were set so that the heavily populated areas helped pay for the extension of lines to rural America. Today that concept is being applied to lnternet Access.
Then there are questions about taxation and regulation and they are not limited to the United States. Whilst the members of the European Union formally deregulated their telecommunications in January of 1998, and Japan even earlier, much de facto regulation lingers on, choking off the benefits to the masses of users. States and local governments wrestle with policies favoring privately owned versus publicly owned networks and there are examples even in the USA of both. In a Business Week forum, the President of Nortel, a world leader in telephony and network systems, observed what costs only thousands to accomplish in North America costs millions elsewhere. Policy and regulations play a huge role, and one of the reasons for Virginia’s ascendancy in the New Economy is the careful metering keeping the cost of doing business low.
A recent NewsLetter by Northern Virginia businessman Til Hazel pointed out that much of the activity in the New Economy is not being taxed. When hit with another recession the tax base may not be able to fund what Virginia and Virginians want to do with their Commonwealth. Details lie beyond the scope of this Newsletter, except to draw lessons from historical comparisons with the Industrial Revolution.
Deployment of the railroad network was exempted from local taxation, not without serious challenge. Lesson: Don’t tax the “social overhead infrastructure” of the Internet which everyone needs to move into the next level of economic participation.
In 1793, having just lost the Americas, England was faced with financing what stretched out to 22 years of intensive warfare with Napoleonic France. Although industrial activity was producing more wealth than land during those years, tax policy stayed with traditional sources of land and landowners. Historians seem to agree that had the tax burden for those wars been placed on industrial activity as it was on landowners, the Industrial Revolution might not have occurred, might have occurred much later, or occurred without the vigor which carried the standard of living of so many people to new and loftier levels. Lesson: Don’t disincentivize investment that can create returns for everyone. More simply put, don’t kill the goose that lays the golden egg.
The principle here is that we are dealing with another revolution, not just another business. Virginia and the US have achieved that realization with a moratorium, and at the G-7 Conference early in 1998 President Clinton and then Prime Minister Hashimoto likewise called for keeping international electronic commerce tariff free.
TELEPORTS AND INTELLIGENT CITIES
Just like market towns grew at the junction of great rivers and later of railroads, teleports and “intelligent cities” at the major nodes of the GII are growing as the major centers of the New Economy. There are some 200 teleports in the world today, and political leaders around the world are joining their communities in the ranks of Intelligent Cities or Smart Communities to insure their place in the New Economy.
Teleports are, basically, facilities equipped with earth stations capable of transmitting and receiving huge masses of data to and from satellites. Some are specifically and entirely communications facilities; other kinds of Teleports include offices (multimedia business parks) and others include residential real estate… merging into the definition of Intelligent City or Smart Community.
Intelligent Cities include new communities built from the ground up with fiber and broadband multimedia access. They also include cities like Toronto, Geneva, Stockholm and many others, which have developed the elements of their networks…, schools, libraries, government, businesses… into an integrated community network.
Teleports are huge job magnets. The Sunderland Teleport in the UK, created in a region whose shipbuilding and coal mining dissolved about the same time, created 3,000 jobs in its first year. The latest member of the family, in Rio de Janeiro, will create 30,000 and underline Rio’s role as a “global city” for Latin America in the New Economy and the new century.
VIRGINIA’S KEY DECISIONS
Virginia made key decisions, which have helped businesses move as far as they have in the New Economy.
As early as 1981, Virginia established a policy to wire every home, every school, and every office in the Commonwealth with fiber optic cable. That visionary act helps explain why, in 1998, Virginia has over 650,000 miles of fiber in the ground - more than any other state - nearly all of it in the private sector.
Since then, new and revolutionary technologies, not least the TCP/IP of the Internet, emerged to realize the full potential of the broadband capabilities of these networks. Already, over half the world’s Internet traffic passes through Virginia.
In 1993 a General Assembly task force was appointed to review Virginia’s position. You wouldn’t expect a parliamentary body to have the agility to react to events as quickly as their records show, but to Virginia’s credit they did. Realizing from the still-in-process analyses what was transpiring in Virginia’s economy, the group established a permanent Joint Commission on Technology and Science (JCOTS) tasked, inter alia, with reviewing all laws and regulations to bring them in line with an Information Age society. And it redirected the CIT, established in 1983 to focus on academic applications of technology, to focus on the needs of the new marketplace instead, transferring it to the Secretary of Commerce and Trade from the Secretary of Education.
Several hundred business leaders under the aegis of “Opportunity Virginia” hammered out definitions and needs for the technology industries. The Legislature would endorse the vision they expressed for the Information Technology & Telecommunications sector of that report. The action is vastly more significant than would first appear because IT&T is present in all other sectors and the foundation of the New Economy. That vision bears reading a couple of times through, because it is a vision for Virginia’s future.
“The IT&T industry vision is to build a knowledge economy rooted in innovation, entrepreneurship, and world class technology infrastructure in Virginia, and to establish Virginia as the acknowledged world capital for the knowledge industry and the premier site for the creation and global deployment of advanced digital technologies.”
The Executive Branch in the meantime (1994) established the Virginia Technology Council to be an advocate for technology policy at all levels of government in Virginia. In turn, modeled after the Northern Virginia Technology Council, eight Regional Technology Councils have been established in all Virginia regions of concentration of business and industry. These eight were not formed because of legislation or executive order. The Councils were created because citizens and regional leaders saw they were needed for the economic well being of their stakeholders.
The CIT was tasked to coordinate and facilitate all these efforts, and to develop a new strategy and plan for the Commonwealth. This work was accomplished by two Technology Summits; one in the fall of 1996; another in the spring of 1997 in Norfolk and Richmond respectively. The result was a formal "Blueprint for Technology-Based Economic Growth in Virginia."
Virginia was one of the first states to enact legislation authorizing use of digital signatures, and one of the first to put in place the necessary regulations to qualify for the federal subsidies for schools and libraries to get Internet access.
What remained was to establish a policy focus for technology issues. In May 1998 Governor Jim Gilmore appointed Don Upson as Virginia’s first Secretary of Technology. The office is the first in the nation at state level to combine both internal IT responsibilities and external policy mandate.
Establishing the office at Secretariat level as a focus for policy is a major step. The Virginia Technology Council had to struggle to accommodate both policy and advocacy. Policy is critical to successful economic development in the New Economy, especially considering the competition from Teleports and Intelligent Cities.
For the 21st Century, Virginia needs a policy which will provide a broadband, multimedia network which is accessible by all, affordable, profitable, and upgradeable.
VIRGINIA’S PRESENCE ON THE GII
Numerous Virginia businesses are even now major players among the projects of the Global Information Infrastructure. The Commonwealth is home of the Internet and key Internet companies like PSI and UUNET. Among the satellite constellations, Iridium’s earth control station, the world’s most advanced, is in Virginia. Orbcomm and Orbital Sciences are Virginia companies. Just this year, Governor Gilmore opened Virginia’s Commercial SpacePort offering low energy access to the most desirable orbital inclinations for the huge communications satellite launch market.
The foundation of the New Economy is the global collection of facilities called “chip fabs,” that create and fabricate silicon microchips. Three chip fab plants are making Virginia their home. In Southwest Virginia, 25 Electronic Villages are providing the infrastructure and public education to participate in the New Economy.
The networks described in this Newsletter are not an end in themselves, although businesses building and deploying them are among the world’s most profitable and fastest growing and many are in Virginia. However, Virginia’s real strength is the complex of enterprises that use those networks.
Information Technology supports everything; high performance manufacturing, just-in-time inventory control all along the Interstate-81 corridor; biotechnology whether clustered around Richmond or in Blacksburg; aerospace whether a satellite company in Northern Virginia or manufacturer in Hampton Roads; agriculture everywhere. The Thomas Jefferson Labs and NASA Langley are jewels of the New Economy. Their products ride as well on the new fiber and satellite link highways.
What all of these infrastructure networks are about is moving business product at the lowest possible cost. In the Shenandoah, the cost of moving business product went from long distance to a local call. The University of Virginia, using NetWorkVirginia, cut the cost of one telemedicine link from $18,500 per month to $1,000 per month.
As the capacity of the new Global Information Infrastructure continues to expand, it will support still more of the kind of economic activity we observe now. But the token amount of telework and telecommuting, which give hints at the future, will swell, according to some, to half the workforce. We can expect that in such an economy Intelligent Cities have an enormous advantage.
Opportunities abound in economic development with these new principles. Regional wealth is proportional to regional bandwidth and bandwidth is the basis of Intelligent Cities. Hampton Roads and Charlottesville are approaching the critical mass of bandwidth to be candidates for Intelligent City status. It remains to be seen if Virginia can develop and implement the policies to continue its present leadership in the New Economy. For sure, these kinds of economic activities are the path to future prosperity. Even if we are entering a period of recession, as an uncertain Wall Street hints, as in every recession of times past, people will dig out with the tools of the times; and those tools are the technologies and Global Information Infrastructure of the New Economy.
COPYRIGHT Dan Malone 1998
1 www.zdnet.com Anchor Desk for Monday 14 July 1997.
2 European Commission, Telework 1997, p. 20.
3 Phyllis Dean, “The First Industrial Revolution,” Cambridge University Press, 1979.
4 Graham T.T. Molitor, “Trends and Forecasts for the New Millennium,” The Futurist, Aug-Sep 1998 p. 54.
5 ITU Inter@ctive97, Geneva, Switzerland 8 September 1997.