Prophet of Productivity

Cisco CEO John Chambers sure showed the chrome-domes in Davos a thing or two.

John Chambers, CEO of Cisco Corp.

World Economic Forum panel
January 24, 2004

In the Oscar-winning film Good Will Hunting, there's a priceless confrontation in which Will, the unassuming genius working as a university janitor, employs his epic command of the facts to upstage an Ivy League blowhard trying to impress a girl with his fulsome views on macroeconomic theory.

So it was when Cisco Corp. CEO John Chambers went toe to toe with global heavies at the 2004 World Economic Forum in Davos, Switzerland. High-level debate on global economics isn't normally within a corporate CEO's zone of comfort. But at Davos, Chambers's persuasive oratory stole the show.

The venue was a discussion on "How to Create a Framework for Sustained Growth." Stacked with three G8 finance honchos and one Nobel laureate economist, the panel was expected to reveal the means for "realizing the world economy's full potential"—without inducing bubble-and-bust spasms, without "overheating China," and without giving fuel to "rising protectionist pressures" in developed nations. (This is Davos, after all. No discussion is too ambitious.)

Despite their credentialed heft, the panelists quickly resorted to high-minded drivel. Francis Mer, France's minister of economy, finance, and industry, argued, "Whatever the countries are . . . the problems are the same, the solutions are the same, the calendar is not exactly the same, the methods are not exactly the same, the target is agreed, and it is the same. That is to say . . . our duty as an administration, largely speaking, is to enter into a decisive program of reform covering a lot of subjects."

Which may explain a lot about France.

Germany's federal minister of economics and labor, Wolfgang Clement, gamely proposed, "I don't think you want to know this in detail, [but] the key . . . [is to] implement reforms to liberate the labor market from structural rigidities." Was he talking about outsourcing? And Haruhiko Kuroda, special adviser to the Cabinet of Japan, offered a timid solution that amounted to little more than "export to China."

Finally, Chambers took the mike. "There is a one-to-one correlation between GDP growth and productivity growth," he drawled, "and a 0.98-to-1 correlation between the percentage of capital investment going into your economy and productivity growth."

Huh. That was good. Then more: "I believe—and I said it four years ago—that you should drive your economies at 2% to 3% productivity growth a year, and 3% to 5% is not out of the question. Four to five years ago, economists said that was impossible. But I believe it is possible, and [if you can do this] you should grow GDP one to two points above productivity increases."

Chambers was slick, all right—but not facile. His logic held water. Joseph Stiglitz, the Nobel Prize-winning economist from Columbia University who sat on the same panel, says Chambers's figures are "totally reasonable."

Chambers's own experience of productivity and growth is, of course, pretty profound. Following the collapse of the stock market and, in 2001, of the telecom business, Cisco went from annual revenue growth of 70% to -30% in the space of 45 days. Chambers told staffers that Cisco's revenue per employee—its productivity— would have to improve to $700,000 from $518,000 for the company to recover.

Cisco reported its second-quarter earnings on February 3. For the eighth quarter in nine, productivity increased, this time by 6%, to $632,000. And GDP? In Cisco's lingua franca, gross domestic product means earnings. And pro forma earnings, which have grown steadily since fiscal 2001, jumped 11%. It wasn't a spectacular result—but it seemed to bear out Chambers's macroeconomic theory. It could be this CEO interloper is onto something.

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