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23

Also in this section 24 Scottish independence 25 Health reform i n trouble 25 U n li kely dties 26 The continui ng credit crunch 26 The mortgage market 27 Business services 28 Bagehot: GLobaL Britai n , SOS

For dai ly analysis and debate on Britai n , visit Economist.comfbritain

Demography

The changing face of London

A baby boom is sending the city's planners back to the drawing board

T ONDON imports the young and exports

L the old, the theory goes-or went. For decades people have come to the capital to go to university or work, moving out again when their children require more space or education or when they retire. But a star­ tling demographic change has drastically slowed the conveyor belt. Births in the capital each year have soared by 25% since 2002, as British wom­ en who delayed childbearing finally got down to it and London's many immigrants produced in Stakhanovite quantities. Lon­ don contributed fully 37% of England's nat­ ural population increase (the surplus of births over deaths) between 2009 and 2010. Many parents are now staying put, thanks to a sticky mortgage market that makes it hard for buyers to get a loan and a sticky labour market that makes it hard for anyone to be sure of a job. Half as many London properties were sold in 2010 as in 2004. Grandparents, too, are less keen on leaving than they were. Black and Asian immigrants who settled in London in the 1960s and 1970s are disinclined to move away from their families in London for the pleasures of, say, Margate. So London is getting both younger and older-and above all bigger. Net outflows to the rest of Britain are half what they were in 2005, partly because more people have drifted into London. Net inflows from

overseas, though dwindling, remain posi­ tive. On current projections London's pop­ ulation will swell from just under 8m now to over 9m by 2031, which is roughly the equivalent of annexing Britain's second city, Birmingham. Ethnic minorities are ex­ pected to account for almost three-quar­ ters of the increase. This expansion has coincided with the hardest squeeze on government finances in almost a century. So it is small wonder that city planners are scratching their heads over how to deliver services such as education and health care, and wondering

I

Primary-school p u pils i n london 2010·11 to 2015·16

% increase by borough.

. Over 20

• 15-19.9

Source: Department for Education

BARKING AND OAGENHAM +43%

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where on earth, given London's long-run­ ning housing crisis, so many extra people are to live. Primary schools have been the first to cry havoc. Since 2008 London Councils, a lobbying group representing London's 32 boroughs, has warned of the coming gap between the number of wriggling young bodies and the number of school places available for them. Now it is undeniable. School places are in short supply all over England, but the problem is especially acute in the capital. By 2015-16 greater Lon­ don will need around 70,000 more school places, London Councils says. In Novem­ ber central government agreed to give the capital £250m ($390m) to increase school places-a step in the right direction, but nothing like what is needed. Barking and Dagenham, in east Lon­ don, is a case in point. With the fastest­ growing birth rate in greater London over the decade to 2010 (up s8%), it also faces the biggest increase in demand for school places. At primary-school level this is set to rise by 43% between the academic years 2010-n and 2015-16 (see map). In the past three years the borough has created almost 8,ooo new primary-school places, some of them to accommodate the growing num­ ber of children who are brought to school after the official registration date. The council has diverted money meant for highways work, converted existing council offices into schools and discussed with private landlords the possibility of turning empty warehouses and shops into classrooms. Its share of the November hand-out was £24m. But in the five years to 2017 it reckons it will need at least 23 addi­ tional classrooms for the reception year, at least 34 more for n-year-olds and 400 new sixth-form places, with more to come later. ��

24

Britain

� Adding this capacity, the borough reckons, would require some £sam a year over the period. No borough is likely to underestimate its future needs publicly. But these figures may not be too far off the mark. Like some other boroughs in outer London, Barking and Dagenham is beginning to feel the pressure as families, especially large ones, move away from inner London to cheaper accommodation farther out. House prices in the borough were the lowest in the Lon­ don area in late 2011, on figures from the Land Registry, and rents were well below the city average. The drift to London's pe­ riphery is likely to increase as the govern­ ment clamps down on welfare and other benefits. Less health, more care

Though schools are the biggest immediate pinch point as the population grows, there are implications for health care too. The National Health Service has long struggled to improve services to London's expand­ ing, ethnically diverse and transient popu­ lation. It has made notable improve­ ments-in stroke treatment, in trauma care, in immunisation coverage-since Ara (now Lord) Darzi identified shortcomings in a widely-read analysis in 2007. This month NHS London launched a website on which family doctors' performance can be monitored by the public, which may help to drive up standards. But maternity services are hugely over­ subscribed in the baby boom (one hospital in east London, designed to handle 8,ooo births a year, is sinking under 9,ooo10,ooo). Maternal death rates are higher than elsewhere, in part because some mothers from ethnic minorities keep the good news to themselves until late in their pregnancies. Doctors' surgeries in the capi­ tal are often rather primitive one- or two­ man affairs-and even these tend to be few and far between in the poorer parts of town. London hospitals have a reputation for treating elderly patients callously. Health outcomes are not the only place where uncertainty lurks. How permanent are these new demographic trends? Will birth rates turn down again as the daugh­ ters of immigrants adopt British ways? Will foreigners find greener economic fields elsewhere? Will native Londoners? Flyers touting emigration services are beginning to appear in parts of town. It's a frightening time for those plan­ ning education or health care or-worst of all-housing. "We thought we had it nailed," says Baljit Bains, head of the Greater London Authority's demography unit. "We were a typical industrialised country, with fertility dropping and eco­ nomic prosperity. Then these crazy fertility numbers came, and the economic down­ turn." As so often, the capital is a crucible for experimentation. •

The Economist J a n ua ry 28th 2012 Scottish independence

More than just words Alex Salmond announces the details of his longed-for referendum

"DO YOU agree that Scotland should

be an independent country?" If Alex Salmond gets his way, that will be the main question confronting his compatri­ ots in the autumn of 2014. Scotland's Nationalist first minister set the timing of the referendum on the nation's indepen­ dence earlier this month. But its wording, which was announced in a consultation document on January 25th, will be more important to the eventual result. Unionists want Scots to be asked sim­ ply whether they wish to stay in the Un­ ited Kingdom or to leave it. Mr Salmond's main question does that, albeit in a rather leading way. But his consultation keeps open the option of an additional question: whether Scotland should be given more powers of self-government. Mr Salmond's critics say that he wants to include this op­ tion of "devolution max" on the ballot be­ cause he cannot persuade enough Scots to leave the union: polls suggest only one­ third support a break. He retorts that it would be undemocratic to exclude an op­ tion that commands a lot of support. Mr Salmond's announcement is mere­ ly the latest punch in a fight between Edin­ burgh and London over the handling of the referendum. The first minister insists that the arrangements are for Scotland to decide, while the British government, which has published its own consultation document, says that it is a matter for the union as a whole. As well as the timing and wording of the ballot, the two sides have disagreed on whether the voting age should be lowered for the referendum (Mr Salmond says that it should) and whether

But who will call the tune?

it should be overseen by the Electoral Commission, which Nationalists testily point out is answerable to the Westminster Parliament. Mr Salmond's consultation, which will close in May, gives ground on the latter but not the former. Mr Salmond used a speech in front of a left-leaning audience in London on Janu­ ary 24th to argue that an independent Scot­ land would be a "beacon for progressive opinion south of the border". He cited free university tuition and free medical pre­ scriptions for the elderly as social-demo­ cratic achievements by the Scottish Parlia­ ment. But the three main parties in Westminster are united in their opposition to Scottish independence. For Labour, which would struggle to win an election without its Scottish MPS, it is a matter of al­ most existential import. Although Mr Salmond is an imperious figure in Scotland, where his Scottish Na­ tional Party governs alone, the skirmishes between London and Edinburgh that have taken place this month have emboldened unionists. Many in the coalition govern­ ment detect that Mr Salmond, for all his tactical wiles, has no persuasive answers to the big questions that have been put to him so far. It is not clear, for example, whether an independent Scotland would adopt the euro, which is unpopular thanks to the unfolding crisis on the continent, or sterling, which would mean interest rates still being set in London. Neither is it obvi­ ous whether Scotland's large banks would be bailed out by the independent nation or (as Mr Salmond suggests) the UK. These co­ nundrums are worrying for the SNP; opin­ ion polls suggests most Scots will base their vote on whether they think indepen­ dence will make Scotland richer or poorer. Having initially craved an early referen­ dum to take advantage of low support for independence, some unionists think a two-year campaign will expose flaws in the Nationalist argument. Mr Salmond has always played a long game. He is no longer alone in that. •

Britain

The Economist J a n ua ry 28th 2 0 1 2 Health reform

This will hurt a bit

Unlikely dties

In name only Two peculiar candidates for city status

David Cameron's detachment from NHS reforms means they are drifting

'l '1 ]HAT education was to Tony Blair in VV his first term, health is to David Cam­

eron. The National Health Service is not just a target for reform and a recipient of comparatively generous tax funding. It is the public service to which the prime min­ ister has made the strongest personal com­ mitment, and the one on which he wants to be judged. But, as the coalition's health bill heads for the statute books, problems are multiplying. Reform plans launched a year ago seek to do two things at once, both onerous. The first is to save £20 billion ($31 billion) by the fiscal year 2014-15, requiring productivity to rise by 4% annually. The second is to place more responsibility for commission­ ing patients' care in the hands of local doc­ tors, who are expected to group together to buy services from hospitals or other pro­ viders-a process ministers believe will bear down on costs. At the same time, priv­ ate health providers will be allowed great­ er leeway to operate in NHS hospitals. It has been a hard road. Andrew Lan­ sley, the health secretary, has been forced to delay the introduction of consortia and make them more accountable to local scru­ tiny. Instead of encouraging new ways of delivering care, austerity has prompted ra­ tioning: the number of patients waiting longer than the 18-week target for hospital appointments has jumped by over 40%. This week a parliamentary committee crit­ icised the government's plans. Internal opposition is fierce. The British Medical Association, which represents doctors, and the main nurses' association are making noisy last-ditch protests. (Both have also threatened to ballot on possible strike action over pensions.) As The Econo­ mist went to press, health workers were meeting to plan a campaign against the bill. In particular, they scorn proposals to allow hospital trusts to make money from private practice. The government has of­ fered a cap of 49% on the amount of hospi­ tal capacity that can be used for private care. But Peter Carter, head of the Royal College of Nursing, argues that any such move will "fragment the service". The public likes the NHS: 70% of people are satisfied with it, according to the 2011 British Social Attitudes survey. The Tories have lower trust ratings on the matter than do Labour, and attitudes to change are mixed. In a poll conducted last year by YouGov, a mere 21% thought the reforms were right, though a further 46% conceded

T ONDONERS like to think they live in

L one of the world's great cities. London may be great, but, formally, it is no city. Lacking a royal charter, it is merely an administrative division composed of 33 local authorities and controlled by the Greater London Authority. But if London cannot be a city, perhaps bits of it can. One new city will be created in Britain this year to mark the queen's diamond jubilee. Among the 25 places that have submitted bids are two London bor­ oughs, Croydon and Tower Hamlets. Until 1889 city status was given only to towns with an Anglican cathedral. That changed when Birmingham was award­ ed a royal charter despite lacking a dio­ cese. The government has periodically handed out the honour since, often in conjunction with a royal celebration. But there are no fixed criteria and no clear rewards. City status affords no new rights, privileges or duties; the biggest change is in the signage and stationery. Most towns make economic argu­ ments, seeing city status as a draw for investors. There is no evidence for this, says John Beckett of the University of Nottingham, who has written a book on city status. And both London applicants are doing pretty well already. Croydon contains a government tax office, the UK Border Agency and several banks. Tower Hamlets is home to London's second financial centre, Canary Wharf, which paid for half the council's bid. The government has been reluctant to award city status to London boroughs. Southwark and Greenwich have tried and failed to become cities-as has Croy­ don. One reason is the fear of setting a precedent. Another is to preserve the sanctity of London's two long-estab­ lished cities: the retail and entertainment hub of Westminster and the more pow­ erful and independent City of London, now a financial district.

Croydon was a separate town until 1965, when it was absorbed into Greater London as part of a reorganisation of the capital's administrative boundaries. Its government hopes city status will give it a distinct identity as more than just a suburb of the capital. Lutfur Rahman (pictured), the mayor of Tower Hamlets, is bolder: he talks about his borough taking its rightful place alongside Lon­ don's other two cities. "We are ready to be on the world stage," he says. A more cynical explanation is that city status is a faster means of raising a politician's profile than the long slog of economic transformation. "It's a much quicker return on your investment," says Mr Beckett. Even if, over the next few years, any newly-minted city mayor's job is likely to entail making lots of deeply unpopular cuts.

some changes could be beneficial. Reformers are trying to fight back. Ju­ lian Le Grand of the London School of Eco­ nomics (and a former health adviser to the Blair government) cites evidence from Brit­ ain and America that hospitals in more competitive areas perform better. A sepa­ rate survey by Alan Garber, provost of Har­ vard University, concludes that competi­ tion might force out inefficient commissioners, GPs or hospitals. That "would be politically problematic, but bet­ ter for patient health," he says.

In the face of growing resistance, though, Mr Cameron has recently failed to put much of his own political capital on the line. That may be a mistake. The NHS reforms are not just technocratic-they re­ quire leadership from the top to assuage doubts and counter those averse to change for ideological or self-interested reasons. Amid falling budgets and growing de­ mand, the NHS needs to alter radically if it is to maintain standards, let alone raise them. Voters still need to be convinced of that unwelcome truth. •

The Michael Bloom berg of Tower Ham lets

25

26

Britain The economy

Squeezed

The Economist J a n ua ry 28th 2012

Not enough to go around

Bank lending to small and medium-sized businesses

British banks'• five-year cost spreads Bosispoints

% dlonge on ayear earlier

T he country is experiencing a quiet but dangerous credit crunch

Tain's

HERE was never any doubt that Brit­ economy was destined for a stormy close to 2011. Its proximity to the tempest engulfing Europe guaranteed that. All told, the economy's fourth-quarter per­ formance-a contraction of 0.2%-is a bit worse than expected, but hardly surpris­ ing. Is worse to come? The answer depends overwhelmingly on whether Europe's crisis deepens or is re­ solved. A sharp decline in European indus­ trial production from September hit both demand and confidence among British businesses. In the fourth quarter British in­ dustrial output sank by 1.2%. Yet the euro­ zone economy seemed to be stabilising by the end of the year. Industry on both sides of the English Channel fared somewhat better in December, and in January the euro zone posted a surprise increase in manufacturing activity. Things are somewhat cheerier at home, too. Consumer-price inflation fell from 4.8% to 4.2% from November to December alone. That should reduce pressure on real household incomes, buoying demand. The hangover from December's gyrations could leave Britain in recession through the first quarter, but growth is expected to return thereafter. The IMF now forecasts growth of 0.6% in 2012, a bit better than the average economists' projection of 0.2%. Those figures hinge on continued progress towards a resolution of Europe's crisis. But growth will require new invest­ ments, and that, in turn, will take more bank credit. Unfortunately, Britain's over­ leveraged banks have been cutting back. Year-on-year bank lending fell for 30 con­ secutive months from June 2009 to No­ vember 2on. Small and medium-sized en­ terprises are finding it ever harder to get loans (see chart); larger corporations are having more success raising money in bond markets weary of low gilt yields. This is where the financial panic that gripped the euro zone last autumn really damaged Britain. Spreads on five-year credit-default swaps for major British lend­ ers-an indicator of the cost of bank fund­ ing-rose sharply from August. That cut the supply of credit and raised the cost of loans. An aggressive bank-lending pro­ gramme by the European Central Bank calmed markets in late December, and con­ ditions seem to have improved for British lenders. Yet even as euro-zone tensions ease, credit difficulties resulting from de­ leveraging remain, impairing recovery.

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The Treasury is trying to resolve this problem with a £40 billion ($62 billion) loan-guarantee scheme, through which the government backs bank loans to small firms. But this is a relatively modest sum, and some bankers believe its main impact could be to reduce the cost of loans rather than to expand their supply. It may yet fall to the Bank of England to unblock the flow of credit. Tumbling inflation and a gloomy growth outlook mean that expansionary asset purchases-quantitative easing-will probably continue beyond February, when they are due to end. If that action fails to bring down borrowing costs, as it has so far, the Bank may need to join its European counterpart in the business of lending heavily and cheaply to the bank· ing sector. • The mortgage market

Home truths

An Englishman's rented flat is his castle

S powerful forces for things just to stand

OMETIMES it takes the interaction of

still. So it is with Britain's housing market, which lenders expect to remain character­ ised this year by low levels of transactions and stable prices. But, quietly, the property market is being transformed. The forces bearing down on housing are obvious enough. Home sales have fall­ en sharply since the start of the financial crisis, to around half their 2007 levels. That reflects greater conservatism on the part of lenders-"We don't assume that home prices will go up, a mistake everyone made in the past," says one-and of borrowers worried by an uncertain economic out· look at home and endless euro-crisis head­ lines. Household demand for secured credit fell in the last quarter of 2011, accord­ ing to the Bank of England. A slump in volumes has not led to a

slide in prices, however. House prices are down by less than 10% from their peak, still well above The Economist's definition of "fair value", which is the long-run average ratio of house prices to rents. Prices in America, by contrast, have fallen back to fair value. A shortage of housing supply has helped sustain prices, as have low in· terest rates: two-thirds of British mortgage­ holders are on variable-rate loans. A big rise in unemployment would unsettle this equilibrium, but only if joblessness bites among homeowners rather than, as now, among young people without mortgages. "This is a broadly flat market and likely to stay that way for the next 12 to 24 months," says Chris Rhodes of Nation­ wide, the country's biggest building soci­ ety. Regulators are determined to stamp out the speculative element of the market, which helped drive prices up before the fi­ nancial crisis. The Financial Services Au­ thority is currently consulting on propos­ als that would require lenders to assess the impact of future rate rises on borrowers' ability to repay, for instance. That would make it much harder for ordinary folk to take out interest-only mortgages. A flat market does not mean an un­ changing one, however. Parts of the mar­ ket are livelier than others, and none is more energetic than buy-to-let lending, in which private landlords buy houses to rent out. This sector also suffered during the cri­ sis: gross advances fell from £45 billion ($90 billion) in 2006 to around £13 billion now. But lenders are expecting growth of 10-20% in the buy-to-let segment this year, and are scurrying to beef up their presence in this area. Some of the rise in renting reflects credit constraints, particularly on first-time buy­ ers. But this cannot explain everything. The proportion of loans allocated to first­ timers has remained steady throughout the crisis as parents have stumped up down-payments for their offspring. Loan­ to-value ratios are creeping up again. And numbers of first-time buyers and buy-to· let loans are not necessarily mirror im­ ages-both were growing just before the �� crunch, for example (see chart).

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Britain

The Economist J a n ua ry 28th 2 0 1 2

�

Rather than being just a cyclical effect, the growth in demand for private rentals fits into a broader pattern. Loans for first­ time buyers were on a downward path well before the crisis, because of high house prices. Meanwhile, immigration and rising numbers of single-person households have driven demand for rent­ ed accommodation. "Growth in the priv­ ate-rental sector is hard-coded into the UK market," claims John Heron of Paragon Mortgages, a specialist buy-to-let lender. But so is the aspiration eventually to buy one's own home. For most people, the housing market still offers a stark choice: rent or take on lots of debt for a house pur-

chase. That could change, however. Castle Trust, a yet-to-be-authorised lender in Brit­ ain backed by JC Flowers, a private-equity firm, plans to offer savers investment pro­ ducts tied to a national house-price index. It will use the money it raises to offer mort­ gage products where borrowers do not pay interest in return for handing over a slice of their equity to the firm. If prices rise, some of the capital gains are shared with the lender; so are a proportion of losses if prices fall. The marriage of housing and financial innovation may look like an ugly match in light of the crisis. But ideas like these could yet prove one of its lasting legacies. •

Professional and business services

Unsung heroes

The British economy's best-kept secret

Tmovich and Boris Berezovsky, which HE court battle between Roman Abra­

centres on years-ago dealings in a Russian oil company, has kept London's high court busy for the past three months. It has pro­ vided amusement to Russian journalists, who are keen to peek inside the lives of two rich men. And it has plumped British lawyers' pockets by an unknown, but surely considerable, sum. Law seems to be defying wider economic trends: according to the latest official figures, turnover has grown by about 10% in the past five years. Two of the world's top five firms are based in London, and last year alone the number of solicitors swelled by 3.5%. Law is a thriv­ ing export industry, with foreign earnings accounting for about 25% of the total. Talk of rebalancing the economy away from harmful, ethereal financial services and back to honest manufacturing tends to overlook a large, thriving business sector that falls roughly between the two. Taken together, professional services (lawyers, accountants, architects and so on) and business services (anything from IT and call centres to security, training and cater­ ing) are worth 17% of the economy. That compares with n% each for manufacturing and retailing, and 10% for financial ser­ vices. They generate huge foreign sales, too. In 2009 the Treasury estimated that professional services alone accounted for half of Britain's annual services exports. Britain was the clear European leader in this respect. Lawyers, accountants, management consultants and other professional-ser­ vices grunts are drawn to London partly for the same reasons financial-services firms cluster there-the global ubiquity of

English and a time zone midway between the rich old world and emerging Asia. Partly, they are attracted to those financial­ services outfits, which create business for them. Earlier this month Aon, an Ameri­ can insurance company, said it was mov­ ing its head office to London from Chicago. Its main reason was to be closer to its grow­ ing number of clients in Asia, but London's range of professional services was part of the attraction. The less glamorous business-services sector is a child of the 1980s. "The Thatcher era got it going," says Mark Fox, who runs the Business Services Association. The then-prime minister's drive to contract out

public-sector tasks to the private sector laid the foundations for firms taking over such services as school and hospital meals, buildings maintenance and even staff training. One leading outsource firm, Capi­ ta, still depends largely on the British pub­ lic sector. But others have moved into new areas and international markets. Serco, for example, runs private prisons in Britain as well as the Dubai metro and American military field hospitals. Balfour Beatty became known as a construction firm but now calls itself an infrastructure company, investing in transport systems and providing professional and support services in many markets including Amer­ ica, Hong Kong and the Middle East. G4S's activities range from delivering cash to banks to creating security systems for buildings and fire protection systems for America's space agency, NASA. Many of these firms benefit from long experience of public-private partnerships, which were pioneered in Britain (and often have a poor reputation there) but have spread to other countries. Professionals, versed in the complex contracts these partnerships of­ ten involve, follow in their wake. In Buda­ pest, Kiev or Moscow you will come across London lawyers who have seen it all be­ fore. Many have even learned local lan­ guages in pursuit of lucrative fees. The professional and business-services firms share some of the City's worries about being based in and around London. They fret about lack of airport capacity for direct flights to new markets, such as in­ land China. They gripe about a high top rate of income tax and restrictive immigra­ tion policies. They face growing competi­ tion from business centres in Asia and the Middle East. But at least they don't have to deal with politicians breathing down their necks and scrutinising their bosses' pay. •

27

28

Britain

Bagehot

The Economist J a n ua ry 28th 2012

I

Global Britain, SOS

A very British row about fairness is, deep down, a fight about globalisation

'l "I JITH your back to the open sea, an island can feel encircled, VV even claustrophobic. Turn to face the waves and an island

feels like a starting point, a place surrounded by a variety of brac­ ing possibilities, both good and bad. Britain has the politics of an island. At worst, its political de­ bate can be parochial, even tin-eared about the world outside. Yet Britain is an outrider for openness, standing out among large European nations for its faith in free trade, liberalised markets and undistorted competition. In many neighbouring countries, calls to rej ect free trade and embrace protectionism attract a quar­ ter or more of the vote. Not in Britain. Yet in island politics, the temptation to gaze inward is never far away. Debates about capitalism dominate British politics. The Con­ servative prime minister, David Cameron, his Liberal Democrat deputy Nick Clegg, and the leader of the opposition Labour Party, Ed Miliband, have repeatedly spoken about building a fairer economy. Responding to voter anger, they talk of reining in bank­ ers' bonuses and pay packages for company bosses. All three agree that there is a need to curb welfare for the work-shy. Most of all, they agree there is a desperate need to help the "squeezed middle" whose incomes stagnated even when times were good. Listen to the leaders, and it would be easy to conclude that the root of the problem is the moral failings of Britain's political par­ ties. The parties accuse each other of letting unfairness thrive, be­ cause they are variously nasty, incompetent or unable to stand up to vested interests. Immigration has become part of this argu­ ment. The Conservatives accuse Labour of lazily allowing for­ eigners to take millions ofjobs during the boom years rather than improving the employability of native workers. On January 19th Mr Cameron accused the previous Labour government of making a "Faustian pact" with debt-fuelled, fi­ nance-driven "turbo-capitalism". That pact, he charged, let bank­ ers and corporate bosses collect "huge rewards" while channel­ ling welfare to those at the bottom. Hard-working Britons in between lost out. Labour does not believe in markets, Mr Camer­ on went on. Conservatives do, and know how to fix them when they fail. Delving into history, he cited Tory reformers from Mar­ garet Thatcher to Benjamin Disraeli. A few days later, in the House of Lords, a coalition of Labour

peers and Church of England bishops cited Charles Dickens and Victorian notions of the deserving and undeserving poor as they attacked government plans to restrict the welfare payments re­ ceived by any one household to the median income of a working family. The rebels won, with the Lords voting to ease the benefits cap for families with many children. Their rebellion will be over­ turned: some three-quarters of voters support the cap. So far, so very British. Yet these seemingly distinct, domestic disputes-about income inequality, executive pay, welfare, the squeezed middle, even immigration-are all also arguments about something bigger. Without acknowledging it, Britain is having a row about globalisation. The Faustian pact Mr Cameron describes is, at heart, an attack on the previous government's compact with globalisation, with soaring rewards for a few, millions parked on out-of-work bene­ fits at the bottom, and-Tories would say-competitiveness either neglected or artificially boosted by importing migrants. Mr Mili­ band's "squeezed middle" analysis leans heavily on work by the Obama administration's "Middle Class Taskforce", and its stud­ ies of how, in an era of automation and globalised supply chains, American workers have seen real incomes stagnate while the richest saw their share of national wealth surge. Inside Downing Street, there is much discussion of Tyler Co­ wen, an American economist who argues that, for many Western workers, economic stagnation may be the "new normal". Jesse Norman, a Conservative MP whose ideas for reforming capital­ ism found strong echoes in Mr Cameron's recent speech, calls glo­ balisation "the whale under the surface" of today's arguments. In lots of other countries, anxiety over globalisation is openly discussed. In Britain, political leaders have instead chosen to channel voter anger into arguments about each other's character. Does that matter? A cynic might argue not: no serious British poli­ tician is calling for protectionism, so let sleeping dogs lie. That is too complacent. British support for free trade runs deep, but thoughtful types in all three parties are worried. No opt-out from global competition

The pressure from globalisation is as intense as ever, says one Tory. But now Britain must manage without the easy credit and generous welfare that once cushioned the impact of competition. On January 26th the Lib Dem leader Mr Clegg demanded a big income-tax break for the "hard-working many", funded by hit­ ting top earners or closing a loophole used by buyers of pricey houses. He calls stagnating middle incomes an "emergency". To some alarmed Labour colleagues, Mr Miliband gives the impression of seeing capitalism as a bad system that needs fixing with regulation, and globalisation as the internationalisation of capitalism. Lord Mandelson, a founder of New Labour, this week published a report with the IPPR think-tank, offering ways to shore up support for globalisation. In America, free trade Demo­ crats "took to the hills" after Bill Clinton left office, says Lord Man­ delson. "We mustn't see the same happen in Britain." Openness comes naturally to the British, a maritime bunch. The British elite has backed free trade for more than a century, partly because for a long time Britain was a world-beater. But now British voters are angry, and globalisation is part of the rea­ son. Consent for open markets has withered before. Denying that a battle needs to be fought is the first step to losing it. • Economist.comfblogsfbagehot

29

Also in this section 30 Italy's reforms 3 1 French politics 3 1 Croatia and the European Union 3 2 Turkish foreign policy 32 Swedish Social Dem ocrats 34 Charlemagne: Europe's search for growth

For dai ly a n a lysis a n d debate on Europe, visit Economist.comfeurope

Germany's coalition

Merl<el at the top B E RLIN

Endless summitry may not have resolved the euro crisis but it has given the German chancellor a political lift

S Germans like to watch the chancellor UMMITS are good for Angela Merkel.

hobnob with the world's most powerful men. She stands out, for braininess and for bringing a flash of colour to the dark-suited serums. But she undoubtedly belongs. Thanks to the euro crisis, summits happen almost as often as Republican presidential debates, giving Mrs Merkel frequent op­ portunities to press Germany's case, in her quietly insistent way. She was the opening speaker at the Davos powerfest on January 25th. On January 30th she will meet fellow European leaders in Brussels for yet anoth­ er summit on the euro. Mrs Merkel does not always prevail and often fails to persuade. The IMF's head, Christine Lagarde, warned in Berlin on]an­ uary 23rd that the world faces a "1930s mo­ ment". German obduracy on the euro might be a cause, she implied. But the crisis is no longer weakening Mrs Merkel at home. Talk of mutiny within her coalition has subsided since the Bundestag voted overwhelmingly in favour of bail-outs for peripheral euro zone countries late last year. And the public mood has changed. Early on, most Germans blamed feckless Greeks for the euro's troubles. Now "peo­ ple see that it's not just about Greece but about European stability as a whole," says Manfred Giillner of Forsa, a pollster. When Mrs Merkel negotiates, people think "she's taking care of them." In early 2011 she mishandled a plagia-

rism scandal involving the defence minis­ ter. Then, seemingly panicked by the Fu­ kushima disaster in Japan, she ordered an abrupt shutdown of nuclear power. The share of voters who made her their first choice for chancellor dropped below 40%. But Germans have largely forgotten the bungles. The economy is helping. The out­ look for growth may be uncertain (some forecasters predict recession this year, oth­ ers modest growth), but unemployment is at its lowest in 20 years. Mrs Merkel is again voters' clear pick for chancellor, with the support of 45% against 33% for her nearest rival, Peer Steinbriick of the Social Demo­ cratic Party (spo). Her government is another matter. Mrs Merkel's Christian Democratic Union and its Bavarian wing, the Christian Social Un­ ion, remain the strongest single political force, backed by about 35% of the elector­ ate. But support for their coalition partner, the liberal Free Democratic Party (FoP), is almost too tiny to measure. If Mrs Merkel is to remain chancellor after the next election in September 2013, the odds are that she will have to find another partner. That will influence how she governs until then. Already, the coalition's most striking initiatives seem to mesh better with the thinking of the SPO and the Greens than with the liberals. The cou wants a minimum wage, which the FOP (and part of the cou) resists. Mrs Merkel recently shocked the FOP by suggesting

that she might support a financial-transac­ tions tax for the 17-member euro zone if Britain blocks one for the European Union as a whole. Philipp Rosier, the economy minister and leader of the FOP, is at odds with the cou environment minister over subsidies for renewable (especially solar) power. And at the top of the FOP's wish list, al­ ways, is a big tax cut. It will be lucky to get a small one. The coalition has agreed to cut taxes by €6 billion ($8 billion) a year start­ ing in 2013 but the upper-house Bundesrat, which is controlled by the opposition, may block this. The liberals tout a planned up­ grading of nursing care but this is unlikely to win back many of their disappointed supporters. Mrs Merkel "is already on course for a grand coalition" with the SPO, comments Tilman Mayer, a political scien­ tist at the University of Bonn. Her allies deny she is courting the op­ position. "We have an enormous interest in stabilising the liberal party," says a se­ nior cou Bundestag man. If there is no lib­ eral partner in 2013, "we have to fight alone against three leftist parties." Coalition arithmetic is better for the c o u if more parties, including the FOP, are represented. But the liberals must do more to heal themselves, the cou thinks. This might start to happen after two forthcoming re­ gional elections. Tiny Saarland, where a novel coalition of the cou, FOP and Greens fell apart, will hold an early elec­ tion in March. Schleswig-Holstein votes in May. In both states the FOP risks falling short of the 5% threshold needed to remain in the legislature. If that happens there is speculation that the party may decide to dump Dr Rosier, who has been leader only since last May. His replacement could be the FOP's parliamentary boss, Rainer Brii­ derle, now seen by many as the only figure who is spirited enough to pull the party ��

30

The Economist J a n ua ry 28th 2012

Europe

�

out of its slump. Delighted as the chancellor would be by a liberal revival, her priority is to lead the next government, whatever its make-up. Plenty could go wrong. Christian Wulff, the German president, is brazening out a scandal. She pushed him for the job in 2010 over objections in her coalition. If he falls, it will be an embarrassment and a distraction. A sharp economic downturn would be even worse. The nuclear shut­ down plus the caprices of wind and sun could play havoc with electricity supplies unless new infrastructure is built quickly, warn the power companies. The worst risk is that the euro re­ emerges as a political threat to her. If all goes according to plan, the Bundestag will hold at least three more euro-related votes:

on a second rescue of Greece, assuming it does not default; on the European Stability Mechanism, the permanent bail-out fund; and on a new treaty to enforce European fiscal discipline. The atmosphere is not as highly charged as it was before last year's euro votes, but that could easily change. Pressure is mounting to expand the bail­ out fund to ease financing conditions for It­ aly and Spain. Mrs Merkel has hinted that she might yield. Stricter fiscal rules in the euro zone are a precondition for any strengthening of the firewall, Germany in­ sists. Even then, many of the schemes be­ ing floated would be contentious. Squalls of this sort may dampen Mrs Merkel's prospects between now and the next election. But from where she is stand­ ing right now, the view still looks good. •

Italy's reforms

The Iron Monti

ROME

T he Italian prime minister faces big protests against liberalisation

M is set fair to become his country's

ARIO MONTI, Italy's prime minister,

Margaret Thatcher. But who will play the role of the miners, whose strike represent­ ed the most serious challenge to the Iron Lady's free-market reforms? Angry victims of Mr Monti's legislation have queued up for the honour ever since his government approved a wide-ranging package of liberalisation measures on Jan­ uary 2oth. Taxi drivers held a one-day na­ tional strike to protest at a scheme to in­ crease the number of licences. Chemists, who have a similar objection to a rise in the number of pharmacies, are to down

Taxi drivers, pharmacists-who is next?

pillboxes on February 1st. Lawyers, who oppose the abolition of minimum and maximum charges, plan a two-day strike later. There is a threat of industrial action by railway workers, upset by proposals to increase competition on commuter lines. So far the most effective and damaging action has been taken by self-employed lorry drivers, whose real gripe is over the soaring cost of diesel. Fuel prices were pushed higher by an increase in excise duty in the Monti government's emergen­ cy budget in December. Truckers are also protesting against an omission from the liberalisation package, which contained

no plans to cut motorway tolls. If they staged a five-day stoppage, it could cost the country as much as €1 billion ($L4 billion), according to the business daily, Il Sole-24 Ore. Blockades have stopped production at car plants and caused widespread food shortages. On January 24th a striking lorry driver was run over and killed by a Ger­ man trucker, who was detained by police. There have been reports of beatings of lor­ ry drivers who refused to back the strike. In Sicily there are claims that leaders of the protests have links to the Mafia. Heady stuff for a government of profes­ sors and other distinguished technocrats. Can they really expect to win a trial of strength with Italy's legendarily stubborn (and sometimes violent) vested interests? The lack of professional party politicians in Mr Monti's government may turn out to be its strongest suit. That means it is not be­ holden to powerful lobbies (though some Italians see the prime minister, who was once an adviser to Goldman Sachs, as a representative of international big busi­ ness, a charge he vigorously denies). Another ace up the government's sleeve is that, for the moment at least, its re­ forms are popular. Mr Monti claims that his liberalising measures will sweep away many "hidden taxes" that Italians pay on services because there is little or no compe­ tition among suppliers. That seems to have struck a chord. A poll for Carriere della Sera, a daily, found 58% support for his package. And, despite the pain it has inflict­ ed, Mr Monti's government has an approv­ al rating of 52%. Fully 68% want it to stay in office until the next general election, due in early 2013. Whether it does will depend on the po­ litical parties, because the government needs their backing in parliament for its survival. And their continued support will in turn depend, in part at least, on the pub­ lic's tolerance of Mr Monti's reforms. Like Lady Thatcher's, however, these will take time to have an effect. One important change in the latest package is the hiving-off of Italy's gas-dis­ tribution network from its majority owner, ENI, to create a level playing-field for com­ petition. But this will take two-and-a-half years to complete, and the effect on con­ sumer prices will not be felt until even lat­ er. An oft-quoted study by Confindustria and the Bank of Italy concludes that liber­ alisation of Italy's services could add 11% to GDP. Less often noted is the study's esti­ mate that the benefits would take over 30 years to come through. Already some politicians are drum­ ming their fingers. On January 2oth the prime minister's predecessor, Silvio Ber­ lusconi, declared that the cure devised by Mr Monti's technocrats had not worked and that he and his ministers "expected to be recalled to occupy the government posi­ tions [they] had before". •

The Economist J a n ua ry 28th 2 0 1 2 French politics

Sauce Hollandaise

Europe Croatia and the European Union

A cautious yes Croats' yes vote may encourage the rest of the western Balkans

L E B O U RG E T

Fram;ois Hollande declares war on global finance

E

VEN the right judged it a success. On January 22nd Fran�ois Hollande, the Socialists' presidential candidate, ad­ dressed his first big rally at Le Bourget, an airport just north of Paris. He answered critics of his lacklustre campaign with a strong performance that electrified his supporters. The polls make him the clear favourite to beat Nicolas Sarkozy, the in­ cumbent, in the second round of the elec­ tion in May. Mr Sarkozy, who has yet for­ mally to enter the race, has started to talk publicly about life beyond politics. To the surprise even of some who work with him, Mr Hollande declared war on global finance. The financial industry, he said, had grown into a nameless, faceless empire that has seized control of the econ­ omy and society. To tackle the enemy and restore the French dream, Mr Hollande wants to separate banks' "speculative" ac­ tivities from their lending arms. He would outlaw "toxic" financial products, keep banks out of tax havens and ban stock op­ tions for all companies except start-ups. Bashing bankers is popular, even though the banks needed little direct help in the 2008-09 financial crisis and they have since repaid it. Mr Sarkozy, too, likes to scold bank chiefs. For Mr Hollande, a moderate, demonising finance is an easy way to unite the Socialists and steal votes from the Front de Gauche, a coalition of the Communists and two other far-left groups that has been doing well in polls. Other gestures to the left included ereat-

Soda list dreamer

N crowds: just a champagne toast and

a sigh of relief. That was the response on January 22nd, when Croats voted to join the European Union. The "yes" camp won a two-thirds majority, far more convincing than anyone had expected. True, the reported turnout of 43% was low. But Croatia's voting rolls are out of date. Guessing at the real number of eligible voters and subtracting the dias­ pora, especially Bosnian Croats, the turn­ out may have been a respectable 6o%, says Vesna Pusic, the foreign minister. Croatia's EU accession was negotiated by the Croatian Democratic Union (HDZ) government, which was thrashed in December's election. But it was backed by its left-leaning successor and by all main political figures, academics, in­ stitutions and the Catholic church. Parts of the nationalist right were against but the wind was knocked from their sails last week when a hero, Ante Gotovina, who was convicted last year by the UN war-crimes tribunal in The Hague, said the EU was where Croatia belonged. Opponents had argued that Croatia, which fought a war of independence against Yugoslavia two decades ago, should not now bind itself in a "Eurosla­ via". They were backed by the likes of

Marine Le Pen, leader of the French N a­ tional Front, and Nigel Parage, leader of the UK Independence Party. A demon­ stration by "no" campaigners the day before the referendum ended in clashes with the police. Mrs Pusic thinks that this prodded complacent pro-Europeans to turn out. They realised who was against, she says-and what was the alternative. Ines Sabalic, a Croatian journalist in Brussels, notes that Croats have always argued that they are part of "Europe", not the Balkans. Now, despite all the bad news across Europe, "they have made a strategic choice." Mrs Pusic agrees. Croats are betting that membership will be good for stability at home and that the eco­ nomic situation will improve. The EU, she concludes, is a long-term project. The vote was greeted with relief in the rest of the western Balkans. A "no" would have been catastrophic for the hopes of other countries. There is still gloomy talk about how long the whole process will take, but this may be over­ done. Serbia, which failed to gain candi­ date status in December, could do so in March. Montenegro is set to begin talks on accession in June. And Bosnia's new government may apply later this year. Slowly but surely the western Balkans is moving towards European integration.

ing a state-owned bank to back strategic companies, fighting "unfair" competition from cheap foreign goods through social and environmental rules and a new 45% tax rate for those earning over €150,000 ($195,000). Nine days after France suffered the humiliating loss of its AAA rating, Mr Hollande barely mentioned the need to cut government debt. With his base energised, Mr Hollande has time to shift to the centre. On January 26th he affirmed his commitment to re­ duce the budget deficit to 3% of GDP by 2013, in line with the government's target, and to eliminate it by 2017, only a year later than Mr Sarkozy pledges. He wants to re­ negotiate the euro zone's new fiscal treaty to favour more growth and less austerity. In November the Institut d'Entreprise, a business think-tank, put the extra annual cost of the Socialist Party's spending prom­ ises at between €26 billion and €29 bil­ lion. Mr Hollande claims that his new pro­ gramme, which includes hiring 6o,ooo new teachers and reversing Mr Sarkozy's pension-age reform to take it back from 62 to 60, would cost only €20 billion a year. His campaign is working on ways to slash

wasteful public spending. Even so, voters will face a stark choice. Next week Mr Sarkozy plans to lecture the French on the need for truthfulness and courage when they consider how their country needs to change. Though voters have tired of his grandiose schemes, he will attempt before the election to pass a far-reaching package of measures to lower labour costs. One controversial idea is to lift the VAT rate and use the proceeds to lower employers' social charges, a reform that produced good results in Germany. He may even suggest scrapping the 35-hour work week, a Socialist folly from 2000 that is widely blamed for damaging France's competitiveness. Mr Hollande's team reckons the pros­ pect of such radical reforms will frighten voters and help Mr Sarkozy to lose the elec­ tion. "People fear the Anglo-Saxonisation of the labour market," says Thomas Chalu­ meau, an economist on the campaign. Yet he also admits that the Socialists need to show that structural reform is not the pre­ serve of the right. There is still no convinc­ ing answer to the mystery of what Mr Hol­ lande would do if elected. •

O FIREWORKS, no flag-waving

31

32

The Economist J a n ua ry 28th 2012

Europe Turkish foreign policy

Problems with the neighb ours

\

*

A N KA RA A N D B R U S S E LS

An activist foreign policy creates its own troubles

0 NE recent night in Ankara Turkey's for­

eign minister, Ahmet Davutoglu, woke up drenched in sweat. "I had a night­ mare about a crisis in Libya," he recalls, speaking on his way to Brussels. "The real crisis was in Syria, though, and I was un­ able to fall back asleep." The bloodbath in Syria is only one headache afflicting the architect of Tur­ key's policy of "zero problems with the neighbours". This week the French Senate passed a bill to make it a crime in France to deny that the mass killings of Ottoman Ar­ menians in 1915 constituted genocide. Re­ cep Tayyip Erdogan, Turkey's prime minis­ ter, had threatened retaliatory measures were the Senate to follow the lower house, which passed the measure in December. Yet no sanctions have been announced­ perhaps because they are unlikely to sway Nicolas Sarkozy, France's president, who is expected to sign the bill into law. Turkey may not care much about the fallout from this on its relationship with the European Union. The membership talks that began in 2005 have ground to a halt, not least because of Mr Sarkozy's op­ position. Continued deadlock in Cyprus is a big problem. But it is not only the Euro­ peans who are causing trouble. Until re­ cently Turkey was boasting not of its EU as­ pirations but of its shiny new alliances in the Middle East, where its secular free-mar­ ket democracy is a model for some. Visa requirements were liberalised across the region and trade has flourished. Mr Erdogan frequently met Syria's presi­ dent, Bashar Assad, and his wife. Turkey helped to get Mr Assad off the hook for his alleged role in the 2005 assassination of a former Lebanese prime minister, Rafik Ha­ riri. In 2008 it almost pulled off a peace deal between Syria and Israel, but the talks collapsed when Israel invaded Gaza. In 2010, when Turkey voted against tougher UN sanctions against Iran because of its nuclear programme, it was widely accused of turning its back on the West. Now Mr Davutoglu's secular critics have a new accusation: that he is forging a Sunni block to counter Iran's influence. They say this explains Turkish support for Mr Assad's Sunni opponents and especial­ ly for the Muslim Brotherhood. Turkey also makes no secret of its support for Iraq's Sunnis and, more recently, its Kurds. Iraq's Shiite prime minister, Nouri AI Maliki, went so far as to claim that Turkey was stir­ ring up sectarian tensions in his country.

I

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Dreams and nightmares for Davutoglu

Mr Erdogan retorted that Mr Maliki was fo­ menting sectarian strife with his clamp­ down on Sunni politicians. Mr Davutoglu says Mr Maliki's actions could unleash a sectarian war in the region. Mr Maliki notes that Turkey, with its Shia minority, might not be spared. Soli Ozel, a commen­ tator on foreign affairs, says the war of words with Mr Maliki suggests that Turkey never had a plan for a post-America Iraq.

Mr Erdogan's more Islamist supporters have a different gripe. Although Turkish ties with Israel remain frozen over the 2010 Mavi Marmara affair, they fret that Turkey has become America's regional stalking horse. They cite the decision to host a NATO defence-radar system, which they assert has as one goal to defend Israel from possible Iranian attack. Mr Davutoglu de­ nies that the radar system is directed against Iran or Russia; yet he speaks, rather surprisingly; of a golden age in Turkey's ties with America. He also argues that the upheaval in the Middle East cannot be entirely put at Tur­ key's door. Yet the inspiration that it of­ fered to repressed Arab masses has been powerful. As Mr Assad's forces continue to slaughter innocent civilians, many in Syria and beyond are hoping that Turkey will ride to the rescue. But the Turks would do this only as part of a coalition of the will­ ing. With a presidential election looming, America has little interest in foreign adven­ tures. NATO is unlikely to intervene. So what would happen if a massacre took place? Would Turkey send troops over the border? And how might Iran respond? Mr Davutoglu has no ready answers. What is certain is that he will have many more sleepless nights. •

Swedish Social Democrats

In the dumps STO C K H O L M

T he Social Democrats change their leader amid record lows in the polls

J

UST when Sweden's opposition Social Democrats thought things could not get worse, they have. Indeed, Europe's most successful political party is in the throes of the worst crisis in its history. Hakan}uholt has quit as leader after only ten months, following a seemingly end­ less stream of blunders that led many party districts to call for him to go. The opinion polls are sending shivers through the party, with support hovering around 25%, its lowest ever. This is not entirely Mr Juholt's fault. The Social Democrats, who ruled Swe­ den for most of the 8o years until 2oo6, lost the elections in 2006 and 2010 be­ cause they failed to appeal to middle­ class voters. Deep rifts have emerged between the party's left and right wings. The Greens and the Left Party; both of which have new and energetic leaders, have surged on the back of the Social Democrats' problems. The party's executive committee decided it should be speedy in choosing a successor to Mr Juholt. But finding one has not been easy. The Social Democrats have been criticised in recent years for failing to groom new leaders and attract

talent. Mr Juholt, who was himself a compromise candidate, was largely unknown to most voters. The choice is always made behind closed doors, guid­ ed by a party culture that frowns on naked ambition. The etiquette is that candidates should deny any interest in the top job until they are made an offer. Most leading Social Democratic poli­ ticians were duly quick to tell the media they were not interested. Margot Wallstrom, a former European Commissioner, was a dream name for many, but in her case no meant no. Par Nuder, finance minister from 2004 to 2006, also said no, because of his boom­ ing corporate career. Thomas Ostros, a party veteran, was also a possibility, but he lacks charisma and is seen by many as too far to the right. The party's secretary, Carin}amtin, who temporarily stepped into the breach, is also popular, but insist­ ed on remaining as secretary. So it seems that the choice is to be Stefan Lofven, who heads the powerful IF Metall trade union, to replace Mr Ju­ holt. Whether a trade unionist will be better able to appeal to the Swedish middle class remains to be seen.

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34

The Economist J a n ua ry 28th 2012

Europe

Charlemagne I Hopeful or hopeless? Europe struggles to find a strategy to grow out of its debt crisis

Tlooming recession across much of Europe is concentrating

HE buzzword in Brussels these days is "growth". Perhaps the

minds. Or leaders may realise that the prospect of years of auster­ ity is stirring bad blood. Unless the debt crisis was resolved and growth recovered, said Christine Lagarde, the IMF's head, Europe and the world risked reverting to the 1930s. At their next summit on January 30th, European Union leaders will solemnly talk of boosting output, tackling youth unemployment, supporting small firms and much else. They might even commit money to job creation, for example by recycling unspent EU funds through the European Investment Bank. Do not be fooled by such pieties. Everybody has different ideas about growth and they often reflect longstanding preju­ dices. For Germany, fostering growth is not about spending more money, but about fiscal discipline and structural reforms in weaker countries. For France, the priority is to curb "disloyal" competition, by harmonising taxes to stop low-tax states (eg, Ire­ land) taking business away from high-tax ones (eg, France), or stopping Britain from imposing tougher rules on its banks that might make them seem safer than French ones. For the British, Dutch, Swedes and other north Europeans, growth should come from the boost to competition from deepening the single market and pursuing free-trade agreements. For ex-communist countries in the east, the secret is the vital role of EU transfers. Beyond papering over such disagreements with official ver­ biage, the main business of the summit will be to push ahead with the "fiscal compact". This requires the signatories to adopt balanced-budget rules. "They are going to sign a treaty that makes Keynesianism illegal," comments one diplomat. Mrs La­ garde, for her part, seems to lean the opposite way. Her recom­ mendations for growth include easing monetary policy; relaxing deficit-cutting in surplus countries, such as Germany, that can af­ ford to boost demand; and ensuring that banks keep lending. She is also urging the euro zone to increase the size of its rescue fund. And she makes the case for a Europe-wide system to support banks and for the mutualisation of some sovereign debt. Mrs Lagarde's words will fall on deaf ears in the country that most needs to hear them, Germany. So is Europe doomed to pa­ ralysis? A World Bank report on Europe, launched this week, tries

to sound optimistic. As the report's main author, Indermit Gill, puts it, "America has taken in poor immigrants and turned them into high-income individuals. The European Union has taken in poor countries and turned them into high-income countries." Its economic model is valid, even if it needs reform. Two problems stand out. One is the scale of European public spending. If America is a defence superpower, spending almost as much on defence as the rest of the world combined, Europe is a "lifestyle superpower", spending more than the rest of the world put together on social protection. Big governments tend to slow growth, says the World Bank, unless they are as effective as Swe­ den's. Ageing will add to the burden. For Mr Gill, Europeans can still choose to work shorter days and take longer holidays than Americans, but they can no longer afford to retire early. It would help if Europe were more productive. But this is the second area of concern. Having almost closed the productivity gap with America in the mid-1990s, Europe is again being left be­ hind. This trend is most alarming in southern Europe, where pro­ ductivity has actually dropped. A simple explanation is that Mediterranean countries enjoyed easy "catch-up" growth by im­ porting technology. New growth needs the harder graft of inno­ vation and enterprise. Southern economies with cumbersome regulation, poor administration, overreliance on tiny family busi­ nesses and an over-protected labour force are bad at this. Fixing that will be the work of a generation, not a summit. Even without its Mediterranean headache, Europe produces too few high-tech start-ups in areas such as IT and biotech. The causes are varied. One is poor synergy between industry and universities. Another is the fragmentation of the single market, making it harder for new firms to expand. Even the internet is filled with frontiers, as anyone who tries to shop across EU bor­ ders online can attest. Patently absurd

One emblematic problem is the decades-old quest for a common EU patent. Europeans can pay five times more than Americans to

protect their ideas, because they need to lodge separate patents and translate documents in each country. The cost of litigation is similarly multiplied. A simple one-stop shop would encourage innovation and cut costs. Yet the common patent was long blocked by linguistic chauvinism. English, German and French are the obvious choices. But Spain and Italy wanted their lan­ guages recognised too, or to have an English-only patent system (the cheapest option). The logjam seemed to be broken last year, when 25 countries agreed to push ahead without Italy and Spain under "enhanced co-operation". Despite lawsuits, a deal was within reach last month. But this is now being blocked by a fresh dispute, over whether the main patent court should be in London, Paris or Munich. Some money is at stake (a court creates a market in legal services), but the row is mostly about prestige. As Europe's biggest issuer of patents and host to the registration office, Germany thinks it should also have the court. Britain and France are in no mood to yield to each other after December's bust-up over the planned new treaty. But if the big countries cannot agree on a small but ob­ vious step to enhance growth, what are the chances of the EU opening up the entire market in services? No wonder the rest of the world and the markets are losing faith in Europe. • Economist.comfblogsfcharlemagne

35

Also in this section 36 Rick Perry quits the race 37 Andrew Cuomo's good start 37 Alabama's immigration laws 38 California's anxious ports

39 The end of Ki ng Coal

40 Lexington: The union's state is dire

For daily a n a lysis a n d debate on America, visit Economist.comfunitedstates

The Repu blican nomi nation

Newt's (fleeting?) moment C H A R L E S T O N A N D T A M PA

The former Speaker trounced Mitt Romney, the front-runner, in South Carolina. Florida may be a different matter

"l '1 ]HEN the Titanic steamed serenely VV into its iceberg 100 years ago, those

on board could at first not believe that the great ship would go down. Mitt Romney is at least not making that mistake. After his astonishing defeat in South Carolina's primary on January 21st, the man who looked invulnerable just a week before has ordered his campaign into panic mode. Mr Romney and Restore Our Future, the deep­ pocketed superP AC that backs him, spent this week firing broadside upon broadside at Newt Gingrich, the pugnacious former House Speaker whose own campaign was recently under water. But time is short. The polls, though now slightly in Mr Romney's favour, still suggest that Mr Gingrich has a chance of beating him again when Florida, the first big state to vote, holds its primary on January 31st. This has been one of the most volatile months in American politics. January be­ gan with a narrow victory for Mr Romney in Iowa's caucuses, followed by a smash­ ing one in New Hampshire. But then came calamity for the front-runner. First a re­ count stripped him of his Iowa crown, awarding it to Rick Santorum. Then came Mr Gingrich's resurrection in South Caroli­ na. Some 40% of the state's Republican voters went for the former Speaker, where­ as only 28% preferred Mr Romney.

I

Back and forth Republican presidential primaries, % • South Carolina result Jan 21st 2011 0

10

- Florida average poll rating• 20

30

40

Gingrich Romney

Paul

Sources: South Caroli na State Election Commission; RealClearPolitics.com

*RCP poll average January 22nd-25th 2012

How did Mr Gingrich, with less money and a smaller organisation, turn the tide so quickly? He may have been helped on the margins by the departure of Rick Perry (see next story), who threw his diminishing support to Mr Gingrich as he left. From dis­ tant Alaska came another endorsement. "If I had to vote in South Carolina, in order to keep this thing going I'd vote for Newt," said Sarah Palin, the pin-up maverick of the tea-party movement. More potent may have been Mr Ging­ rich's depiction of Mr Romney as a pluto­ crat who made his riches by shredding humble livelihoods at the firms taken over by Bain Capital. Mr Romney refused to

apologise for being successful and retorted that Bain created far more jobs than it de­ stroyed. But he also made, as he admitted later, the mistake of refusing to release his tax returns before South Carolina voted. Yet the principal reason for Mr Ging­ rich's victory appears to have been his vi­ tuperative attacks on "the elites" and their lackeys in the media in the two televised debates that preceded polling day. In the first he was asked by a black journalist whether he understood why knocking food stamps seemed to belittle racial mi­ norities. Mr Gingrich thundered back that "only the elites despise earning money", and that he would continue "to help poor people learn how to get a job . . . and learn some day to own that job." This moment earned a standing ovation from the audi­ ence of tea-partiers and was aired repeat­ edly on news programmes. Three days lat­ er, he stirred up another round of thunderous cheers when, in a second de­ bate, he excoriated the "destructive, vi­ cious" news media for dwelling on the re­ marks of his ex-wife just before a presidential primary. Can two moments of televised drama upend the whole primary process? Per­ haps: many voters in the Palmetto State told reporters that Mr Gingrich looked best equipped to win debates with Barack Obama. His tirades are also channelling white working-class anger in a way the carefully rehearsed Mr Romney never could. At Mr Gingrich's rallies there are lots of T-shirts and baseball caps; at Mr Rom­ ney's most of the shirts have buttons. Stripped now of his aura of inevitabil­ ity, the former front-runner has seen an abrupt decline in his poll numbers. But Mr Romney did not come this far to sink grace- ��

36

The Economist J a n ua ry 28th 2012

United States

� fully beneath the waves after his first set­ back. In the first of two scheduled debates in Florida this week he launched an imme­ diate attack on Mr Gingrich, accusing the former Speaker of having become an "in­ fluence-peddler" in Washington after be­ ing forced to resign from his Speakership "in disgrace". In particular, he mocked Mr Gingrich for having earned $25,000 a month from Freddie Mac "as a historian",

at a time when the government-sponsored mortgage giant was pumping up the hous­ ing bubble whose bursting inflicted spe­ cial pain on homeowners in Florida. Mr Gingrich denies ever having been a lobbyist, and published one of his con­ tracts with Freddie Mac to prove it. The Romney campaign, unsatisfied, demand­ ed to know precisely what services the for­ mer Speaker had rendered. Meanwhile Mr

Rick Perry quits the race

Back in the saddle A U ST I N

T he governor will return to a changing Texas

I Rick Perry, governor of Texas, entered

T WAS a well-earned thumping. When

the race for the Republican presidential nomination last August, he was instantly considered a heavyweight. But within weeks he had cheerfully threatened the head of the Federal Reserve with perso­ nal harm, and had forgotten his own reform proposals in a televised debate. After a fifth-place finish in the Iowa cau­ cuses he said he would consider with­ drawing, but then thought again. To no avail; and when the end came at last, on January 19th, few were surprised or sorry. "I know when it's time to make a 'strategic retreat'," said Mr Perry, referring to Sam Houston, the military leader of the Texas revolution, whose strategic retreat in1836 drew the Mexicans north. The governor did not mention that Hous­ ton would order his troops to burn the bridges behind them before they whumped the Mexicans at San Jacinto­ and would then go on to be president of the Republic of Texas. Mr Perry's return will not be quite so dramatic, but Texans are curious. He is the only one of the Republican also-rans with a high-ranking day job, and al­ though he has some political insulation­ having been re-elected in 2010-a col­ lapse on the national stage will inevita­ bly hurt him. "He's been unpopular before, but never wounded," says Jason Stanford, a Democratic consultant based in Austin. The prospect, he adds, is "thrill­ ing and horrifying at the same time". Some Democrats worry that the greatest pressure will come from Mr Perry's right, particularly on immigra­ tion: despite his typically tough rhetoric, the governor has been a moderate on that issue. Another headache for Mr Perry may be that the state's good record on jobs has taken some hits. In December 2011 the unemployment rate in Texas was 7.8%: lower than the national rate of 8.5% for that month, but still too high for com­ fort. In November a report from Texans for Public Justice found that only 26% of

Romney at last released his tax returns for 2010 and 2011, while still declining to re­ lease more. Those he did publish con­ firmed that he paid an effective federal rate of only 15% or so on the $42.5m he earned in the past two years, because most of his income is in capital gains. It did not look good. Especially it looked bad in Florida, which, like South Carolina, has had a hard time of it in the recession. Unemployment stands at 9.9%, well above the national av­ erage. Almost half of the houses in the state are worth less than their mortgages. Although Mr Romney's focus on the econ­ omy should resonate, so do Mr Gingrich's bomb-throwing attacks on elites. Unlike South Carolina, however, Flori­ da is huge. It is the fourth-most-populous state in the country, with almost 20m peo­ ple. In the previous Republican presiden­ tial primary, in 2008, some 2m voted. Moreover, Florida's Republicans are spread out across at least ten big media markets (depending on how you count), and are much more diverse than their lily­ white counterparts in the other early-vot­ ing states. Will it play in Daytona?

That way, dear

the 65 projects that received incentives from the Texas Enterprise Fund-the governor's "deal-closing fund," as his office puts it-created as many jobs in 2010 as they had promised. There is also, however, some pos­ sibility of bipartisan reform. The most salient criticism of Mr Perry's economic policies has always been that the state, in its zeal for cutting both taxes and spend­ ing, has badly neglected its infrastructure and services. Texas does have a lot of jobs, and it would be churlish to sneer at that, given the intractable unemploy­ ment in much of the country over the past few years. But it also has threadbare roads, strapped schools, and too little water for its swelling population. Per­ haps, as one state senator suggests, the national attention paid to the state's problems might have brought things into focus. If so, Texas could be an indirect beneficiary of the governor's campaign.

All this should favour Mr Romney. He opened his Florida headquarters in Sep­ tember; Mr Gingrich did not get around to it until earlier this month. He has been en­ couraging supporters to avail themselves of Florida's absentee- and early-voting sys­ tems, and probably did well among the 200,000 or so ballots cast before the South Carolina results came in. For weeks he and his wealthy backers have been bombard­ ing Floridians with television advertise­ ments extolling his record and rubbishing Mr Gingrich's. The former Speaker's campaign and its surrogates began replying only this week. A superPAC supporting him says it will spend $6m on TV ads. That is still only half of what Mr Romney's camp is thought to have planned. But Jose Mallea, Mr Ging­ rich's campaign manager in the state, says momentum and enthusiasm are more valuable than organisation. Mr Gingrich should do well, argues Su­ san MacManus of the University of South Florida, in the fiercely conservative pan­ handle in the north of the state. The afflu­ ent retirement communities of southern Florida will probably plump mostly for Mr Romney. In 2008 he fared poorly among Cuban-Americans in Miami, but several prominent local politicians have endorsed him this time round. As usual, though, it is the I-4 corridor, which runs from Tampa to Daytona Beach via Orlando, which will decide the elec­ tion. It accounts for almost half the regis­ tered Republicans in the state. Mr Romney and Mr Gingrich are both trying to hone their appeal there. Mr Romney is softening ��

The Economist J a n ua ry 28th 2 0 1 2

� his previously harsh rhetoric about illegal immigration, in deference to Florida's large immigrant community. Mr Gingrich is planning a speech on the failings of Mr Obama's space policy, a blatant pander to the residents of the "Space Coast" south of Daytona. Even if Mr Gingrich maintains his mo­ mentum and wins Florida, however, the next few contests are likely to bring Mr Romney some respite. In his last presiden­ tial race he won five of the six states that will vote in February. The month's relative­ ly light schedule will also give all the candi­ dates a chance to regroup and raise money in anticipation of their next big show­ down: Super Tuesday, on March 6th, when ten states vote. The nomination, which had seemed all but decided, now seems unlikely to be squared away before then. • Andrew Cuomo

Next, wall< on water N EW Y O R K

A New York governor is actually governing

F When Eliot Spitzer, a crusading lawyer,

OR four years New York was adrift.

became governor in 2007, his uncompro­ mising ways caused political gridlock in Albany, the state capital. Just over a year later, he was caught frolicking with a pros­ titute and resigned. His successor, David Paterson, was affable enough, but too weak to push the state legislature to bal­ ance the books. When Andrew Cuomo, a Democrat like his predecessors, handily won the 2010 governor's race on a promise to "rebuild the government, restore com­ petence, restore trust, [and) get the people

Among the illustrious

U nited States

of this state believing once again", New Yorkers gave a cynical snort. But Mr Cuomo has had an extraordi­ nary year. In the first six months of his term he could point to three historic achievements. First, he balanced the bud­ get: not only bringing spending under con­ trol-filling a $10 billion hole and nudging the public-sector unions to make conces­ sions worth $450m-but putting mecha­ nisms in place to control spending in fu­ ture. He even got the cantankerous legislature to agree. In June Mr Cuomo brought in a cap on property taxes, in a state which the Tax Foundation ranks as the sixth-most-taxed in the country. Robert Ward of the Rockefeller Institute called it "the biggest change in New York's fiscal policy since the creation of Medicaid", al­ most 50 years ago. Then, also in June, Mr Cuomo signed a bill legalising same-sex marriage, having worked hard to drive the bill through the Republican-controlled state Senate. In De­ cember he got bipartisan backing to change the income-tax code, which he says will generate $1.9 billion in additional revenue for the state. It sets in place the lowest tax rate for the middle class in 58 years, while-according to Mr Cuomo's op­ ponents and the Manhattan Institute­ leaving the tax burden on the richest at its highest level since 1986. Still, most New Yorkers are not upset with him. Indeed, they rate him very high­ ly. He learnt much about Albany politics at the knee of his father, Mario, a former go­ vernor. He is clever and determined. His most noticeable flaw is his arrogance, which he has tried to keep in check, but which slipped out in November when he remarked: "I am the government." In that case, his cockiness was accurate. There is not much transparency in how he is getting the results, notes Gerald Benja­ min of the State University of New York at

37

New Paltz. Disappointingly, it is still three men (Mr Cuomo, the assembly Speaker and the Senate president) in a room mak­ ing all the decisions. And there are some big ones ahead. Mr Cuomo is promising to veto any redistrict­ ing plan from the legislature which does not come from an independent commis­ sion. He wants to expand gambling in the state, infuriating the Indian nations who run its casinos at the moment. Rather bi­ zarrely, he wants to build America's biggest convention centre in Queens. And he plans to make a start on p�nsion reform. The thorniest issue he faces is fracking, a controversial drilling technique in which high-pressure water and chemicals are pumped into a bore-hole to ease the extrac­ tion of natural gas. New York has a morato­ rium on the practice, but new rules from the state environment department may al­ low it. Gas exploration could bring in bad­ ly needed jobs and money, but opponents worry that fracking may contaminate the drinking water. If Mr Cuomo can sort that tangle out, says Doug Muzzio, a political scientist at Baruch College, "the next thing he's going to do is walk on water." • Immigration laws

Caught in the net M O N T G O M E RY , A LA B A M A

Alabama's immigration law is proving too strict and too costly

ALABAMA'S immigration law, boasted ./"\.. Micky Hammon, an Alabama legisla­ tor and one of its co-authors, "attacks ev­ ery aspect of an illegal immigrant's life. They will not stay in Alabama . . . This bill is designed to make it difficult for them to live here so they will deport themselves." It is not, however, designed to introduce visit­ ing executives from Mercedes-Benz, which employs thousands at its factory in the state, to the pleasures of Alabama's jails. But that is what happened to Detlev Hager, who was caught in November driving in Tuscaloosa with only German ID on him. Alabama's immigration law is the na­ tion's toughest. It requires police to check the immigration status of anyone they de­ tain, stop or arrest and have a "reasonable suspicion" of being in the country illegally. It bars illegal immigrants from working, so­ liciting work, attending public universities or entering into "a business transaction" with the state. It invalidates any contract to which an illegal immigrant was party. It prohibits people from renting apartments to illegal immigrants, taking them in their cars or giving them shelter, and it requires officials in state schools to determine whether pupils are legal or illegal. ��

38

The Economist J a n ua ry 28th 2012

United States

As enacted, however, the law has not turned out quite as its backers planned. In September a federal judge struck down four provisions, including the prohibition on illegal immigrants working, the section forbidding citizens from concealing, har­ bouring or transporting them, and the part that makes hiring or retaining an illegal im­ migrant actionable. In October an appel­ late court blocked the law's directive re­ quiring schools to determine their pupils' immigration status, as well as the section making it a crime for illegal immigrants not to have proper identification. And in De­ cember a district judge struck down the section forbidding illegal immigrants from doing business with the state. The law's authors shrewdly included a severability clause, ensuring that if a court strikes down or prohibits one part of the law, the rest remains in effect. So it has, and Mr Hammon's fond hope-that illegal im­ migrants will leave-seems to have come true. Anecdotal reports suggest that thou­ sands of Latinos, legal as well as illegal,

have left Alabama. Farmers complain of rotting crops and building companies of rising costs, both because there are too few workers. Samuel Addy, an economist at the University of Alabama, estimates the law's total cost-taking into account pro­ ductivity declines, increased enforcement cost, and declines in aggregate consumer spending and tax revenue since so many workers have left-in the billions. Then there are the less quantifiable costs. They may be there illegally, but un­ documented immigrants are still people; a Human Rights Watch report tells of fam­ ilies fleeing in darkness, of crime victims too scared to go to the police, of workers being cheated out of wages. And then there are innocents like Mr Hager, who was kept in custody until a colleague could pro­ duce his passport and driving licence. For­ eign companies have flocked to Alabama in recent years; they employ over 54,000 Alabamans. How many more will want to come if their employees risk being treated like Mr Hager, or worse? •

California 's ports

The fickle Asian container

LONG B E A C H

Fears that a new and improved Panama Canal will divert trade

I ships from Asia, each with thousands of NTO San Pedro Bay they pull, the huge

containers full of lawn chairs, toys or iPads. As they enter the bay they go left, to the Port of Los Angeles (America's largest), or right, to the Port of Long Beach (the second­ largest): geographically and logistically, the two are one harbour, even though rival cit­ ies operate them in competition. Gantry cranes then unload the containers onto trucks. About half go to consumers in the urban sprawl of southern California. But

the other half are driven a few miles to a railway yard, where they are put on east­ bound trains to the rest of America. That part of the business is now at risk, and with it tens of thousands of regional jobs. The risk comes from the Panama Canal, which the Panamanians are digging wider and deeper. In an inexorable shipbuilding trend, each generation of freighters is larg­ er than the previous one. So the canal to­ day accommodates only ships that carry up to about 5,000 containers, whereas

large freighters already carry 12,000, and the largest carry even more. This is why it is currently best to move a box from Guang­ dong Province to New York by floating it to Los Angeles or Long Beach, then putting it on a train. But the digging in Panama is about to change that calculation. The Panamanians (who took control of the canal from the Americans in 1999) have been working at it since 2007 and are due to be ready for the big ships in 2014. Their speed and efficiency has taken rivals everywhere by surprise. And their busi­ ness plan explicitly assumes that a lot of the trade between Asia and America's east and Gulf coasts will be diverted from Cali­ fornia's ports to the canal. This is why America's eastern ports-such as Miami, Savannah and Charleston-are dredging eagerly to welcome these ships. By the same token, this boon to the east­ ern ports could be a bane to the western ones. The region still remembers the col­ lapse, after the end of the cold war, of the aerospace industry that once supported blue-collar workers in the area. Today Cali­ fornia has barely begun to recover from the twin busts in housing and world trade that started in 2007. Wally Baker, the founder of the Jobs 1st Alliance, a coalition that hopes to make the ports more competitive (his campaign is called "Beat the Canal"), says that if ships are indeed diverted en masse, the remain­ ing working-class folk of southern Califor­ nia will be in jeopardy. For although re­ markably few human beings are visible in the harbour itself-modern technology has automated much of the process-the ports directly or indirectly support about half a million jobs, from longshoremen to truckers and warehouse workers and those who sell and rent to them. But what can the California ports do? Floating cargo from Asia to the east coast by boat will always be cheaper, concedes Christopher Lytle, the executive director of the Port of Long Beach. But unloading in Long Beach and taking the train to New York can be faster by a week, he says. So California's ports must compete on speed, which is increasingly important for time­ sensitive goods such as fashion wear or consumer electronics. Let the lawn chairs go and keep the iPads, he reckons. A lot must happen to keep that advan­ tage in speed, however. One bottleneck is that short truck ride to the railway yard. Not only do the trucks account for much of the port's air pollution (even though they are dramatically cleaner than just a decade ago), but they clog up stretches of the I-710 freeway, wasting precious time. One of the port's plans is therefore to build a new, bet­ ter and closer railway yard. If you ask Mr Baker, this is where the problem becomes vintage Californian in its obdurate and litigious bureaucracy. Lo­ cal politicians here and environmentalists ��

The Economist J a n ua ry 28th 2 0 1 2

� there are resisting, just when everyone should be working together to keep Cali­ fornia's ports afloat. He wants "the guys in Savannah to get scared of us" as they dredge their own port, he says. Instead, "we're so uncompetitive and so arrogant" in thinking that Californians need not change to keep their business. David Pettit, a lawyer at the National Resources Defence Council and one of

U nited States

those environmentalists who so frustrate Mr Baker, says that he fully understands the threat posed by the canal. But moving the railway yard to another community, and thus polluting it, is not the answer. Bet­ ter, he says, to put the railway yard right on the docks. That would take up too much space, replies the port. The combatants have only until 2014 to work out their an­ swer and build it. •

American coal

A burning issue H A R LA N C O U NTY, K E N T U C K Y

Tighter regulation, bountiful natural gas and declining installation costs for renewable energy herald the end of America's coal era

Awith coal covered in a light dusting of FREIGHT train, its dozen cars loaded

snow, snaked through the narrow valley, sometimes following the two-lane high­ way and sometimes crossing it. The valley was silent and snowy, and though it was two days into 2012 it could easily have been 1982, 1942 or 1922: coal has been mined in Appalachia and carried out by rail for well over a century. And by some measures, coal is still go­ ing strong. It provides more of America's electricity than any other fuel. Production has fallen off since 2008, but it remains high, as do prices, for which thank the de­ veloping world's appetite. In Appalachia, coal remains a source of well-paidjobs in a region that needs them: for the first three quarters of 2011 employment in the Appa­ lachian coal industry was at its highest lev­ el since 1997. And the Powder River Basin, which spans Wyoming and Montana, has become America's major source of coal in the past decade, relieving overmined Ken-

tucky and West Virginia. The Energy Infor­ mation Administration (EIA) reckons America has enough coal to meet current demand levels for the next 200 years. But if the raw numbers look good, the trends tell a different story. Regulatory un­ certainty and the emergence of alternative fuel sources (natural gas and renewables) will probably make America's future far less coal-reliant than its past. In 2000 America got 52% of its electricity from coal; in 2010 that number was 45%. Robust as ex­ ports are, they account for less than one­ tenth of American mined coal; exports cannot pick up the slack if America's taste for coal declines. Appalachian coal pro­ duction peaked in the early 1990s; the EIA forecasts a decline for the next three years, followed by two decades of low-level sta­ bility. Increased employment and declin­ ing productivity suggest that Appalachian coal is getting harder to find. Toughening regulation has an effect, too. Coal-fired power plants are the source

of more than one-third of greenhouse-gas emissions in America. Last July the Envi­ ronmental Protection Agency (EPA) issued a rule that requires 28 states to reduce the amount of sulphur dioxide and nitrogen oxide they emit; in December came anoth­ er, reducing the amount of mercury and other toxic air pollutants that power plants can puff out. Many plants have already made the necessary upgrades and retrofits; around 53% of America's coal-fired capacity comes from units fitted with scrubbers. But oth­ ers, particularly older plants, will have to decide whether such expensive upgrades are worth doing at all. Most of America's coal-fired capacity comes from plants at least 30 years old, and as much as 14% of existing coal-fired plants, accounting for 4% of America's generation capacity, will have to be retired in the next five to eight years. Energy providers face a stark choice. They can fight these regulations in court (outcome uncertain). They can retrofit old plants: plenty have done that, too. Or they can build new plants-in which case, far more are choosing plants that burn natural gas or use renewables rather than coal. To some, regulations prove the current administration's hostility to coal. To oth­ ers, however, they are a long-overdue at­ tempt to gauge a putatively cheap fuel's true external costs. A National Academy of Sciences report estimated that the external costs unrelated to climate-change costs (to human health, crop and timber yields, building materials and recreation) of coal­ fired power plants in 2005 totalled $62 bil­ lion. A study of coal's effects on Kentucky's budget in 2006 found that it contributed $528m in revenue, but its on-budget costs­ training, support, repairs to the roads, R81D for the coal industry-totalled $643m. A study in West Virginia in 2009 also found the coal industry a net cost to the state. Without alternatives, America might need to resign itself to these costs. But alter­ natives are there. As coal's share of Ameri­ ca's electricity-generation market fell be­ tween 2000 and 2010, those of natural gas and renewables rose: gas from 16% to 24%, and renewables from 9% to 10%. The EIA forecasts that America will still obtain 39% of its energy from coal by 2035, but that assumes a consistent regulatory framework. Other sources are less san­ guine. Deutsche Bank predicts that coal's share will fall to 20% by 2030 as regulatory risk grows, with natural gas and renew­ abies rising. That seems more likely. The EPA's new emissions rules may have been stayed by the courts, but they loom none­ theless, hampering investment in coal. The switch away from it will be painful for some. But as Robert Byrd, the late sena­ tor from West Virginia, once said, coal-de­ pendent regions "can choose to anticipate change and adapt to it, or resist and be overrun by it." •

39

40

The Economist J a n ua ry 28th 2012

United States

Lexington

I

The union's state is dire

Barack Obama's big speech to Congress was mainly a bit of electioneering

T IS becoming hard to remember that Barack 0bama's speeches

I were once described as inspiring, visionary and transforma­

tional. His state-of-the-union message on January 24th was none of those things. Then again, circumstances were against him. He said, as presidents must, that the state of the union was "getting stronger". But everyone knows that the true state of the union is dire: 13m Americans are unemployed, the recovery is fragile and at any moment the economy could be blown sideways by a new gust of bad economic news from Europe. Nor, frankly, was this speech a useful guide to the administration's legislative plans for the coming year. Since the mid-term elections of November 2010, the Republican majority in the House of Representatives has blocked most of the Democrats' legislation, and will continue to do so, which means that the president's plans count for little. To be understood, this speech needs to be seen for what it was: an audition for re-election. Measured by that standard, how did he do? A president asking voters for four more years cannot just promise jam tomorrow. Since the Republicans want to make the coming election a refer­ endum on his performance, Mr Obama has to brag about what he has already done. So, cloaked in praise for the armed services, he book-ended his speech with reminders that it was he who or­ dered the raid that killed Osama bin Laden. He called his contro­ versial decision to bail out Detroit's car industry a "bet on Ameri­ can ingenuity" that had put General Motors "back on top as the world's number one". He claimed (this is a stretch) that his reform of banking regulation meant that taxpayers would never again have to bail out a financial institution too big to fail. And, recog­ nising that millions of voters still fume about the bail-outs, he said he was creating a special team of prosecutors to track down and punish those responsible for the abusive lending that pumped up the housing bubble and led to the crash of 2008. Nice try. Mr Obama's problem is that Americans simply do not believe these good tidings. More than 48% of them disap­ prove of the way he is doing his job. More than 65% believe that the country is on the "wrong track". To stand a chance of re-elec­ tion, he must therefore do whatever he can to frame the vote less as a referendum on his performance in office and more as a choice between competing visions for the future. This speech

confirmed that the main contrast he intends to draw with the Re­ publicans is that he stands for "fairness". A strategy like this en­ tails a risk. Despite the ruckus of those who claim to represent the 99%, Americans believe in opportunity, not equality-mongering. And although fairness is a less provocative word than "equality", his opponents have already identified it with "class warfare". Mr Obama told Congress that it was not "class warfare" to ex­ pect a billionaire to pay at least the same tax rate as his secretary, the rule proposed by Warren Buffett, the investment guru and sage of Omaha. The president now says that anyone making more than $rm a year should pay at least 30% in taxes. By the grace of God (or the machinations of Newt Gingrich), Mr Obama gave his speech on the very day that Mitt Romney, still his likeliest Republican opponent in November, felt compelled at last to pub­ lish his most recent tax returns, showing that the founder of Bain Capital earned $42.sm in the past two years but (since these were mainly capital gains) was taxed at a rate of less than 15%. If Mr Romney becomes the Republican nominee his wealth, and the way he earned it, could damage him in the general election, just as it has in his own party's primaries. After defending his record and setting up a contrast with his opponents, a president up for re-election must immunise himself against the other party's attack lines. The Republicans accuse Mr Obama of apologising for America and accepting its decline, so he said its standing had never been higher and it remained "the one indispensable nation". The Republicans say he is blocking the exploitation of the country's energy resources, so he prom­ ised more exploitation of offshore oil and gas and called for new tax credits for clean energy. Mr Romney accuses China of curren­ cy manipulation, so he is creating an "enforcement unit" to police "unfair trading practices". And so forth. A first term ending in a whimper

In all these ways, Mr Obama's speech can be defended as a work­ manlike attempt to sum up his achievements and set out his stall for November. And yet it was in some ways also profoundly dispiriting. Health-insurance reform was barely mentioned, an acknowledgment that the vast piece of social legislation Mr Obama once saw as his greatest domestic achievement has so far fallen flat with voters. The president implied falsely once again that squeezing the rich was the key to taming the deficit, instead of admitting that returning the public finances to a sustainable path will require higher taxes all round and painful reforms of health and pension entitlements. His talk about reversing the flow of manufacturing jobs abroad brought to mind the words "King" and "Canute". In a wistful passage at the end of his speech, Mr Obama re­ flected on the trust and teamwork that enabled the Navy's SEALS to kill bin Laden, inviting his audience to imagine how strong the union would be if America as a whole could demonstrate similar common purpose. This is the fantasy of many a president. They deploy untold power and enjoy total obedience as commanders­ in-chief, but in the civilian domain are checked and balanced at every turn by a fractious polity. It is not all Mr Obama's fault that the parties have seldom been more divided than they have been on his watch. But he entered the White House promising to rise above partisanship. To judge by this speech, there will not be much of that in this election year. • Economist.comfblogsflexington

41

Also in this section 43 Crime in Nicaragua 43 Ecuador's reti rement capital

For daily analysis and debate on the Americas, visit Economist.comfamericas

Race in B razil

Affirming

a

divide

RIO D E J A N E I R O

Black Brazilians are much worse off than they should be. But what is the best way to remedy that?

I beautify the rundown port near the cen­ N APRIL 2010, as part of a scheme to

tre of Rio de Janeiro for the 2016 Olympic games, workers were replacing the drain­ age system in a shabby square when they found some old cans. The city called in ar­ chaeologists, whose excavations un­ earthed the ruins of Valongo, once Brazil's main landing stage for African slaves. From18n to 1843 around soo,ooo slaves arrived there, according to Tania Andrade Lima, the head archaeologist. Valongo was a complex, including warehouses where slaves were sold and a cemetery. Hundreds of plastic bags, stored in shipping contain­ ers parked on a corner of the site, hold per­ sonal objects lost or hidden by the slaves, or taken from them. They include delicate bracelets and rings woven from vegetable fibre; lumps of amethyst and stones used in African worship; and cowrie shells, a common currency in Africa. It is a poignant reminder of the scale and duration of the slave trade to Brazil. Of the 10.7m African slaves shipped across the Atlantic between the 16th and 19th centu­ ries, 4.9m landed there. Fewer than 400,000 went to the United States. Brazil was the last country in the Americas to abolish slavery, im888. Brazil has long seemed to want to forget this history. In 1843 Valongo was paved over by a grander dock to welcome a Bour­ bon princess who came to marry Pedro II, the country's 19th-century emperor. The stone column rising from the square com­ memorates the empress, not the slaves.

Now the city plans to make Valongo an open-air museum of slavery and the Afri­ can diaspora. "Our work is to give greater visibility to the black community and its ancestors," says Ms Andrade Lima. This project is a small example of a much broader re-evaluation of race in Bra­ zil. The pervasiveness of slavery, the late­ ness of its abolition, and the fact that noth­ ing was done to turn former slaves into citizens all combined to have a profound impact on Brazilian society. They are rea­ sons for the extreme socioeconomic in­ equality that still scars the country today. Neither separate nor equal

In the 2010 census some 51% of Brazilians defined themselves as black or brown. On average, the income of whites is slightly more than double that of black or brown Brazilians, according to IPEA, a govern­ ment-linked think-tank. It finds that blacks are relatively disadvantaged in their level of education and in their access to health and other services. For example, more than half the people in Rio de Janeiro's fa­ velas (slums) are black. The comparable fig­ ure in the city's richer districts is just 7%. Brazilians have long argued that blacks are poor only because they are at the bot­ tom of the social pyramid-in other words, that society is stratified by class, not race. But a growing number disagree. These "clamorous" differences can only be ex­ plained by racism, according to Mario The­ odora of the federal government's secre­ tariat for racial equality. In a passionate

and sometimes angry debate, black Brazil­ ian activists insist that slavery's legacy of injustice and inequality can only be re­ versed by affirmative-action policies, of the kind found in the United States. Their opponents argue that the history of race relations in Brazil is very different, and that such policies risk creating new ra­ cial problems. Unlike in the United States, slavery in Brazil never meant segregation. Mixing was the norm, and Brazil had many more free blacks. The result is a spectrum of skin colour rather than a dichotomy. Few these days still call Brazil a "racial democracy". As Antonio Riserio, a sociolo­ gist from Bahia, put it in a recent book: "It's clear that racism exists in the us. It's clear that racism exists in Brazil. But they are dif­ ferent kinds of racism." In Brazil, he argues, racism is veiled and shamefaced, not open or institutional. Brazil has never had any­ thing like the Ku Klux Klan, or the ban on interracial marriage imposed in 17 Ameri­ can states until 1967. Importing American-style affirmative action risks forcing Brazilians to place themselves in strict racial categories rather than somewhere along a spectrum, says Peter Fry, a British-born, naturalised-Brazil­ ian anthropologist. Having worked in southern Africa, he says that Brazil's avoid­ ance of "the crystallising of race as a mark­ er of identity" is a big advantage in creating a democratic society. But for the proponents of affirmative action, the veiled quality of Brazilian rac­ ism explains why racial stratification has been ignored for so long. "In Brazil you have an invisible enemy. Nobody's racist. But when your daughter goes out with a black, things change," says Ivanir dos San­ tos, a black activist in Rio de Janeiro. If black and white youths with equal qualifi­ cations apply to be a shop assistant in a Rio mall, the white will get the job, he adds. The debate over affirmative action splits both left and right. The governments ��

42

�

The Economist J a n ua ry 28th 2012

The Americas

of Dilma Rousseff, the president, and of her two predecessors, Luiz Inacio Lula da Silva and Fernando Henrique Cardoso, have all supported such policies. But they have moved cautiously. So far the main battleground has been in universities. Since 2001 more than 70 public universi­ ties have introduced racial admissions quotas. In Rio de Janeiro's state universi­ ties, 20% of places are set aside for black students who pass the entrance exam. An­ other 25% are reserved for a "social quota" of pupils from state schools whose par­ ents' income is less than twice the mini­ mum wage-who are often black. A big fed­ eral programme awards grants to black and brown students at private universities. These measures are starting to make a difference. Although only 6.3% of black 18to 24-year-olds were in higher education in 2006, that was double the proportion in 2001, according to IPEA. (The figures for whites were 19.2% in 2006, compared with 14.1% in 2o01). "We're very happy, because in the past five years we've placed more blacks in universities than in the previous sao years," says Frei David Raimundo dos Santos, a Franciscan friar who runs Educa­ fro, a charity that holds university-en­ trance classes in poor areas. "Today there's a revolution in Brazil." One of its beneficiaries is Carolina Bras da Silva, a young black woman whose mother was a cleaner. As a teenager she lived for a while on the streets of Sao Paulo. But she is now in her first year of social sci­ ences at Rio's Catholic University, on a full grant. "Some of the other students said 'What are you doing here?' But it's getting better," she says. She wants to study law and become a public prosecutor. Academics from some of Brazil's best universities have led a campaign against quotas. They argue firstly that affirmative action starts with an act of racism: the divi­ sion of a rainbow nation into arbitrary col­ our categories. Assigning races in Brazil is not always as easy as the activists claim. In 2007 one of two identical twins who both applied to enter the University of Brasilia was classified as black, the other as white. All this risks creating racial resentment. Secondly, opponents say affirmative ac­ tion undermines equality of opportunity and meritocracy-fragile concepts in Brazil, where privilege, nepotism and contacts have long been routes to advancement. Proponents of affirmative action say these arguments sanctify an unjust status quo. And formally meritocratic university entrance exams have not guaranteed equality of opportunity. A study by Carlos Antonio Costa Ribeiro, a sociologist at the State University of Rio de Janeiro, found that the factors most closely correlated to attending university are having rich par­ ents and studying in private school. In practice, many of the fears surround­ ing university quotas have not been borne

out. Though still preliminary, studies tend to show that cotistas, as they are known, have performed academically as well as or better than their peers. That may be be­ cause they have replaced weaker "white" students who got in merely because they had the money to prepare for the exam. Nelson do Valle Silva, a sociologist at the Federal University of Rio de Janeiro, says that the backlash against quotas would have been even stronger if access to universities were not growing so fast. For now, almost everyone who passes the exam gets in somewhere. It also helps, he says, that many universities have adopted less controversial "social quotas". Mr Fry agrees that affirmative action has "become a fait accompli". He attributes the declining resistance to guilt, indifference and the fear of being accused of racism. T he battle for jobs

For black activists, the next target is the la­ bour market. "As a black man, when I go for a j ob I start from a disadvantage," says Mr Theodora. He notes that the United States, which is only 12% black, has a black president and numerous black politicians and millionaires. In Brazil, in contrast, "we have nobody". That is not quite true: apart from footballers and singers, Brazil has a black supreme-court justice (appointed by Lula) and senior military and police offi­ cers. But they are exceptional. Only one of the 38 members of Ms Rousseff's cabinet is black (though ten are women). Stand out­ side the adjacent headquarters of Petro­ bras, the state oil company, and the Nation­ al Development Bank in Rio at lunchtime, and "all the managers are white and the cleaners are black," says Frei David. Some private-sector bodies are starting to espouse racial diversity in recruitment. The state and city of Rio de Janeiro have both passed laws reserving 20% of posts in civil-service exams for blacks, though they are yet to be implemented. If unemploy­ ment rises from today's record low, job quotas are likely to create even more con-

The shadow of the past

troversy than university entrance has. What stands out from a decade of de­ bate about affirmative action is that it is be­ ing implemented in a very Brazilian way. Each university has taken its own deci­ sions. The federal government has tried to promote the policy, but not impose it. The supreme court is sitting on three cases ad­ dressing racial quotas. Some lawyers sus­ pect it is deliberately dragging its heels in the hope that society can sort the issue out. Society itself is indeed changing fast. Many of the 30m Brazilians who have left poverty over the past decade are black. Businesses are taking note: many more cosmetics are aimed at blacks, for example. The mix of passengers on internal flights now bears some resemblance to Brazil, rather than Scandinavia. Until recently, the only black actors in television soap operas played maids; now one Globo soap has a black male lead. Much of this might have happened without affirmative action. The question facing Brazil is whether the best way to repair the legacy of slavery is to give extra rights to darker-skinned Bra­ zilians. Yes, say the government and the black movement. Given the persistence of racial disadvantage that is understandable. But the approach carries clear risks. Un­ til the invasion of American academic ideas, most Brazilians thought that their country's racial rainbow was among its main assets. They were not wholly wrong. Mr do Valle Silva, a specialist in social mo­ bility, finds that race affects life chances in Brazil but does not determine them. And if positive discrimination becomes perma­ nent, a publicly funded industry of entitle­ ment may grow up to entrench it and to promote divisive racial politics. There may be better ways to establish genuine equality of opportunity and rights. Brazil has had anti-discrimination legislation since the 1950s. The 1988 consti­ tution made both racial abuse and racism crimes. But there have been relatively few prosecutions. That is partly because of rac­ ism in the judiciary. But it is also because ��

The Economist J a n ua ry 28th 2 0 1 2

� judges and prosecutors think the penalties are too harsh: anyone accused of racism must be held in jail both before and after conviction. And in Rio de Janeiro the black movement's preference for affirmative ac­ tion led the state government to lose inter­ est in measures aimed at attacking racial prejudice, according to a study by Fabiano Dias Monteiro, who ran the state's anti-rac­ ist helpline before it was scrapped in 2007. The hardest task is to change attitudes. Many Brazilians simply assume blacks be­ long at the bottom of the pile. Supporters of affirmative action are right to say that the country turned its back on the pro­ blem. But American-style policies might not be the way to combat Brazil's specific forms of racism. A combination of stron­ ger legal action against discrimination and quotas for social class in higher education to compensate for weak public schools may work better. • Crime in Nicaragua

A surprising safe haven MANAGUA

How Central America's poorest country became one of its safest

T YING between Colombia's coca bushes L and Mexico's cocaine traffickers, Cen­ tral America is a choke point on the drugs trail. In 2010 the smugglers ensured that Honduras, El Salvador, Belize and Guate­ mala were among the world's seven most violent countries. Costa Rica and Panama are richer and safer. But since 2007 their murder rates have respectively risen by a third and nearly doubled. Amid this inferno Nicaragua, the poor­ est country in mainland Latin America, is remarkably safe. Whereas Honduras's murder rate in 2010 was 82 per 1oo,ooo people, the world's highest in over a de­ cade, Nicaragua's was just13, unchanged in five years. That means it is now less violent than booming Panama, and may soon be safer than Costa Rica, a tourist haven. What explains the relative peace? Spending is not the answer. With a GDP per head of $1,100, Nicaragua can afford only 18 policemen for every 1o,ooo people, the lowest ratio in the region. (Panama has so.) Earning $120 per month, its officers are also the worst-paid. Nor does Nicaragua spend much on prisons: itjailsjust12o peo­ ple per 10o,ooo, compared with 390 in El Salvador. This may work in its favour: El Salvador's violent mara gangs look for re­ cruits in the country's packed prisons. Nicaragua's distaste for its neighbours' mano dura ("iron fist") policies grew out of the 1979 revolt against the Somoza dictator­ ship. "We didn't know how to be police.

The Americas Ecuador's reti rement capital

Going gently C U ENCA

An "anti-imperialist" country welcomes American pensioners

Tthe centre of Cuenca, Ecuador's third

HE double-decker tour buses leaving

city, rarely carry even ten passengers. Yet when Andres and Rocio Molina held a viewing of their two-bedroom house for interested Americans, some 30 boarded a bus provided by the estate agent. For three straight years this city of 330,ooo people has topped International Living magazine's ranking of retirement spots. American diplomats say some s,ooo expatriates from the United States, mostly over 55, now live in Cuenca, which has enough colonial and 19th­ century architecture to qualify as a UNES­ co world heritage site. The city offers a packed schedule of events, including an international art biennale and the national hockey tour­ nament. Its private health clinics are well-regarded and cheap: a doctor's visit runs to $30 and insurance costs $100 a month. Its public spaces, like the El Vado walk on a bluff overlooking the Tome­ bamba river, are being renovated, and many stately homes have been con­ verted into smart restaurants and bou­ tique hotels. People still feel safe walking Cuenca's cobblestone streets at night-as they seldom do in Quito, the capital. Cuenca has some unavoidable draw­ backs. Traffic on narrow streets is harrow­ ing. Buses and lorries using low-quality diesel spew arsenic into the air. Few houses have heating, and at an altitude of 2,soom (8,200 feet), evenings are brisk. The inequality between foreigners

We only knew we didn't want to be like the Somozan Guard," says Aminta Granera, a former nun and guerrilla who leads the force. Officers are aided by 10o,ooo volun­ teers. They include law and psychology students; 1o,ooo former gang members, who mentor youths via baseball in the barrios; and nearly 4,000 domestic-vio­ lence victims, who persuade women to speak out. Amnesty International, an NGO, highlights the frequency of rape, which is made worse by a blanket ban on abortion: last year a 12-year-old was forced to give birth to her stepfather's baby. Still, confidence in the police is the highest in Latin America after Chile. The drug war could yet reach Nicara­ gua. The country's low wages may attract kingpins just as they have wooed legiti­ mate investment: smugglers charge under $sao to drive a car of cocaine from Mana­ gua to Mexico. The gangs may only have been kept out by the country's ropy ports.

and locals can be jarring, and may lead to social tensions. Elderly native women still carry loads to market on their bent backs, and ageing cobblers toil in dark adobe workshops. Although most Cuen­ cans ignore the anti-American rhetoric of Rafael Correa, the president, they resent being priced out of the property market. Cuenca owes some of its growth to liberal immigration policies. Ecuador grants residency to any retiree over 65 whose pension exceeds $Boo a month, just $255 above the poverty line. Since older people pay a mere $so a month for health care from the social-se curity system, a new influx of retired people could strain budgets to breaking point. Mr Correa will have to be careful not to let one of Ecuador's biggest draws be­ come a victim of its own success.

What's the Spanish word for dentures?

The police say they broke up 14 drug-traf­ ficking cells in the first half of 2011 alone, up from 16 in all of 2010 and one or two a year until 2oos. Ms Granera says that such plots often include Mexicans. The Zetas, a brutal Mexican mob, could easily ignite more violence if they move in. A cloud hangs over the police's leader­ ship. Ms Gran era is justly popular. But like many officials in Daniel Ortega's govern­ ment, she has ignored the limit on her five­ year term. That deadline passed in Sep­ tember, only for Mr Ortega-who himself began an unconstitutional third term this month-to reappoint her. The opposition complains that the police do little to stop the periodic rampages of mobs loyal to Mr Ortega: in 2010 a Holiday Inn was attacked with makeshift mortars while the opposi­ tion held a meeting there. Mr Ortega has al­ ready hollowed out most Nicaraguan insti­ tutions. It would be a crime if the country's police suffer the same fate. •

43

Also in this section 45 Boo ks in Arabic 45 Governing Libya 46 Art in Saudi Arabia 46 Yemen's president 47 Nigerian Muslims 47 Kenya and the ICC

For dai ly a n a lysis and debate on the Middle East a n d Africa, visit Economist.comfworld/middle-east-africa

Syria's crisis

It looks lil<e civil war

Syrian rebel forces are buying arms and fighting closer to the capital

Tusually occupied by rich Syrians in sec­ HE breezy hilltop resort of Zabadani is

ond homes and Gulf tourists enjoying the picturesque mountains on the Lebanese border. But for much of January the town of some 40,000 people has been a rebel enclave. After several days of fighting by daring but lightly armed opposition forces, the army, equipped with tanks and heavy weaponry, was forced to pull back onJanu­ ary 18th. Residents hailed their "liberated city" and hung pictures of the dead in a tree. They waved placards and shouted slogans ridiculing the regime. Civilians guarded checkpoints usually manned by the security forces. Zabadani is not the first place in Syria to experience a brief taste of freedom over the past ten months. Last year Mr Assad's forces temporarily lost control to the oppo­ sition in Hama, the country's fourth-larg­ est city. Rastan and Tel Kalakh, two small towns close to Horns, have at times barri­ caded themselves in. Parts of Horns, the third-largest city, and villages near Idleb have also enjoyed a measure of autonomy. But Zabadani is much closer to Damas­ cus, the capital, than any of them-about 25 miles (4okm). The fight for control of the country is no longer taking place far from the centre of power. Just days after Zaba­ dani was liberated, armed clashes erupted in Douma, a suburb six miles from Damas­ cus. Army defectors seized control of the town for a few hours. Reports of firefights are no longer rare in what was once a peaceful capital. Two

large car bombs exploded in front of a se­ curity-services' building on December 23rd. It was followed by another one in a residential area a fortnight later. Few Syri­ ans now dare to drive on the country's main artery, the highway from the capital north to Aleppo, a commercial hub, fear­ ing ambushes on the road. Military buses and oil pipelines are often hit by explo­ sions. Who is responsible is hard to know. "There is so much going on that it gives the feeling that everything is starting to unrav­ el," says a Western diplomat in Damascus. A year ago Syria could call itself the saf­ est country in the region. But since the start of the uprising in March, the regime has presided over rising violence. It appears readier than ever now to employ heavy weapons and kill indiscriminately. The regions surrounding Idleb and Horns are the bloodiest. In the hills close to Kafer Oweid, a hamlet some 25 miles from

Idleb, more than 100 civilians and defect­ ing soldiers, as well as some regime men, were killed on December 19th and 2oth. Tanks sent mortars through the walls of houses. Corpses of fleeing villagers littered the nearby orchards. Some of the dead had their hands tied behind their backs. Wit­ nesses describe an imam bayoneted in the throat after pleading with attacking sol­ diers to stop the massacre. Sectarian rifts appear to be intensifying in these areas. The security forces are dominated by members of the Alawite sect. The battered Sunni majority has on occasion taken indiscriminate revenge, al­ though many activists have shown re­ markable patience and remained peaceful in the face of the regime's onslaught. But a growing number are viewing an armed struggle as the only way out. The majority fighting on the opposition side are defectors calling themselves the Free Syrian Army. Their leaders claim to command up to 15,000 men, though out­ siders believe there may be no more than 7,000. Most fight in autonomous groups. Activists say frustrated civilians are in­ creasingly j oining in. Most of them have only basic military training. This has result­ ed in mishaps: having procured two rock­ ets to target a police station, a group fired one over its roof and the second into a tree. Still, army defectors and civilian volun­ teers are becoming increasingly auda­ cious. They have repeatedly picked off government snipers and security chiefs at checkpoints. The regime says it has lost 2,000 men so far. The UN talks of more than 5,000 dead civilians. Activists shake their heads in dismay at their weakening control of the street; imams preaching non-violence may be the last barrier holding back a surge to arms. "Many people are just waiting to be told they can fight back," says a young profes­ sional from Horns. Protesters now chant slogans celebrating defectors rather than ��

The Economist J a n ua ry 28th 2 0 1 2

Middle East and Africa

45

Libya's recovery

Books i n Arabic

Revolution between hard covers CAIRO

Better than it sounds

What Arabs are writing about the Arab spring

T

HE Middle East has a bad reputation when it comes to books; nowhere else do so few people read them. But that might change as censorship rules are relaxed and new books begin to dissect the popular uprisings that felled despots in Egypt and Tunisia-along with other delicate subjects. Eye-witness accounts, jeremiads and self-congratulatory mem­ oirs jostle for space at the Cairo book fair, which coincides this month with the first anniversary of the revolutions. The fall of Hosni Mubarak in Egypt is chronicled by Abdel Latif al-Menawy in "Tahrir: The last18 days of Mubarak". As head of state-television news he had a bird's-eye view of the uprising. He can be deliciously gossipy, as when he describes Suzanne Mubarak, the former first lady, fleeing from the helicopter meant to ferry her into exile to take a final look at the presidential villa, stuffed with her ill­ gotten possessions. Less plausible is Mr al-Menawy's spirited defence of the role he played at the state broadcaster, which he describes as "neutral and profession­ al". Most Egyptians remember him for his verbal attacks on the protesters. The most elegant contribution to the new canon comes from Alaa al-Aswany, author of "The Yacoubian Building", a bestselling novel from 2002. In a col­ lection of previously published articles, entitled "Has the Egyptian revolution gone wrong?", he sets out his long-estab­ lished scepticism towards government in general and laments how little has changed in Egypt since the revolution. In Tunisia Amor Chedly, an adviser to Habib Bourguiba, a former president, has published a bestselling account of the 1987 "medical coup" in which his ailing boss was deposed by Zine el-Abidine Ben Ali, who then ruled until he fled to Saudi Arabia inJanuary last year. Other ex­ officials are shedding light on formerly taboo subjects, including the assassina­ tions of dissidents. Radhi Meddeb, a businessman, has published an eco­ nomic manifesto, "Together let us build � the divided political opposition. A minor­ ity of groups have started openly to advo­ cate armed struggle. "The people want Ji­ had" is a new slogan being discussed. The rebels are, however, still poorly armed. Until now, they have been relying on equipment from rogue regime soldiers. But arms dealers and smugglers are seeing a sharp increase in demand. "A gun that cost $8oo a year ago now costs $},ooo,"

the Tunisia of tomorrow", that has made him a political star. One of the most popular formats for chronicling the past year are youmiyat (diaries), often written in rhyme. Hassan Talab, a poet, rather immodestly called his latest work "The revolution's Bible and its Koran". It basks in the glory of Tahrir Square. Sondos Shabayek, a play­ wright, has adapted Eve Ensler's "Vagina Monologues" to produce "The Tahrir Monologues", an ever-changing col­ lection of vignettes from the revolution. But the great novel of the Arab spring has yet to be published. This year's Ara­ bic Booker prize shortlist is dominated by gloomy works about the oppression that prevailed before 2011. Two Egyptian entries are telling: Ezzedine Choukri­ Fishere's "Embrace on Brooklyn Bridge" is about alienation, whereas Nasser Iraq's "The Unemployed" describes a young man forced to leave home and find work in Dubai. Good art, like revolu­ tionary change, takes time.

A novel habit

says a volunteer fighter in Horns. In Idleb some groups have attacked regime bases in search of weapons. A university stu­ dent-cum-rebel in Deir ez-Zor, the eastern oil province, says locals have received weapons from Sunnis in Anbar province across the border in Iraq eager to see Mr As­ sad's demise. A handful of battle-hard­ ened Libyan youths spoiling for a new fight have also shown up. •

B E N G HAZI A N D T R I P O L I

The new government is making progress even if things are still messy

T IBYA'S interim rulers had their first seri­

L ous wobble on January 21st when a crowd of several thousand massed outside a government building in Benghazi, the country's second city, where members of the National Transitional Council were meeting. They hurled grenades and Molo­ tov cocktails, yelled angry slogans and de­ manded more support for rebel fighters now out of a job. Their discontent had been building for some time, particularly in the east of the country, which fell swiftly to rebel forces early last year. As war raged further west until the fall of Tripoli, the capital, in Au­ gust and the death of Colonel Muammar Qaddafi in October, Benghazians felt in­ creasingly neglected. The most recent uproar came after more than a month of nightly protests. Pic­ tures of the once-popular Mustafa Abdel Jalil, who led the rebels in opposition, have been burned in the streets; other leaders have been vilified for their links with the former regime. Protesters complain that the city, marginalised under Qaddafi, has seen few improvements since his fall from power. The judicial system is still suspend­ ed, schools have only recently reopened, official handouts for the poor are not yet re­ stored, and promised medical treatment for fighters wounded in the uprising last year has yet to materialise. The deputy head of the council, Abdel Hafiz Ghoga, whom many dislike for hav­ ing once led the lawyers' union under Qaddafi, resigned after the latest protests. Mr Abdel Jalil later pleaded for patience during a television interview. The authorities face formidable difficul­ ties in bringing stability, prosperity and justice to the country as it emerges from 42 years of brutal and divisive rule. The great­ est test, officials often say, is findingjobs for tens of thousands of fighters hailed as he­ roes when, with NATO's backing, they de­ feated Qaddafi's troops. Some have re­ turned to work or university, but many were unemployed and remain on the streets, in mismatched uniforms and car­ rying light weapons. The defence and inte­ rior ministries have declared they will em­ ploy 25,000 men each, but it will take time. Meanwhile, the UN reports the secret detention of thousands of Qaddafi loyal­ ists. Clashes have erupted intermittently between tribal militias, and reports of viol­ ent crimes such as kidnapping and carjack­ ing by uniformed men with guns are on ��

46

The Economist J a n ua ry 28th 2012

Middle East and Africa

� the increase. The limited police force has difficulty dealing with criminals who are more numerous and organised, not to mention far better armed. Remnants of old regime forces have also been increasingly active. Progress in Libya is scrappy and slow but there are nonetheless grounds for opti­ mism. The rebel fighters on the streets are for the most part co-ordinating with the de­ fence and interior ministries. They patrol residential districts and guard public build­ ings. Observers believe they are strong enough to deal with a low-level insurgen­ cy if one were to spring up. The prolifera­ tion of heavy weapons, and absence of a plan to collect them, is worrying but artil­ lery is only rarely now seen on the streets. Clashes are, for the moment, little more than unpleasant, but isolated, incidents. Shops and cafes open late in city centres and, at least in the urban coastal areas, peo­ ple are still largely positive about their lot. Ministers often appear live on televi­ sion and take questions by telephone. Minutes of cabinet meetings, which hap­ pen fairly regularly, are made public. An election commission recently produced a draft law for a poll set for the summer. The proposal was wildly unpopular and the commission is now reviewing over 10,000 comments from civil-society groups and the general public sent by e-mail. Libyans appear to enjoy having their say. • Art in Saudi Arabia

The picture is changing J EDDAH

Saudi artists and comedians are enjoying a thin breath of freedom

AUDI ARABIA's response to the Arab

S spring might be described as allergic.

The tiniest whiff of protest last March prompted the government to outlaw de­ monstrations. Even as women, in effect, continue to be banned from driving, and dissidents jailed or banned from travelling, a new media law has clamped tighter re­ strictions on the press. Echoing events in tiny Bahrain, where the ruling family crushed Shia protests, Saudi security forces have responded to rising unrest in their country's east, among the kingdom's

own 10% Shia minority, with blunt mea­ sures, including live gunfire that killed five protesters in recent months. Instead, the immediate beneficiaries of the Arab spring in Saudi Arabia may be a new generation of comedians and artists. They certainly stole the limelight on 19th January, at the opening of "We Need to Talk", organised in Jeddah, a Red Sea port city. Set in a bare-walled, unfinished shop­ ping mall by Edge of Arabia, an indepen­ dent arts initiative, the festival was billed as the most significant exhibition of con­ temporary art ever staged in the kingdom. Many of the 22 Saudi artists involved have repeatedly exhibited abroad, but until re­ cently their work was felt to be unaccept­ able in the country where most of them live (see image below). The upheavals across the Arab world last year appear to have changed that. Alongside the artists-whose work looks at such issues as the ban on women driving, religious extremism, Saudi bu­ reaucracy and cultural conservatism­ were also young comedians who have shot to fame online in the last year. "We shouldn't think of what has happened in the region just in political terms," says Aziz Shalan, one of the comedic collective tel­ faZll (the "n" refers to 2on), whose latest video pokes fun at the Saudi religious po­ lice and was viewed more than a million times on YouTube in a week. "What hap­ pened here is something bigger. It's not po­ litical change, it's social change." Other artists and comedians share this attitude. They want social change, but without seeking confrontation with the government. Their target is ordinary peo­ ple, and increasingly they collaborate. Ten years ago it was largely impossible for either group to express themselves in Saudi Arabia to much more than a roomful of friends. The government controlled most channels of communication. Now artists and comedians can produce their work independently and use the internet to share it with their audience. Abdulnasser Gharem, an army officer who is also one of the leading lights in Sau­ di contemporary art, describes the grow­ ing movement as an evolution. It is often assumed the divisions in Saudi Arabia are religious or political, he says, but they are really between young and old. "After the Arab spring I think the older generation in Saudi has realised this. Now they want to hear the younger generation." •

Yemen's presi dent

Another one bites the dust SANAA

T he ruler of the poorest country in the Middle East departs at last

A LI ABDULLAH SALEH ended his 33 .fi years as president of Yemen on Janu­ ary 22nd and boarded a plane to Oman and may go on to America. This has brought to a close, at least temporarily, a violent power struggle. Riven by civil strife for many years, op­ position groups rose up in open revolt a year ago, following the example of youths in Tunisia and Egypt. Mr Saleh, weakened by an injury from a bomb attack in June, clung to power. For months Yemen ap­ peared in danger of sliding into bloody chaos. Mr Saleh's loyal troops fought not only student protesters but also tribal bands and defecting soldiers, leaving ex­ tremist groups to set up strongholds in the north and south of the country. His departure was brokered by Western diplomats and Gulf leaders. It follows an agreement that gives him and his loyalists immunity from prosecution. The final sign-off on the deal was delayed by several months, until it was enshrined in law by the Yemeni parliament. Mr Saleh's going should ease political tensions in Yemen. UN envoys have coaxed its competing fac­ tions into a detailed power-sharing plan that excludes jihadists. However, Mr Saleh has accepted neither defeat nor perma­ nent exile and says he plans to return to Ye­ men, a possibility that could yet disrupt the delicate transition of power. Mr Saleh left behind a country that is broke and sclerotic. For decades he secured his power by playing off favourites among the tribes and by withholding funds from officials deemed too independent. The em­ boldened protest movement has promised to push for a fundamental reform of poli­ tics. It has vowed to topple corrupt officials from the defence ministry, the national air­ line and even girls' schools. Some in the opposition have criticised the transition as elite brinkmanship, not least since a single consensus candidate, Mr Saleh's deputy, will stand in coming elections for the country's top job. But a planned national dialogue has at least some chance of success now that the veter­ an leader is out of office and his regime is on the defensive. Mr Saleh's departure is not a clear-cut move to democracy but a compromise that may spare Yemen the devastation visited on Libya and Syria in the last year. Few are celebrating in Sana'a, the capital, but more has been achieved than was once thought possible. •

The Economist J a n ua ry 28th 2 0 1 2

Middle East and Africa

Nigeria's northern capital

The terror they dare not name KANO

Globalisation andjihadism intersect in the little-known metropolis of Kano

A Kano had to pass a sign forbidding al­ YEAR ago arrivals on the outskirts to

cohol consumption and banning women from riding on motorbikes. Now it is gone. Kano may be the sixth-biggest Muslim city in the world-after Karachi, Jakarta, Dhaka, Cairo and Istanbul-but it is far from the most conservative. Women lift their hemlines to get on the back of acha­ bas, motorbikes that are the main source of transport. Mini vans carry both sexes to their destination. It is possible to get a cold beer to wash away sand inhaled during a day on the edge of the Sahara. The relaxation of sharia rules has come gradually, but it has accelerated with a re­ cent change of guard. Ibrahim Shekarau, the former governor, liked to please radical clerics. He put up pious signs even as pros­ titutes plied their trade and policemen took bribes from alcohol merchants. When Rabiu Kwankwaso took over last year, he dropped the charade. Few protested in the city of almost 10m Muslims, where thousands of minarets

Is that your wife on the back?

puncture the skyline through the dust of the dry season. Most women dress mod­ estly but a few wear trousers and shirts. Uncovered heads arouse no comment. At traffic lights hawkers surround cars to sell plastic goods and phone cards. Boys offer bootleg Hollywood films while Indi­ an music plays on the radio rather than modern Nigerian pop produced in the south of the country. This is a political statement: Kanoites have little time for their southern compatriots, who are pre­ dominantly Christian. They accuse them of hogging government posts and oil rev­ enues. Such antagonism is common across

Kenya and the ICC

Brace yourself NAIROBI

Kenyan politics is shaken up by the indictment of several heavyweights

T(Icc) onJanuary 23rd announced the HE International Criminal Court

prosecution of four well-known Kenyans for crimes against humanity. The charges date back to a post-election spree of vio­ lence in 2008, which killed1,500 people and displaced 30o,ooo more. Among those facing trial are Francis Muthaura, the country's top civil servant, and Uhuru Kenyatta, the finance minister. Both men resigned three days later. They are from the Kikuyu tribe, while the other accused are from the rival Kalenjin: William Ruto, a former cabinet minister, and Joshua Sang, a radio-show host. Politics is likely to get messy as a result. Messrs Kenyatta and Ruto may still plan to stand in presidential elections this year. Mr Kenyatta, who says he will co-operate with the court, would likely be the main challenger to Prime Minister Raila Od­ inga. Mr Ruto has little chance of being elected, but could play the role of king­ maker if the result is close. The court's indictments are unlikely

yet to be much of an impediment on the campaign trail. President Mwai Kibaki had originally planned to ask the men to step down for the duration of the case. But a recent speech indicates he lacks the stom­ ach-or the power-to act against Mr Muthaura, his closest aide. After four years, Kenya has done al­ most nothing to get justice for victims of the killing spree. Only a handful of people have been prosecuted in domestic courts. Initially, the government welcomed inter­ national involvement, but with trials in The Hague now imminent, that has changed. Githu Muigai, the attorney­ general, has appointed a legal team to examine the ICC case. Some Kenyans believe a mostly Kikuyu establishment is trying to protect its own. An attempt to delay the elections until next year has added to the sense of uncer­ tainty in the Kenyan capital and is symp­ tomatic of a country often unprepared to take hard decisions. Especially where they cut across tribal lines.

the north and has contributed to the rise of a radical Islamist group, Boko Haram. On January 2oth, Kano was the target of the group's most deadly attack to date. A series of co-ordinated bombings and am­ bushes destroyed police buildings and se­ cret-service offices, leaving some 200 dead. The president fired his police chief in response. Boko Haram justified the assault as revenge for the arrest of several mem­ bers. Over the past three years it has killed almost l,ooo people in attacks across Nige­ ria. The group was founded a decade ago in Maiduguri, a city in the north-east. It claims to campaign for the strict imple­ mentation of sharia, which is widely but loosely followed in Nigeria's Muslim north and absent in the Christian south. Traders in Kano markets are reluctant to comment on Boko Haram, fearing more at­ tacks. The group's name is almost never mentioned in public and instead referred to as "BH " or "the terror". Intimidating businesses is a powerful tactic. Once a rich trans-Saharan trade hub, the city can ill af­ ford to lose more commerce. For centuries it enjoyed high levels of literacy and a de­ gree of architectural sophistication. But its main industries, cotton and leather, have collapsed, unable to compete with low­ cost imports. "The Chinese are choking small-scale businesses," laments Sani Yusuf, a manag­ er at Kana's indigo-dye pits, some of the oldest in Africa. His machinery is decrepit. Generators struggle to compensate for the "epileptic" city grid. "Business is very diffi­ cult," says Yusuf Mukta, a worker at a plas­ tics factory. "There is not sufficient power. Diesel for generators is expensive, and we have no support from the government." For now religious homogeneity in Kano creates harmony, one resident says. "It allows people to communicate. There is little bitterness or resentment." But as 10m souls are confined to their homes during a newly imposed night-time curfew follow­ ing this month's attack, many will wonder how long until BH strikes again. •

47

Also in this section 49 Censors hi p in India 49 Coup talk in Bangladesh so Politics in Australia

For daily a n a lysis a n d debate on Asia, visit Economist.comfasia Economist.comfblogsfbanyan

Political visions in Japan

Generational warfare

O S A K A AN 0 TO KYO

Two rival political visions emerge for reviving Japan. Will they clash?

I leader, and even rarer to find two. Yet T IS rare in Japan to find one bold political

since the start of the year, two men with wildly different personalities, political styles and power bases have launched dar­ ing projects that they hope will help shake Japan out of its long economic funk. They may end up colliding with each other. The first is the prime minister, Yoshi­ hiko Noda. At the opening of the Diet, or parliament, on January 24th, he said he would present a bill by the end of March that aims to double the consumption tax, to 10%. For well over a decade, the political establishment has acknowledged the need for an increase, but its nerve has failed it time and again, despite a ballooning gov­ ernment debt and rising social-security costs for an ageing population. Mr Noda is now gambling his political life on such a tax rise. He also wants to slash the number of Diet members from 480 in the lower house to 395, cut the salaries of civil ser­ vants by 8%, and reduce their housing benefits. Any one of these measures would, in a Japanese context, be considered bold. All three together seems almost quixotic in a divided Diet where the upper house is dominated by the opposition Liberal Democratic Party (LDP). Moreover, Mr Noda's popularity has slid in recent opin-

ion polls. He has the support of his own Democratic Party of Japan (DPJ), never a given for any leader of that fractious party. But the LDP shows the same intransigence that has been its stock-in-trade since it lost power in 2009. It vows to block the tax bill, even though raising the consumption tax has long been a plank in its own policies. It would like Mr N ada to dissolve parliament and call a general election on the issue. Mr Nod a, his aides say, counts on LDP obstruc­ tionism to backfire with voters. Yet history has not been kind to prime ministers seek­ ing to raise the consumption tax. Meanwhile, a different vision of gov­ ernment-leaner, less inclined to tax, and less obsessed with regulation-is appear­ ing far from the political centre. In the in­ dustrial city of Osaka, a political move­ ment is emerging, led by 42-year-old Toru Hashimoto, the new mayor. He draws sup­ port from those frustrated by the quagmire of mainstream politics. Osaka is Japan's second-biggest city, with a huge industrial hinterland. Its people are known for busi­ ness acumen and an earthy frankness. Mr Noda and Mr Hashimoto embody very different political styles. Mr Noda, who is 54, is old school. He has called him­ self the "no-sides" leader who promises to put consensus before confrontation. When he chides the LDP, he does so gently, turn-

ing its own words back at it. Some of Ja­ pan's elder statesmen consider him the best prime minister in years. Mr Hashimoto, by contrast, is deliber­ ately abrasive. He has a withering con­ tempt for his enemies, as was clear over the new year when he publicly refused to shake the hand of the boss of the local la­ bour confederation who had backed his ri­ val in last year's election (as also had the DPJ and the LDP). Compounding the in­ sult, Mr Hashimoto plans to turf the con­ federation out of its low-rent offices in the city hall, from where it has brokered power for half a century. Mr Hashimoto is also scathing about central government. He particularly loathes the hidebound education ministry, which he loves to call "stupid". Such talk rattles the Tokyo establishment. Some there dismiss him as a badmouthing popu­ list. Others describe his style as "Hashism", to confer a sort of dangerous extremism. So far, he has shown only the odd right­ wing tic-such as requiring Osaka's teach­ ers to stand for the national anthem. His tactics look more like determina­ tion than despotism. First, he has a clear short-term political goal. He wants to merge the city of Osaka with the prefec­ ture surrounding it in order to cut overlap­ ping government services and reduce debt. He stood down as governor of Osaka prefecture to run for mayor in order to achieve just that. His plan needs a Diet vote to take effect, and he is assiduously courting politicians in Tokyo. But if they vote it down, his advisers say, he will send "assassins" to run in the next election against the national politicians who op­ pose him. His Osaka-based Restoration Party has already started recruiting paten- ��

The Economist J a n ua ry 28th 2 0 1 2

� tial candidates.

Second, Mr Hashimoto has a sophisti­ cated group of backers. These not only in­ clude many in the Osaka media and busi­ ness establishment who have supported his crackdown on the unions and govern­ ment waste. The mayor is also drawing sharp minds from the civil service in To­ kyo, and has support from mayors and go­ vernors in other parts of Japan who favour devolution. Third, he is pretty persuasive. On Janu­ ary 24th Seiji Maehara, the DP]'s policy chief, said Mr Hashimoto had convinced him to change his mind about the creation of an Osaka megalopolis. In Osaka some

Asia

observers say the biggest danger now is that no one any longer stands up to Mr Hashimoto. Potentially troubling for Mr Noda, Mr Hashimoto strongly opposes an increase in the consumption tax. As a high official in Tokyo puts it: "There's a fight between the DPJ and the LDP, and between the DPJ and the populist undercurrent. In the end, it's the populists who are more of a worry." Many in Tokyo hope that, like other region­ al leaders who have emerged in a flash of charisma, Mr Hashimoto will wilt in the national spotlight. For the moment, though, he is sharpening up Japanese poli­ tics, and that can only be a good thing. •

Censors hip in India

Unfunny gags J A I P U R , RAJ A S T H A N

No freedom to offend

E with the unlikely tale that unfolded

VEN a magical realist would struggle

this week at the Jaipur literary festival. Salman Rush die, an author whom Islam­ ists revile, stayed away, warned by police that two assassins had been dispatched by a Mumbai mafioso to prowl among the literati and murder him. When it turned out that the police story was more inventive than most novels, Mr Rushdie offered to speak by video link. Yet the plug was pulled on that, amid implausible talk of baying mobs of Muslims. The festival organisers, prodded by the authorities, also sent other writers packing fromJaipur for daring to read out extracts from his book "The Satanic Verses", banned in India. Mr Rushdie managed at least to ap­ pear on television, where he blamed politicians for scuppering his appear­ ance. They were, he said, increasingly "in bed" with religious extremists. The Con­ gress party (in power both in Rajasthan and nationally) does look craven, fearful of offending Muslim voters in pending state elections. Groups that monitor censorship rank India as pretty free. Yet unedifying excep­ tions exist. In 2010 another writer, Arund­ hati Roy, was charged with sedition for criticising abuses by the Indian state in Kashmir, disputed with Pakistan. Last year Gujarat banned an unflattering biography of a native son, Mahatma Gandhi. Censors block publications with maps that show the actual line of control in Kashmir, not India's territorial claim. Now officials want to impose online restrictions. In October the communica­ tion minister, Kapil Sibal, tried ordering Go ogle, Facebook, Microsoft and others to remove web pages critical of political leaders, such as Sonia Gandhi, adding

that he worried too about religiously provocative material. He also reportedly told firms to pre-screen all content before it was posted, which he denies. The firms refused. They said that would be impossible, but offered to remove objectionable content quickly once published. Go ogle says it got re­ quests to delete 255 online items of "gov­ ernment criticism" in the first half of last year, up fromjust nitems late in 2010. The row has moved to court. A private case demands that 21 big online firms in India pre-censor all published content. The case appears, suspiciously, to do the bidding of Mr Sibal, who denies any involvement. The courts are moving unusually quickly. One judge hearing the case in Delhi warned online firms to comply with his orders. Otherwise, "like China, we will block all such websites".

The bayi ng mobs

49

Politics in Bangladesh

Turbulent house D E LHI

The army claims to have thwarted a coup

I er to Bangladesh's prime minister, "very T WAS, says Gowher Rizvi, a close advis­

quickly nipped in the bud". He was talking of a coup plot foiled by the army. The schemers-16 were involved, and some are on the run-included disgruntled mid­ ranking officers, retired officers, and others abroad. He claims investigators found a list of prominent people to be assassinated, and another list of generals expected to be "potential partners". Bangladesh has faced dozens of coups, failed or not, in its 40 years. But for an army spokesman to give details of one, on Janu­ ary 19th, was unusual. He named the plot­ ters and blamed them for inducing others to revolt (by passing on provocative e­ mails and posting on Facebook). The con­ spirators, he said, shared extreme religious beliefs. The official view is that dogged oppo­ nents of Sheikh Hasina Wajed's elected re­ gime must now be rooted out, especially from the army. These include Islamists­ many supposedly recruited to the army in the early 2ooos-and those who oppose ongoing war-crimes trials (over killings during the secession war of 1971). Mr Rizvi says the government's legiti­ macy is assured and reports "absolute calm" in Dhaka, the capital. The army's dis­ cipline looks admirable, he says, encour­ aged by a popular desire (in contrast to a few years ago) for men in uniform not to meddle in politics. The equanimity is not shared by all. Many normally garrulous Bangladeshi commentators this week shunned re­ quests to talk. A wide presumption exists that phones are bugged. Speak to one of the men accused of leading the plot, who is in hiding abroad, and a murky picture emerges. Ishraq Ahmed concedes that the arrested men are his friends, but denies re­ ligious extremism (indeed, he complains that the authorities have seized his pains­ takingly collected cellar of wines, Arma­ gnacs and malt whiskies). He says the gov­ ernment "can show no troop movements, no guns, anything" to prove the plot. Mr Ahmed is a former high-ranking of­ ficer from a liberal family. He says he fought "with great responsibility" for Ban­ gladesh's independence. Now he and oth­ er nationalists are merely trying to oppose what they see as a coup-by-stealth by Sheikh Hasina, who is letting Bangladesh be "turned into a Bantustan" run by India. He makes many claims. Among the ��

so

The Economist J a n ua ry 28th 2012

Asia

� more

plausible and specific is that spies from India's Research Analysis Wing (RAW) operate in the country. He claims, too, that for two years RAw has had an of­ fice within the headquarters of Bangla­ deshi Intelligence in Dhaka and a "direct submarine cable for communications" back to India. He claims that Indians con­ duct electronic surveillance in the country and kidnap suspects from Bangladeshi cit­ ies. Indian prodding, he adds, encourages the government to crack down on " anyone with beards. Any practising Muslim is vili­ fied and portrayed as Taliban." Mr Rizvi denies all this, saying he is "to­ tally unaware of any Indian presence in Bangladesh". Yet he accepts that many are uneasy about Bangladesh's rapproche­ ment with India under Sheikh Hasina. Bangladesh has also met Indian demands to root out Islamists' training camps, and he concedes that some individuals­ though not Bangladeshis-are taken over the border for prosecution in India. Fractiousness will grow ahead of a gen­ eral election in 2013. Returned to power three years ago, Sheikh Hasina has seen her popularity slump from 81% to 39%, ac-

And fine cellar confiscated

cording to an opinion poll published by the Daily Star on January 8th. More telling, 74% say they oppose her constitutional meddling last year, which changed how elections are organised. That may bode ill for stability. Mughal kings struggled to rule the territory over four centuries ago, la­ menting that Bengal was "a house of tur­ bulence". Little has changed. •

Gaming and politics in Australia

Ms Gillard's gamble

SYDNEY

An unpopular prime minister's majority is wafer-thin

I large. These gambling machines (poker N AUSTRALIAN politics, "pokies" loom

machines, or pokies in Oz-speak) crowd the country's pubs and clubs. Australians lose more than A$19 billion ($20 billion) a year gambling, about two-thirds of it on pokies. Julia Gillard, the prime minister, put together a minority Labor government 16 months ago partly on the strength of a deal to attack perceived problem gam­ bling. On January 21st, after a campaign by Australia's clubs industry, she ditched the deal. In doing so, she has further compli­ cated her government's chances of surviv­ al at the election due next year. Ms Gillard struck the pokies deal with Andrew Wilkie, a Tasmanian independent elected to parliament in 2010. Mr Wilkie was alarmed by gambling addiction and its baneful effect on addicts' families in his constituency. About 6oo,ooo Australians (4% of adults) play pokies at least once a week. On average they pour an astonish­ ing A$8,ooo each year into the machines. Ms Gillard promised Mr Wilkie legislation by next May that from 2014 would make pokies carry devices known as "manda­ tory pre-commitment". Before playing, gamblers would have to decide how much

money they were prepared to lose; after that amount, they have no choice but to stop spending. The Wilkie deal, plus back­ ing from two other independents and an Australian Green, gave Ms Gillard a bare majority, a single vote, over the conserva­ tive Liberal-National coalition, enabling

Dennis's mum plays the pokies too

her to form a government. But a gambler's loss is someone else's gain. Australia's six state governments reap A$5 billion a year in taxes from gam­ bling. They have been wishy-washy in calling for curbs. And Clubs Australia, a lobby group, fought Ms Gillard's plan tooth and nail. It poured millions into a jin­ goistic campaign branding the plan "un­ Australian", and suggested misleadingly that Australians would need to apply for li­ cences to gamble. The campaign hit home in some key Labor constituencies. Many sensed an element of paternalism in the pokies proposal-posh people, after all, do their betting at the races. Ms Gillard has not abandoned pokie re­ form entirely. Early next year a mandatory pre-commitment trial will start in the small Australian Capital Territory (Can­ berra and environs), with possible nation­ al adoption three years later. But Mr Wilkie has abandoned Ms Gillard. Declaring her to be in breach of their agreement, he with­ drew his support from her government. She can still survive. In December Ms Gillard cleverly wedged into the role of parliamentary Speaker a wild card from the conservative opposition, called Peter Slipper or Slippery Pete, depending on your viewpoint. Ms Gillard got an extra vote when the former Speaker, from her own party, returned to the back benches. Ms Gillard's pokies decision was calcu­ lated to balance conflicting forces in her prime ministership. She has placated some nervous Labor parliamentarians, for whom the Wilkie deal threatened political death, and shored up her standing with colleagues. But voters' judgment may be different. A recent poll showed 61% of Aus­ tralians supporting the original pokie re­ form. Ms Gillard's credibility with voters has already suffered after breaking an elec­ tion promise not to introduce a carbon tax. She is now gambling on riding out yet an­ other broken commitment. •

51

Also in this section 52 Yunnan's tobacco boom 52

•.•

••.

and its caffei ne rush

53 Attitudes towards the death penalty 53 New urban tribes 54 Banyan: China, oil and Iran

To accompany o u r new China section, The Economist will be lau n c h i n g a China blog. Readers a re i nvited to suggest a name for the blog at www.economist.comjchi nablo g F o r dai ly a n a lysis a n d debate o n China, visit Economist.comfchina Economist.comfblogsfchina

The long arm of the state

Where's the party?

B EI J I N G

How the Communist Party is trying to expand its influence in the private sector

"l '1 ]HEREAS many urbanites devour VV Chinese editions of Western maga­

zines like Cosmopolitan, GQ, and Vogue, some officials still peruse weightier titles. In December a dozen Communist Party of­ ficials gathered in the eastern city of Hangzhou to celebrate the first anniversa­ ry of an alluring journal, Party Construc­ tion in Non-State-Owned Enterprises. In its inaugural year, said one of them, the maga­ zine had "struck a beautiful pose". The journal in question, as its title suggests, is engaging with the tricky issue of how the Communist Party can maintain influence within a growing private sector. The subject exposes some of the deep­ est contradictions that now lie at the heart of Chinese society. How can the party maintain control over a place that, in ideo­ logical terms, is no longer communist? The closure in the 1990s of vast numbers of state-owned enterprises shattered the party's grassroots base. Over the past de­ cade a priority of the party's secretive Or­ ganisation Department (it handles person­ nel issues for the Born-strong party, yet has no listed telephone number) has been to form party cells in private businesses, or "new economic organisations" as the offi­ cial literature calls them. In 1999 only 3% of private businesses had party cells. Now the national figure is nearly 13%. Coastal Zhejiang province claims all private firms with more than 8o employees have a branch. As party officials see it, setting up branches in the private sector is about

more than just proving that a once-revolu­ tionary party is still in touch with the masses. At a time of rapid social change and outbreaks of unrest, officials hope the new party branches will reinforce stability and keep the party abreast of potential trouble. Some bosses of private firms en­ courage the formation of cells, in which at least three party members are required. They do so in order to curry favour with lo­ cal officialdom. But others have misgiv­ ings. They worry that the "red-collar" workers, as party-member employees are sometimes called, might interfere in the running of the company. In state firms, party committees once controlled workers' lives, monitoring everything from their ideological rectitude to their reproductive cycle. Now the party appears less clear about exactly what the cells should be doing, though it often tries to present them as exemplars of do-good­ ing in a boy-scout vein. Xinhua, the state news agency, reported without irony last July that Communist Party branches in foreign-invested firms in Shanghai had acted as a "red impetus" to growth in the wake of the global financial crisis of 2008. It said one such branch in a British marine-equipment company wrote to the firm's headquarters in London sug­ gesting that the company take advantage of strong local demand by moving more of its operations from Britain to China. On re­ ceiving this suggestion, "light filled the eyes" of the top British management, and the firm carried out the party's plan.

In practice, party cells are most unlikely to be debating ideology with company management. Even within the party, few people believe in Marxism any longer. The tension between an attractive private-sec­ tor career and allegiance to the Commu­ nist Party is always there for the new breed of party members: 20-somethings who tote iPhones and tweet furiously. Many of them joined the party in the first place only because they were top of their college class and they saw it as a way to earn a lot more money. In some parts of the country, the gov­ ernment levies a tax, usually o.s% of pay­ roll, to pay for private firms' party activi­ ties. Few openly complain, but some resist the party's embrace. Non-governmental organisations-known in party-speak as "new social organisations"-have proved particularly difficult to penetrate. The party, fearful that some might evolve into opposition groups, tries to keep them small. But in December a report published by a government think-tank warned that "party leadership" over NGOs needed to be strengthened. Otherwise, the report warned, they might become tools of "hos­ tile foreign forces". In a crisis, the party expects its grass­ roots cells to help dissuade people from staging public protests and to feed infor­ mation to the authorities about possible unrest. In the far-western region of Xin­ jiang, where the authorities are on high alert against separatist unrest among Mus­ lims, at least some party cells in private firms are expected to report on potential troublemakers. Last year the authorities in Jimsar county selected 39 party members from private firms to act as gatherers of public opinion and intelligence on "the en­ emy situation". A local party report in Au­ gust said nine pieces of "valuable informa­ tion" had been collected this way. Clearly some red-collar workers are still putting the party first. •

52

The Economist J a n ua ry 28th 2012

China Yunnan's tobacco boom

•••

•••

and its caffeine rush

For all the coffe e in China

Poisonous gift YUXI

In China's south-west, a smoker's paradise

Leaves versus beans

I wrote that smoking tobacco for too long

Tfice of Pu'er is located in the city's Tea

' PU E R

N 1643 Fang Yizhi, a Chinese scholar,

would "blacken the lungs" and lead to death. The then-emperor, Chongzhen, didn't bother with warning labels. He out­ lawed growing and smoking the leaf. Vio­ lators were to be beheaded. (As it happens, a year later, the Ming dynasty and Chong­ zhen were both dead, neither from black­ ened lungs.) Attitudes to smoking have changed somewhat since then. Today a carton of smokes is one of the most popular gifts in China, especially at the Chinese new year. In tobacco-rich Yunnan, the cigarette in­ dustry is a local pillar. Many advances over the centuries have taken place in the pro­ cessing, packaging and marketing of tobac­ co. Top-end brands can sell for $25 a packet (and some are proudly labelled "organic"). On health warnings however, progress has been slight: packets bear a simple, generic message printed in text, with no eye-catch­ ing images. That is because the cigarette-makers want it that way. China's tobacco industry is both owned and regulated by the gov­ ernment. It makes and sells more than two-fifths of the world's cigarettes-2-4 tril­ lion in 2011, 3% more than in 2010. The gov­ ernment says the industry took in profits and tax receipts of 753 billion yuan ($119 billion) in 2011, an annual increase of over a fifth. Production, sales and tax receipts are likely to increase for years to come. As a signatory to a World Health Orga­ nisation tobacco-control treaty, China is, rather awkwardly in the face of these pro­ jections, meant to reduce smoking. The country has more than 300m smokers, close to a third of the global total. Ciga­ rettes are still the currency of masculinity, especially in rural China, and more than half of Chinese men smoke. About rm Chi­ nese die each year from smoking-related illnesses. More explicit warning labels would help. The government is mandating a larg­ er font size on its labels from April 1st, and is pondering whether to make the labels more dramatic, using gruesome images. However, the cigarette-makers are power­ ful, and the Ministry of Health is not. "If you really were to use disgusting images, that would hurt the function of cigarettes as a gift," says He Youfei of Hongta, one to­ bacco group, sitting in the company's can­ teen (smoking permitted). Hongta, or Red Pagoda, is China's larg-

HE Coffee Industry Development Of­

Comes with few warnings

est cigarette-maker by retail sales, and the fifth-largest in the world, selling more than 270 billion cigarettes a year. If Hongta is the Philip Morris of China, then Yuxi is its Richmond, Virginia (see map). The city, with a population of more than 2m, has a Hongta Hotel and a Hongta golf course. The company sponsors more than a dozen primary schools in the region, each called "Hongta Hope" (there are also "Tobacco Hope" schools elsewhere). A tobacco mu­ seum in Yuxi boasts pictures of Mao Ze­ dong and Deng Xiaoping leading the revo­ lution with cigarettes in the vanguard, along with testimonials to smoking's good effects (Mao lived to 82, Deng to 92). It was a Western imperialist firm, Brit­ ish American Tobacco, that created China's modern tobacco industry in the early 2oth century, but Mao nationalised the industry after seizing power in 1949. People's Libera­ tion Army soldiers were issued cigarettes, and families were given tobacco vouchers. In the public consciousness, the cigarette still remains closely tied to the state. One of the most popular brands is named Zhongnanhai, after the forbidden com­ pound in Beijing where the country's lead­ ers reside. The cigarettes were favoured by Chairman Mao himself. "The industry and the government are one family," says Li Xiaoliang of Pioneers for Health Consultancy Centre, an anti­ tobacco NGO in Kunming, Yunnan's capi­ tal. That makes her task rather delicate. She thinks that the country needs one of its leaders to come out against smoking. For Ms Li, there is a risk in her work. "If we're against the industry, it seems that we're against the government." •

Industry Bureau building, its roof designed to look like a leaf of this city's ubiquitous crop. It is also one of the rare offices in Chi­ na where a government official will greet a visitor with a decent cup of coffee-even though the deputy director, Liu Biao, was until a year ago promoting tea. In 2007 this city in southern Yunnan province (see map) changed its name from Communist-era Simao back to its histori­ cal name of Pu'er, in order to capitalise on the tea leaves that it made famous. Now Pu'er is once again overhauling its identity. Farmers here endured the collapse in 2008 of a bubble in the price of Pu'er tea, possi­ bly manipulated by officials and specula­ tors. They are now rapidly sowing more coffee seeds, with the encouragement of the local government. Some growers are clearing forested hillsides, something they once did to plant tea. Pu'er today has 28,ooo hectares (70,000 acres) of coffee, twice as much as in 2009, and that is pro­ jected to grow by half again by 2015. (By comparison, the city has 220,000 hectares of tea of all kinds, roughly the same as three years ago.) The economic impetus is clear. A family with a hectare of coffee can earn more than $1o,ooo a year, triple the amount for tea, and five times more than for maize or rice, says Mr Liu. Nestle, along with the Chinese government and the United Nations De­ velopment Programme, helped jump-start coffee production in the area in the late 1980s. Yunnan's first coffee growers, 19th­ century European missionaries, found a suitable climate for their bitter juice, but lit­ tle native interest in drinking it. Now Yun­ nan accounts for almost all the coffee grown in China. Other buyers have fol­ lowed Nestle in recent years, and demand ��

C

H

N

Y U N N A N Yoxi

0 0

Kunming

The Economist J a n ua ry 28th 2 0 1 2

� has outstripped supply. Beans are sold at the global price, which last year briefly topped 40 yuan ($6.30) a kilo, and is now about 30 yuan. Three years ago, the price was only 16 yuan a kilo. Many not-so-decent beans are includ­ ed. The high price of coffee last year prompted farmers to cash in by selling the bad with the good. One local exporter, Liu Minghui, rejected a big share of the beans offered to him last year-he has a brand name to protect, after all: Starbucks, a glo­ bal coffee chain, has agreed to buy a major­ ity stake in his coffee business, Ai Ni. In 2010 Howard Schultz, the Starbucks chief executive, stopped by for a visit. Mr Liu at the coffee office says it was the first time a foreigner had come to Pu'er by private jet. Look out for a town called Starbucks some time soon. • Attitudes towards capital punishment

Who goes to the gallows? B EI J I N G

Concern over a high-profile death penalty

I to defend the filthy rich. But a provincial T IS rare for China's 500m internet users

court's decision on January 18th to uphold a death sentence imposed on one of Chi­ na's wealthiest businesswomen has created an unusual outpouring of sympa­ thy. It has also led to criticism of a legal sys­ tem seen to treat private citizens far more harshly than errant officials. The case of 31-year-old Wu Ying, who was convicted of "illegal fund-raising", has also stirred debate about the fairness of the economic system. State-owned enter­ prises can borrow money from (state­ owned) banks, whereas private business­ es are often left to fend for themselves in an informal market of moneylending, such as the one in which Ms Wu thrived. Ms Wu's youth and humble origins, as well as an absence of real evidence that her activities caused harm to anyone, ex­ cept possibly some rich investors, have also helped endear her to a general public informed by internet chatter. She began her career working in her aunt's beauty sa­ lon in coastal Zhejiang province, and went on to run other beauty parlours before building up a conglomerate, the Bense Group, with a wide range of interests from property to lending. Amazingly, in 2006, aged just 25, she was named China's sixth­ richest woman by Hurun Report, a wealth researcher. Ms Wu's extraordinary rise is hard to imagine without her doing some dodgy deals. Possibly the wrong ones, for her fall was even more rapid than her rise. She was

China China's new tri bes

Ant tribes and mortgage slaves S H A N G HAI

T he subdivisions of urban China

ll. JHO knew China was tribal? The VV diversification of Chinese society has seen a flowering of a new vocabu­ lary. Perhaps most fascinating has been the division of people into tribes (zu in Mandarin). The travails of the yi zu, or ant tribe, have been well-chronicled-recent graduates from outside the main cities who move to urban areas, live cheaply and work hard, often in low-paid j obs. Perhaps less well-known are the ken lao zu, the bite-the-old tribe, those between 25 and 35 who are underemployed or out of work, still at home and sponging off mum and dad. Many of the tribes, inevitably, are made up of people looking for love. There is the jia wan zu, the marry-the­ bowl tribe. These are young women searching for that most stable of hus­ bands, the one who holds a government job (still known as the iron rice bowl). The shan hun zu, or lightning-marriage tribe, marry fast and sometimes divorce faster. They should not be confused with the yin hun zu, the hidden-marriage tribe. These are women in their 20s who hide the fact that they are married, knowing they will not be hired or promoted if there is even the whiff of the possible need for maternity leave-socialist gen­ der-equality does not offer much protec­ tion in the Wild East of modern China. And if you can only afford a postage stamp of an apartment, you're probably a member of the wo ju zu, the snail-house tribe. You can belong to more than one tribe. Most members of the ant tribe also belong to the ben ben zu, the rush-rush tribe, to which, in fact, most urban Chi­ nese belong. All that rushing around can arrested, sentenced to death in 2009 for il­ legally raising $12om in funds from illicit sources (ie, not official banks). Chinese press reports said Ms Wu gave information that led to the arrests of officials and bank­ ers. Some wonder whether the death sen­ tence was aimed at stopping her from re­ vealing more. Since 2007 China has required that all death sentences be reviewed by the su­ preme court, which now represents Ms Wu's final chance of reprieve. Last year the number of capital crimes was reduced for the first time since 1979. The number of exe­ cutions in China is a state secret, but the Dui Hua Foundation in California, which promotes improved legal rights in China, estimates that it fell from around 8,ooo in

create a lot of pent-up anger, giving rise to the nie nie zu, the crush-crush tribe, so named because they go into supermar­ kets and take out their frustration by standing in the aisles crushing packets of instant noodles (yes, really). Many tribal members are also slaves (nu in Mandarin). There are the fang nu (mortgage slaves) and hun nu (marriage slaves, who are also, by definition, mort­ gage slaves) and all Chinese parents are of course haizi nu (slaves to the only child). Perhaps the group China needs most as it tries to stimulate its domestic con­ sumer economy is the yue guang zu, or moonlight tribe, so named because the Chinese characters for "moonlight" sound the same as the phrase "spend all your monthly salary". Their parents saved every yuan, but life for these youngsters is just spend, spend, spend. Now, that's patriotic consumption.

Crush crush

2007 to 4,000 last year. Reforming spirits in China groaned when Wang Shengjun, a man with no legal training, was appointed president of the supreme court in 2008. Mr Wang has been a strong advocate of President Hu Jintao's idea of the "three supremes" in judicial af­ fairs: the supremacy of the Communist Party's interests, of the public's interests and (in third place) of the law. Global Times, an English-language paper in Beij­ ing, said public support for the death pen­ alty for non-violent crimes was falling, and expressed hope that the supreme court would take heed of this. But it la­ mented that public opinion may affect what it coyly called "judicial indepen­ dence" in the case of Ms Wu. •

53

54

The Economist J a n ua ry 28th 2012

China

Banyan

I

Having it both ways

Iran and the gap between theory and practice in Chinese foreign policy

AT FIRST blush, it looks like a beautiful marriage of ideological fi consistency and practical benefit. With its "principled" ob­ jection to the sanctions imposed by America and Europe because of Iran's assumed nuclear ambitions, China remains true to its long-held opposition to sanctions as a tool of foreign policy. More broadly, it can continue to harp on about its devotion to the prin­ ciple of "non-interference" in other countries' affairs. Mean­ while, as Europe's ban on imports of Iranian oil takes effect, Chi­ na, which accounts for over one-fifth of Iran's oil exports, can expect chunky discounts on the oil it continues to buy. Small wonder then that Tim Geithner, America's treasury sec­ retary, visiting Beijing this month to seek China's help in curbing Iranian oil exports, received a polite brush-off. "We oppose pres­ suring or international sanctions, because these pressures and sanctions are not helpful," read a deputy foreign minister from page one of his diplomatic manual. A few days later China's hau­ teur turned to indignation when America announced sanctions on a Chinese company, Zhuhai Zhenrong, for its dealings with Iran, even though the sanctions were largely symbolic. China's stance over Iran, however, is far from clear-cut. It finds itself in a pivotal but acutely uncomfortable position. The sim­ plistic old platitudes in which its foreign policy is couched cannot do justice to the complexity of the calculations it has to make. Most of its foreign-policy principles, says Minxin Pei of Clare­ mont McKenna College in California, are "either obsolete or un­ der pressure", and Iran is an example of their irrelevance. They do seem nevertheless to provide intellectual cover for a self-interested policy. (That is the mark of what diplomats call "good principles".) "Energy security" has long been a priority for Chinese diplomacy. It has underpinned its friendships with oth­ er regimes excoriated in the West: pre-division Sudan, for exam­ ple, or Myanmar's junta before it donned civilian clothing and gave charm a chance. In Iran, China has longstanding commer­ cial relationships and an important-and cheap-energy suppli­ er. Naturally it wants to avoid antagonising a reliable old friend. Moreover, China has more reasons than usual to be suspi­ cious of America's intentions. Viewed from Beijing, the "pivot" towards Asia announced by Barack Obama in November, as he unveiled plans for American marines to establish a permanent

presence in northern Australia, was an affront. It was taken as a message to the Asia-Pacific region that America now saw China's rapid economic and military advance as the main global strategic threat to its interests, and as a threat that it was determined to counter. That many of China's neighbours welcomed the pivot only made things worse, It is in this context that the more nationalistic sections of the official Chinese press are fuming about American pressure on Iran. Global Times, a Beijing newspaper ("the Fox News of the Chinese media", in Mr Pei's phrase), has argued that this pressure has led increasing numbers of people in both China and Russia to advocate an alliance between the two countries, directed at America. That seems far-fetched-after all, Russia is probably on better terms with both India and Vietnam, traditional Chinese ri­ vals, than it is with China itself. But, at the very least, China would want to maintain a common anti-sanctions front with Russia on the United Nations Security Council-ensuring that the American and European embargoes are not supplemented by UN sanctions. A final reason for resisting sanctions might be a genuine fear of their effect on Iran. If the Iranians were to carry out their threat to blockade the Strait of Hormuz, China would suffer directly, through a likely surge in the oil price. A blockade would also bring closer the prospect of a potentially disastrous conflict. However, this calculation of Iran's possible actions could just as well be one of many reasons why China might eventually soft­ en its objections to sanctions. If Iran is emboldened by the sup­ port it believes it has from China and others to resist Western pressure over its nuclear programme, then that, too, could lead to conflict. Israel, for instance, might take matters into its own hands, with a pre-emptive strike against Iranian nuclear facilities. It is fair to assume that Chinese leaders are sincere when they say they do not want a nuclear-armed Iran. Wen ]iabao, China's prime minister, was unusually explicit about this on January 2oth. China, he said, "adamantly opposes Iran developing and possessing nuclear weapons." China may resent the hypocrisy of Western leaders, who tolerate nuclear programmes in India and Israel, but it seems to accept that Iran's acquisition of the bomb would be bad for regional stability. Mr Wen was speaking in Qatar during a tour that took in the United Arab Emirates and Saudi Arabia-but not Iran. This car­ ried a reminder to Iran that, big though its oil exports to China are, they come to only about half of Saudi Arabia's. Not only would China want to be sure it had other sources of supply if Iranian oil dries up. It would also be wary of antagonising Saudi Arabia, a strong supporter of the American and European embargoes. And in fact Chinese purchases of Iranian oil have fallen sharply in Jan­ uary, supposedly because of a commercial dispute. Words speak louder than actions

So from EU and American perspectives, China's position on Iran has been neither as unhelpful nor as principled as feared. With the Communist Party's ten-yearly leadership transition looming in the autumn, its leaders' preoccupations lie at home. They do not want to find China caught in the middle of a huge interna­ tional crisis. They have a genuine interest in maintaining peace, and will not endanger it through a misplaced sense of loyalty to Iran, nor with outworn diplomatic dogma. • Economist.comfblogsfbanyan

55

Privacy laws

Private data, public rules

Also in this section 56 First aid by smartphone

H O N G KO N G , M U N I C H A N D S A N F R A N C I S C O

T he world's biggest internet markets are planning laws to protect personal data. But their approaches differ wildly

F The online entrepreneurs and venture

IRST came the yodelling, then the pain.

capitalists at D LD, a geeks' shindig this month in Munich, barely had time to re­ cover from their traditional Bavarian enter­ tainment before Viviane Reding, the Euro­ pean Union's justice commissioner, introduced a new privacy regulation. Ms Reding termed personal data the "curren­ cy" of the digital economy. "And like any currency it needs stability and trust," Ms Reding told the assembled digerati. The Eu's effort (formally published on January 25th) is part of a global govern­ ment crackdown on the commercial use of personal information. A White House re­ port, out soon, is expected to advocate a consumer-privacy law. China has issued several draft guidelines on the issue and India has a privacy bill in the works. But their approaches differ dramatically. As data whizz across borders, creating work­ able rules for business out of varying na­ tional standards will be hard. Europe's new privacy regulation is one of the most sweeping. Its first goal is to build a "digital single market". That will be a welcome change from the patchwork of rules that has grown up since the previous privacy directive in 1995. When Google's Street View mapping service accidentally captured personal data from some open, unsecured Wi-Fi networks in the houses it

photographed, some EU countries told the firm to delete the data. Others told it to hold the information indefinitely. The Commission hopes that when the new regulation comes into effect (probably in 2016) it will clear up this mess. A firm based in, say, Ireland will be able to obey Irish law and do business across the EU, without worrying whether it is in line with other countries' rules. A new European Data Protection Board will enforce the re­ gime. And if a company faces judicial pro­ ceedings in two member states, the courts will be obliged to communicate. Ms Red­ ing expects these changes to save business €2.3 billion ($3 billion) a year. But the new regime is tougher as well as being uniform. Firms must gain proper consent (defined strictly) before using and processing data. They may collect no more information than is necessary and keep it only while they need it. Children's data gain extra safeguards. Users must be able to move information from one service pro­ vider to another (for example, an address book between two social networks). The Eu's so om residents will also win a brand new right: to be forgotten. Users can not only request that a company show what data it holds on them; they can also demand that it deletes all copies. Critics say this is impractical, vague, and over-am­ bitious. It is hard to say where one man's

data end and another's begin. And once something is online, it is virtually impossi­ ble to ensure that all copies are deleted. Small firms will struggle; even big ones will find the planned penalties steep. Even more contentiously, the directive covers any firm that does business with Europeans, even if it is based outside the EU. America's Department of Commerce sent the Commission a strong1s-page prot­ est, saying that the directive "could hinder commercial interoperability while unin­ tentionally diminishing consumer privacy protection". An ocean of data

That stance reflects differences in Ameri­ can and European attitudes towards data protection, and indeed to regulation in general. America has avoided overly pre­ scriptive privacy legislation, believing that companies should generally regulate themselves. Only when firms fail at self­ regulation does the Federal Trade Commis­ sion (FTC) step in. It has broad powers to tackle unfair and deceptive practices, and has not hesitated to use them. In recent rul­ ings, Google and Facebook agreed to a bi­ ennial audit of their privacy policies and practices for the next 20 years. European sensitivities are different. A Eurobarometer poll last year found that 62% of Europeans do not trust internet ��

56

The Economist J a n ua ry 28th 2012

International

� companies to protect their personal infor­ mation. A big reason is history. In the 1930s Dutch officials compiled an impressive na­ tional registry. This later enabled the Nazis to identify 73% of Dutch Jews, compared with just 25% in less efficient France, notes Viktor Mayer-Schonberger of Oxford Uni­ versity in his book "Delete: The Virtue of Forgetting in the Digital Age". For the global digital economy, differ­ ences in privacy laws are a kind of trade barrier and a costly brake on innovation. In the past Europe and America reached a compromise with the "safe harbour" framework of 2000. As long as American companies adhered to certain principles based on the 1995 directive, they could do business in the EU. The arrangement has worked well, but America now worries that when its new rules come in the EU may want to rejig the deal. America might have more bargaining power if it had its own privacy law on the statute books, some experts argue; in any case public concern about data protection is growing there. On January 24th Go ogle triggered an outcry when it announced that from March it will share data gleaned from people logged into any of its services with all of its businesses, whether those users like it or not. The administration is hurrying to catch up. In its report, the White House will rec­ ommend a legal framework for privacy, plus new codes of conduct. The chances of legislation passing in an election year are slim, even on what is usually a bipartisan issue. Talks among business lobbies, pri­ vacy activists and regulators may at least produce non-statutory codes, though without the imminent threat of legislation some companies may dawdle. The FTC will also release a privacy re­ port later this year. This will look broadly at the use of personal data being scooped up by companies on- and offline. Among other things, it is likely to applaud progress in letting internet users take steps to block tracking by tweaking their web browsers. It will probably support a tougher regime for brokers of consumer data, and an in­ dustry initiative to give web pages special icons that people can use to prevent firms from tracking their activity. America and Europe will set the global standards. But other countries' privacy rules matter too. China and India will soon have more people online than Europe and America have citizens. Neither Asian country has yet passed formal national legislation, but both are considering it­ with every indication that their new laws will outdo even Europe in their severity. India's draft privacy bill will set up a data-protection authority, call for consent before personal data can be processed, and create a formal "right to privacy". Critics say the bill is too broad and that clauses protecting an individual's "honour and

Saving Lives

Scattered saviours TEL AVIV

First aid that gets there first

I first aid-and the difficulties of provid­

SRAELIS know all too well the need for

ing it. When Eli Beer was four, in 1978, he saw the carnage after a hijacked bus exploded. In 2001 he was knocked to the ground by a secondary bomb intended to kill first-aiders rushing to the scene of a suicide blast. Conventional ambulances called to such scenes have plenty of fancy equip­ ment, but they start from a central loca­ tion and often struggle to squeeze through traffic jams. So they often arrive too late: the most gravely injured often die in minutes.

Eli Beer: sm art bike, phone and idea

good name" could be used for censorship. China's draft Personal Information Pro­ tection Law was proposed in 2003, but has since languished, leading to both regional experimentation and some big ad hoc rul­ ings from ministries. The resulting hotch­ potch leaves businesses and consumers confused. But in January 2011 the Ministry of Industry and Information Technology issued draft rules on data protection that restrict the ability of organisations to trans­ fer personal data without specific prior in­ formed consent. These define personal information broadly, as anything that can identify an individual either on its own, or in combi­ nation with other data. They also appear to forbid the export of personal informa­ tion-even, on one reading, from one clivi-

Mr Beer has designed something better. His charity, United Hatzalah, co-ordinates a group of 1,700 volunteers scattered around Israel. All are trained in basic first aid. And each has a G Ps-en­ abled smartphone revealing exactly where he or she is. Anyone who sees an emergency can call a central number (1221 in Israel). A smartphone app (a small programme installed on a modern mobile phone) instantly alerts the nearest first aider, who may be only a block away, standing behind a deli counter or dozing in a meeting. He stops whatever he is doing, races to the scene and tries to stop the victim's bleeding or start his heart (most volunteers are equipped with defibrilla­ tors). They mostly have motorbikes too, to nip through the traffic. When the am­ bulance arrives, the volunteer goes back to his day job. Last year United Hatzalah answered 200,000 calls, saving (it reckons) thou­ sands of lives. If he can raise annual donations from $5m today to $7m, Mr Beer will aim to respond to nearly any emergency call in Israel in 90 seconds. Soon, members of the public will be able to download an app that puts them directly in touch with the nearest first­ aider, bypassing the call centre. The model-of dispersed volunteers using ubiquitous gadgets, a simple medi­ cal kit and a motorbike-is easily export­ able. A similar (but smaller) scheme has started in Sao Paulo. Mark Gerson, a successful New York-based businessman who chairs United Hatzalah's board, says it is his dream to spread the ingenious and low-cost idea far, wide and fast. sion of a company to another. That could hamper multinationals which need to send data across national borders. And it could hit outsourcers trying to deal with their customers. A further danger is that China's regulations are often arbitrarily or selectively enforced. Some information­ processing firms are said to have moved their operations to Hong Kong, which has laxer and more predictable rules. Building a single European data-protec­ tion regime is hard enough. Harmonising it smoothly with America will be harder. Reaching deals with Indian bureaucrats and Chinese mandarins set to defend the interests and the data of their countries' rapidly growing online firms may be downright impossible. Welcome to the new world of data geopolitics. •

57

Also in this section 59 B uyers besiege Boeing 60 Canada's high -tech woes 60 Kim Dotcom busted 61 Selling law firms to non-lawyers 6 1 Grameen under attack 62 Schum peter: the power of tribes

For dai ly a n a lysis a n d debate on busin ess a n d o u r weekly "Money talks" p o dcast, visit Economist.comfbusiness-finance

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The big business of swindling people who trust you

W25,000 members of the New Birth ITH a nudge from their pastor, the

Missionary Baptist Church near Atlanta opened their hearts, and their wallets, to Ephren Taylor. And why not, given his glit­ tering credentials? Mr Taylor billed himself as the youngest black chief executive of a publicly traded company in American his­ tory. He had appeared on NPR and CNN. He had given a talk on socially conscious investing at the Democratic National Con­ vention. Snoop Dogg, a rapper, had tapped him to manage a charitable endowment. So when Mr Taylor's "Wealth Tour Live" seminars came to town, faithful ears opened wide. Eddie Long, the mega­ church's leader, introduced Mr Taylor at one event with the words: "[God] wants you to be a mover and shaker. . . to finance you well to do His will." Mr Taylor offered "low-risk investment with high perfor­ mances", chosen with guidance from God. Divine inspiration, alas, has given way to legal tribulation. For many investors, the 20% guaranteed returns proved illusory. Mr Taylor (whereabouts unknown) stands accused of fraud in a number of lawsuits. Bishop Long, a co-defendant, has urged Mr Taylor to "do the right thing" and cover any losses. The charges are not the first blot on the minister's reputation: last year he set­ tled for an estimated $1sm-2sm claims that he had coerced young men into oral sex.

An essential element of Mr Taylor's ap­ proach was to make those he targeted want to invest in him personally, says Cathy Ler­ man, a lawyer representing some of the victims. "He was a master of creating a marketing presence. He would say: 'If you want to check me out, just Go ogle me."' He had no problem convincing them that he was an ordained minister, even though he had no formal seminary training, accord­ ing to court documents. It will take time to gauge the full extent of the losses, not least because it will re­ quire untangling a web of companies, some of them shells. Victims, many of whom entrusted their life savings to Mr Taylor, are still coming forward. Some call him "the black Bernie Madoff". Let us prey

Mr Madoff, whose victims lost perhaps $20 billion, perpetrated the largest "affini­ ty fraud" ever. The term refers to scams in which the perpetrator uses personal con­ tacts to swindle a specific group, such as a church congregation, a rotary club, a pro­ fessional circle or an ethnic community. Once the scammer gains their trust, his scam spreads like smallpox. Most affinity frauds are Ponzi schemes, in which money from new investors is used to repay old ones, or is siphoned off by the promoters. The Madoff fraud fed on multiple affini-

ty circles: wealthy Jews in Florida and Isra­ el, country-dub types and European old money, lured with help from marketers running "feeder" funds. The next-largest alleged investment fraud of recent years, the $7 billion collapse of Allen Stanford's empire, also concerned specific groups, in­ cluding the Latin American and Libyan diasporas and Southern Baptists. Mr Stan­ ford's trial began on January 23rd. He de­ nies wrongdoing. Beneath the mega-scams swirls a mass of smaller cons, spanning the world. Any close-knit community can be a target. Last August a South Korean pastor was indicted for misappropriating 2-4 billion Korean won ($2.3m) that the faithful had handed over to set up a Christian bank. In Britain, Kevin Foster's KF Concept targeted the for­ mer coal-mining towns of South Wales, bilking more than 8,ooo victims with the help of glitzy roadshows. The problem is a global one but best­ documented in America. Besides the Ma­ doff saga, Marquet International, a Consul­ tancy, has identified more than 300 size­ able Ponzi schemes from the past ten years, with combined losses for investors of $23 billion. It estimates that up to half of those were affinity-based. No one has a reliable number for smaller frauds over the same period, but guesses range from $5 billion to $20 billion. In all, affinity-fraud losses in America could be as much as $so billion. The FBI is probing some 1,000 cases of investment fraud, more than double the number outstanding in 2008. Six state se­ curities commissioners contacted by The Economist all say the problem is growing. The increase is partly a result of better detection, post-Madoff. The SEC filed more than twice as many Ponzi cases in 2010 as in 2008. The number of Ponzis exposed ��

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The Economist J a n ua ry 28th 2012

Business

� each month began to climb just as the fi­ nancial crisis struck in 2007 (see chart). Frauds are more prone to collapse in a weak economy as investors try to pull money out to cover shortfalls elsewhere. Bad times also make get-rich-quick schemes more tempting. Desperation breeds gullibility. The median annual re­ turn offered by scammers in the Marquet study was 38%. In a case in Montana, vic­ tims were promised 8oo% back in a week. Mistrust of mainstream finance helps the scammers. The big guys on Wall Street have shown they can't be trusted, they say; better to go with someone you know. This was part of Mr Taylor's pitch in Georgia. Brent Baker, a former SEC lawyer who now works on affinity-fraud cases, has seen ones involving "just about every type of community you can think of", including one where loyal listeners of a Persian-lan­ guage radio show were bilked by its pre­ senter. But religious fraud is particularly common, because people find it hard to imagine that the pastor is a perp. Joseph Borg, Alabama's securities commissioner, reckons half of all affinity frauds in the American South are faith-based. The problem stretches across all types of belief, and ranges far beyond the Bible Belt. In September, a n-year-old man from Ohio was indicted for allegedly defraud­ ing 2,700 fellow Amish of $17m (though he had somehow resisted the temptation to trade his horse and cart for a Ferrari). T he hook of Mormon

The state thought to have the most affinity fraud per head is Utah, where 6o% of the population are Mormons. In 2010, regula­ tors and the FBI were investigating cases there with 4.400 victims and perhaps $1-4 billion (or $sao for every Utahn) in losses. The numbers have surely climbed since, with the three largest cases alone involv­ ing combined losses of up to $700m, says one investigator. Mormons tend to be both trusting and welcoming of newcomers, says Keith Woodwell, head of Utah's Division of Se­ curities. As soon as you pull up to your new house, neighbours appear to help you unpack. A scammer who gets his foot in the door can exploit this closeness. LuElla Day, for example, lost $1.2m in a deal hatched by Daniel Merriman, a fellow Mormon she had known for four years. "He'd spoken at our meetings. When I sold my farm, he came and said the bishop had asked him to help me invest the proceeds," says the 81-year-old. He told her the money would go into government debt. The tran­ saction was done on a handshake. Ms Day never got a penny back. Credulousness is not confined to sweet old ladies. One of Ephren Taylor's victims was an electrical engineer with an MBA. A man in Utah was taken for $so,ooo by his next-door neighbour, who offered a

A m u ltitude of Mad offs Ponzi schemes i n America*, by year of exposure

120 100 80 60 40

-····

20 0

2002 03 04 05 06 07 08 09 Source: Marque( International

10

111

•eases where fraud >:$ 1 m

IJan-t•lay annualised

chance to invest in a new type of ice mach­ ine. Nothing remarkable there, except that the victim was a retired federal agent who had worked on white-collar fraud cases. Why do such people let their guard down? "Everyone is looking for a short­ hand way to judge character, and affinity settings offer that, at least in theory," says Jeff Robinson, head of the Utah County At­ torney's investigations bureau. Tribal ties foster trust, which is usually a good thing (see page 62). But it can be abused. Another factor is the rise of "prosperity theology", or the belief that God wants Christians to be rich as well as good. This idea has taken root fastest in black and His­ panic churches. The problem is that it puts pressure on congregations to invest suc­ cessfully, which makes them more vulner­ able, says Ole Anthony of the Trinity Foun­ dation, which investigates church fraud. Social media make affinity fraud quick­ er. Bonds that used to take years to estab­ lish can be forged in days on Facebook or Twitter. Fraudsters read potential victims' online profiles, and use the information they glean to refine their pitches. In a re­ cent case, the SEC won a restraining order against a scam targeting users of chat sites popular with the deaf. At a federal level, the American govern­ ment's response has been inadequate. The SEC has launched some high-profile cases, but done little to educate investors. The agency "has chosen to stick some ambu­ lances at the bottom of the cliff rather than build fences at the top," as one former em­ ployee puts it. American states have tried harder. Pennsylvania, for example, holds hun­ dreds of meetings a year to teach investors how to be more careful. Utah ran a bill­ board campaign showing a series of re­ spectable-looking types saying: "I'm your friend. I'm your neighbour. I'm a con man." People should "be trusting but veri­ fy", says Gary Herbert, Utah's governor. A new law in Utah increased penalties for fraudsters who abuse a relationship of trust. Another pays whistle-blowers up to 30% of recoveries. (The SEC operates a sim­ ilar scheme, but only for cases larger than

$rm.) Both bills were sponsored by Ben McAdams, a state senator who returned to his native Utah from New York to help en­ sure that "as much energy went into shrinking the fraud economy as growing the ski economy." In Utah, suspected fraudsters' property can be seized before charges are brought, if there is "probable cause" that a crime was committed. Other ideas are percolating. Sean Reyes, a lawyer who is running for state attorney­ general, supports the creation of a "fraud­ sters registry", similar to the one for sex of­ fenders. "It's amazing how many are re­ peat offenders," he says. He also wants to explore the idea of reducing sentences for scammers who lead investigators to assets they have salted away. Most victims see a few pennies on the dollar returned, if that. Investigators face strong headwinds. One is that victims are often reluctant to come forward. Some cannot admit to themselves what they have lost. Others don't want their families to know: older victims often fear being deemed unable to manage their lives and shoved in a home. In religious cases, there is often an unwrit­ ten rule that what happens in church stays there, with disputes handled by the church elders or the minister. Many frauds are dauntingly complex. One Ponzi, at the Bap­ tist Foundation of Arizona, used 120 shell firms to extract $590m from members. There is only so much governments can do to protect people from their own credu­ lity. Mr Baker thinks that private groups are better-placed to build those fences on the cliff top. He has set up a "Fraud College" in Utah (and on the web) with help from Mr Reyes. This self-styled "neighbourhood watch" for fraud offers online advice and holds events to raise awareness. The next conference, on February 15th, will hear from state and federal fraudbusters, vic­ tims and, in a first, a senior figure from the Mormon church. Amen to that. •

The Economist J a n ua ry 28th 2 0 1 2

Business

Boeing

Faster, faster, faster

S E ATTLE

The planemaker struggles to fulfil a rush of orders

Twhich the next six years' worth of cus­ HERE are not many businesses in

tomers form an orderly queue, putting down fat deposits and topping them up with further instalments as they wait in line. But that is Boeing's fortunate position. On January 25th it announced a 21% rise in annual net profits, to $4 billion. Last September, after three years of de­ lay, Boeing made the first deliveries of its newest model, the 787 Dreamliner. A re­ vamped version of the trusty but ageing 747 jumbo has also arrived, two years late. A few airlines got fed up and cancelled, but most had little choice but to keep waiting. Boeing's main rival, Airbus, has an even longer backlog-up to eight years at current production rates. And the delivery sched­ ule for Airbus's answer to the Dreamliner, the A350, has been slipping. Last year, straining to ramp up produc­ tion to meet soaring demand, the two big planemakers turned out a record 1,011 air­ liners between them. But for every plane they delivered, they won more than two fresh orders (net of cancellations), so the queue got longer. On January 25th Boeing won its largest-ever order from Europe: Norwegian Air Shuttle is to buy 122 planes worth $11-4 billion at list prices. The lion's share of 2011's advance or­ ders were for the A320neo, a re-engined version of Airbus's short-haul airliner, which should enter service in 2015. This year the plane most in demand looks to be

the 737MAX, a re-engined version of Boe­ ing's short-haul plane, deliveries of which are due to start in 2017. At Boeing's Renton factory near Seattle the existing version of the 737 is now being turned out at a record rate of 35 a month, after a recent speeding-up of the two as­ sembly lines. At the front of assembly line number one, a plane destined for flydubai, an airline that can't afford capital letters, is ready to roll. Behind it is the latest addition to Ryanair's huge fleet of 737S, which has just had its engines fitted. Next, a Korean Air plane which is about to receive rows of seats; then an Azerbaijan Airlines jet, its toilet cubicles lined up alongside ready for installation. The plan is to increase the pro­ duction rate further, to 42 a month by 2014. Fortunately, there is space to squeeze a third assembly line into the giant hangar. Likewise, at Boeing's Everett factory to the north of Seattle and another plant in South Carolina, plans are afoot to churn out more of the company's bigger jets, in­ cluding the 787. But the 40-odd unfinished Dreamliners scattered around the Everett campus and elsewhere are a reminder of how such attempts to ramp up production can go wrong. Having first suffered from a worldwide shortage of the fasteners that hold bits of the plane together, the 787 was then held back further by other mishaps, including faulty horizontal stabilisers sent by an Italian supplier. Boeing is struggling to correct the problems on the unfinished

planes even as it strives to get its produc­ tion lines turning out ten fault-free 787s a month by the end of next year. The head of Boeing's commercial-air­ liner division, Jim Albaugh, admits that with hindsight too much of the Dreamlin­ er programme was contracted out to other firms. Some work has been brought back in-house so that it can be more closely su­ pervised. The planemaker has also set up a "war room" that constantly monitors the world's supply of aircraft parts and raw materials. It has signed a long-term deal with a Russian metals firm to ensure a steady supply of crucial components made from titanium. And it has hired hun­ dreds of "examiners" to visit suppliers, to check that they are building up production to meet Boeing's increasing needs and chivvy them along if not. Boeing's assembly plants are the final stage in a long and hugely complex global supply chain. It has about 1,200 "tier-one" suppliers, which provide parts directly to the planemaker from 5,400 factories in 40 countries. These in turn are fed by thou­ sands more "tier-two" suppliers, which themselves receive parts from countless others. Beverly Wyse, who oversees pro­ duction of the 737, admits that it has some­ times been a job to persuade all these sup­ pliers to invest enough to meet future demand. To do so, Boeing has had to learn to be more open with them about its pro­ duction plans, and a bit less paranoid about whether such information might reach the ears of its competitors. Even with all these new measures in place, Boeing's plans to boost production of the Dreamliner remain "hugely ambi­ tious", reckons Richard Aboulafia of Teal Group, an aviation consultancy. He won­ ders if the planemaker is serious about its target of making ten of them a month, or whether it is just bandying about an unre­ alistic figure to rev up its suppliers. "Not true," retorts Mr Albaugh. Boeing has ev­ ery intention of reaching the goal, he says. Fasten your seat belts

Still, with the world economy looking wobbly and the euro-area crisis far from over, might suppliers not have good reason to fear that the recent surge in aircraft or­ ders could go into reverse thrust? Myles Walton, an aerospace analyst at Deutsche Bank, believes that both Boeing and Air­ bus have quietly begun double-booking some of their delivery slots, in case a cus­ tomer collapses. He reckons they have done enough of this to cope with the worst imaginable recession in Europe. Perhaps the biggest risk on the horizon would be a sustained surge in the price of oil, which could send airlines into a tail­ spin of losses and bankruptcy. So far, though, the chief worry for Boeing and its main rival is how to get their products fly­ ing out of the door faster. •

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Business Canada's high-tech woes

Research in commotion

The internet and file-sharing

Dotcom bust S A N FRAN CISCO

T he arrest of Kim Dotcom (pictured) has rocked the world of cyberlockers OTTAWA

As RIM struggles, Canadians recall the fate of another technology champion

F

OR months Research In Motion (RIM), the Canadian maker of BlackBerry smartphones, has seemed incapable of getting anything right. Its PlayBook tablet went on sale without e-mail (unless at­ tached to a BlackBerry)_ Its network was blacked out for days with scarcely a word from the company. It has been slow to up­ grade BlackBerry's operating system. In­ vestors squealed as the share price fell by 70% in ten months. Canadians are now worried they might lose a second technol­ ogy champion within a few years. Ever louder calls for a change in leader­ ship were answered on January 22nd, when RIM's joint chief executives and chairmen, Jim Balsillie and Mike Lazaridis, stepped down. Investors doubt the new chief executive, Thorsten Heins, a former chief operating officer, will stop the rot. On January 23rd the share price fell by 9%. Perhaps that is because RIM sees little rot to stop. Mr Heins was anointed by Messrs Balsillie and Laziridis, who are still on the board. "I don't think there is some drastic change needed," he told analysts this week-certainly not a break-up of RIM, an idea some disgruntled shareholders want to consider. His boldest step will be to find a new chief marketing officer. But rot there is. Fewer and fewer com­ panies insist that their staff use BlackBer­ rys. ComScore, a research firm, says that last autumn only a sixth of American smartphone-users brandished RIM's de­ vices, half the share of a year before. Drip­ pier, a gadgets website, reckons that only a quarter of BlackBerry-owners want a new one. Mr Heins purred about the next Black­ Berry platform, the fruit of a purchase by his predecessors. But however excellent it may be, it will not be on the market for months. And time is not on RIM's side. All this comes at the same time as a painful reminder of the fate of another Ca­ nadian tech giant: the trial for fraud of three former executives from Nortel Net­ works, which began in Toronto on January 16th. Nortel, which declared bankruptcy in 2009, once had a market capitalisation of $250 billion and employed 95,000 people. Like RIM, it was a global brand and proof, to many, that Canada was no longer a mere drawer of water and hewer of wood. When NorteI crumbled, it took a chunk of the Canadian tech sector with it. In the cluster that grew around it near Ottawa, the number of tech jobs has fallen by 40% since the bankruptcy. RIM is far from such

M could end up on the wrong end of a OST people running a business that

lawsuit would keep a low profile. Not Kim Dotcom. The boss of Megaupload, a popular website that let users store and share music, films and other content, Mr Dotcom went out of his way to attract attention-and not just by changing his surname from Schmitz. He surrounded himself with glamorous women and fast cars bearing number plates such as "GUILTY". He likened himself to Dr Evil, a movie villain, though he looks more like Dr Evil's henchman, Fat Bastard. American investigators examining Megaupload's business concluded that it was encouraging its users to share pirated content. They persuaded authorities in Britain, Hong Kong and other countries to seize the firm's assets and to arrest its owners, including Mr Dotcom, who was nabbed by police in New Zealand on January 2oth after being found with a shotgun in a "safe room" at his mega­ mansion. The raid occurred just as Hol­ lywood was howling after Congress gave up on a bill to crack down on piracy. The closure of Megaupload-which

insists it has done nothing wrong-has triggered a swift response from other file-sharing sites, or "cyberlockers". Some, such as File Sonic and FileServe, stopped users from sharing material with one another. Others, such as Uploa­ ded.to, blocked users in America from accessing their services. And others, such as x7.to, shut down altogether. Their critics say this shows that cyber­ lockers realise illegal file-sharing will no longer be tolerated. Correspondence cited in an indictment of the Megaupload site in America suggests that the firm knew of the problems with illegal con­ tent. "We're not pirates," writes the au­ thor of one e-mail cited in it. "We're just providing shipping services to pirates." The legal assault on Megaupload will probably cause at least some traffic to migrate to cyberlockers in Russia and other countries where property rights are weak. Determined pirates could also make more use of "torrent" sites such as The Pirate Bay, which allow peer-to-peer transfers. The technology underlying such sites could make them even trickier to deal with than cyberlockers.

This year's beach sumo contest was surprisi ngly one-sided

a wretched end, but its troubles have weighed on the values of other Canadian tech companies. Terry Matthews, a foun­ der of many firms in the sector, thinks a sale or break-up of RIM would dampen prospects further. "The sentiment will be, you can't make it in Canada," he says. Should RIM disappear, the place with most to lose is Waterloo, in southern On­ tario, where the company forms the core of

a thriving cluster. Mr Lazaridis donated C$10om ($66m then) to set up a theoreti­ cal-physics institute and gave C$5om to the University of Waterloo to form a quan­ tum-computing centre. Mr Balsillie created a global-governance think-tank. Mr Heins, like many locals, maintains that RIM's troubles are just bumps in the road. Maybe. But these are mighty bumps, and the road is long. •

The Economist J a n ua ry 28th 2 0 1 2 Legal services

Psst, wanna buy a law firm? L O N D O N A N D N EW YORK

Non-lawyers can now own law firms in Britain. Where's next?

T AWYERS have long considered them­

L selves a breed apart: highly educated professionals, not dim-witted business­ men who think a "whereas" is a man who turns into a small member of the horse family when the moon is full. Many coun­ tries bar business types from owning even a bit (much less all) of a law firm. But in Britain, that law changed in October. Companies are queuing up to form new "alternative business structures" (ABS). The Solicitors Regulation Authority, the biggest legal regulator, has received at least 65 applications. The first ABSs should be approved in February. The "alternative" possibilities are many. Irwin Mitchell, a big personal-inju­ ry firm, may float its shares. Slater & Gor­ don, which in 2007 became the first Aus­ tralian firm to go public, has since bought some smaller firms and nearly tripled its revenues, to A$182m ($194m). Another new structure will be that of the Co-operative, a membership organisa­ tion best known for its supermarkets, but which also runs a bank and buries and cre­ mates more people than any other entity in Britain. The Co-op already has a legal arm for its members. Approval as an ABS will let it sell the same services to the gen­ eral public. In anticipation, it plans to add 150 people to its current legal staff of 400. Liberalisation will make lawyering cheaper, say its boosters. Tech-savvy entre­ preneurs may buy or start law firms and of­ fer more services online. Quindell Portfo­ lio, a software-outsourcing company, has said it will seek approval to buy Silverbeck Rymer, a Liverpool-based law firm. New­ comers may be less deferential to tradition, and more innovative. Tony Williams of Jo­ mati, a consultancy, says that if lawyers "insist they're not a business, they'll carry on until they're out of business." Many lawyers fear that cheap, off-the­ shelf products will replace expert advice. (The nickname "Tesco Law" has stuck, though Tesco, a supermarket chain, has not applied to become an ABS.) Critics of change also fret that taking outside capital might make lawyers favour investors over clients. But lawyers have always cared about making money, and giving duff legal advice is seldom a good business plan. Liberalisation will probably affect low­ end services first, such as will-writing and conveyancing. Britain's "Magic Circle" of big profitable partnerships (Clifford Chance, Allen & Overy, Linklaters and

Business

Freshfields Bruckhaus Deringer) show lit­ tle interest in being bought-by Tesco or anyone else. But if their new rivals prove capable, they may have to adapt. Some see this. Clifford Chance has had a back office in India for years. Allen & Overy launched one in Belfast last year. Recession-racked clients demand value for money. Foreigners are watching Britain's exam­ ple with interest. Current American law on this issue is like Britain's used to be. But Ja­ coby & Meyers, a big personal-injury firm, is suing three states (New York, New Jersey and Connecticut) for the right to raise out­ side capital. The managing partner, An­ drew Finkelstein, has already talked to po­ tential outside partners about buying in, but can go no further unless the rule is overturned. (He has not yet talked to in­ vestment bankers about going public, but he says he is interested.) The states are try­ ing to get the suit thrown out on a techni­ cality. Jacoby & Meyers may lose this round. But if Britain's reform is successful, the American old guard may struggle to win the next one on the merits. • Grameen's business empire

Grabbing Grameen P roperty rights in peril in Bangladesh

H brated

E IS probably Bangladesh's most cele­ citizen. Muhammad Yunus, winner of the 2006 Nobel peace prize, founded Grameen Bank in 1983 to provide tiny loans to poor rural women. Grameen became a global model for microfinance. lt also spawned 48 other firms in sectors that stretch from textiles to mobile phones. Yet the Bangladeshi government seems deter­ mined to take Mr Yunus down a peg. In May 2011 the government pushed him out of his job as boss of Grameen Bank, saying that he was past the retire­ ment age for someone running a govern­ ment bank. (Grameen Bank mostly be­ longs to its borrowers but the state owns a slice.) Mr Yunus says this is just a pretext for a power grab. The government now wants to assert more control over other firms in the Grameen network, which includes as­ sets worth an estimated $1.6 billion. This is controversial, to put it mildly, not least because some Grameen firms have big foreign partners. Grameenphone, Ban­ gladesh's largest telecoms provider, was created with Norway's Telenor and gener­ ates sales of nearly $1 billion a year. Gra­ meen Danone Foods, a yogurt-maker, and Grameen-Veolia, a water company, are joint ventures with French giants. BASF Grameen, which makes mosquito nets,

and Grameen Intel, which creates software for poor farmers, also have foreign backers. The government says that Grameen Bank owns or part-owns all these firms, and that its stakes partly belong to the gov­ ernment itself. Mr Yunus's aides say the members of the Grameen family are all in­ dependent entities with no legal ties to each other. The government will have none of this. Officials are furiously trying to unearth ev­ idence that Mr Yunus in fact controls them. A lawyer for Bangladesh's central bank, a state body, reasons that since Grameen Bank is a "state authority" and Mr Yunus was a "public officer", all companies created with the help of the bank's fi­ nances, its people or even its goodwill are in effect state resources. The government is calling for the Gra­ meen empire to be brought together "un­ der a single structure". Bangladeshi busi­ nessfolk are horrified. If a Nobel prize is no defence against expropriation, that doesn't bode well for the security of property rights in Bangladesh. Grameen's foreign partners are keeping quiet, for now. A spokesman for Telenor Group, in an e-mail, says that the firm ex­ pects that its relationship with Grameen Telecom "will continue based on profes­ sionalism, openness and in the best inter­ est of Grameenphone." Eric Lesueur of Grameen-Veolia says he believes that the new management of Grameen Bank "will respect the growth plans and strategies de­ veloped with Professor Yunus." Several foreign firms own majority stakes in their Grameen-branded joint ventures, often large ones. Telenor owns 56% of Grameenphone, Veolia raised its stake in Grameen-Veolia to 70% last year and BASF owns 99.5% of its joint venture. The government wouldn't be so foolish as to grab their assets. Would it? •

Some day, all this will belong to the state

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Business

Schump eter I The power of tribes Businesspeople need to reckon with the Anglosphere, the Sinosphere and the Indosphere

E division between East and West, people have been inventing

VER since the collapse of the Soviet Union ended the old, neat

new ways of dividing up the world. In the 1990s it was fashion­ able to talk about America, Europe and Japan. Today pundits draw the line between emerged and the emerging markets. Joel Kotkin, a geographer, suggests another frame of reference. In "The New World Order", a paper for the Legatum Institute, a think-tank in London, he looks at the world through the prism of culture. The ties of history and habit-of shared experiences and common customs-can explain a lot about who does business with whom. Mr Kotkin quotes Ibn Khaldun, a 14th-century Arab historian: "Only tribes held together by a group feeling can sur­ vive in a desert." Substitute "globalised economy" for "desert" and this describes the modern world quite well. Mr Kotkin's argument chimes with recent research. The World Values Survey divides the world into big cultural zones (the Con­ fucian zone, the English-speaking zone, etc) on the basis of com­ mon values. These common values cannot be explained simply by income (eg, English-speaking countries tend to be rich, and rich countries tend to be liberal). Pankaj Ghemawat of lESE, a business school, calculates that two countries which share a common language trade 42% more with each other than two oth­ erwise identical countries that lack that bond. Two countries that once shared imperial ties trade a startling 188% more. Imperial ties affect trade patterns more than membership of a common currency (which boosts trade by only 114%). Cultural ties matter in business because they lower transac­ tion costs. Tribal loyalty fosters trust. Cultural affinity super­ charges communication. Reading a contract is useful, but you also need to be able to read people. Even as free trade and elec­ tronic communications bring the world closer together, kinship still counts. Indians in Silicon Valley team up with other Indians; Chinese-Americans do business with Taiwan and Shanghai. One of the most vibrant cultural networks is also one of the oldest: the Sinosphere. China's growing might is reinforced by its links with the overseas Chinese. Some 70m ethnic Chinese live outside mainland China. Some are descended from those who moved abroad during China's imperial expansion from the 12th to the 15th centuries, settling in what are now Indonesia, Viet-

nam, Malaysia and Myanmar. More recently, many fled to escape the horrors of Maoism, or to seek a better life in America or an­ other rich country. Together they connect China to every corner of the world. The overseas Chinese are the biggest investors in mainland China. Some 68% of the foreign direct investment (FDI) that Chi­ na received in 2009 came from places where ethnic Chinese are the biggest group, with Hong Kong the number one source, Singa­ pore number four and Taiwan number nine. The overseas Chi­ nese also spearhead China's global expansion: Africa, for exam­ ple, is dotted with Chinese malls that sell the latest gadgets from Guangdong. China's government grasps the importance of cul­ tural ties: it has funded hundreds of Confucius Institutes to teach Chinese and nurture China's soft power. The world's second rising power is doing something similar, though with less direction from the top. India's success at home is reinforced and rearticulated by the Indosphere. Ethnic Indians are less than 1% of America's population but 13% of the graduate students at the country's best universities. In Britain ethnic Indi­ ans earn at least 10% more than the national average. The top five destinations for Indian overseas investment all have large Indian populations: Mauritius, America, Singapore, the United Arab Emirates and Britain. The Tata group, an Indian conglomerate with a new British-educated boss, is the largest employer of manufacturing workers in Britain. The third great cultural zone is the "Anglosphere". Mr Ghema­ wat has tried to measure the links between Britain's former colo­ nies and the rejected mother country. He looked at the flow of goods, services, FDI, migration and information (using telephone calls as a proxy). He compared the ex-colonies' traffic with Britain with their traffic with the rest of the world. He found that trade flows were 13% higher than you would expect, capital flows were 24% higher and the flows of people and information were a star­ tling 93% higher. The Anglosphere is not the only great European cultural block: Mr Ghemawat calculates that by some measures Spain's ties with its old colonies are even closer than Britain's. Despite the financial crisis of 2008, which has seriously tar­ nished the reputation of Anglo-Saxon capitalism, Mr Kotkin pre­ dicts that the Anglosphere will remain powerful for some time. It is the world's biggest economic block: it accounts for more than a quarter of the world's GDP (at purchasing-power parity), com­ pared with the Sinosphere's 15% and the Indosphere's 5.4%. It is still the frothiest fountain of science and technology. America produces far more scientific papers than any other country, and Britain ranks number five. English is the closest the world has to a lingua franca. It dominates international business and diplo­ macy. It also binds the Anglosphere to the rising Indosphere. Global tribesmen

This way of looking at the world clearly leaves something to be desired. Culture is not everything. Wise firms recruit people on the basis of merit, not blood or background. Those that get too clubby miss good ideas produced by outsiders. Also, the lines be­ tween different cultural zones are often blurred: Britain is tugged towards Europe as well as its old dominions. But cultural ties ex­ plain so much that it would be foolish to ignore them. In an age when many businesspeople are turning into global nomads, it is worth remembering the enduring power of tribal loyalties. • Economist.comfblogsjschumpeter

63

Also in this section 64 Why the ma rkets dislike austerity 65 Buttonwood: In praise of pessimists 66 The Fed's interest-rate projections 66 Competition and exchanges 67 Private equity: the verdict 70 Free exchange: Wiggle-room i n emerging markets

For dai ly a n a lysis a n d debate on eco n o mics, visit Economist.comfeconomics

Greece and the euro

An economy crumbles

ATHENS

Uncertainty about whether Greece will stay in the euro is crippling its prospects

Tof Greece museum in Athens promise a HE banners at the entrance to the Bank

"fascinating journey through Greece's modern economic and monetary history". How could any passer-by resist? Inside the museum ranks of glass cases enclose an ar­ ray of coins and old bank notes, as well as the paraphernalia used to make them. The bills range from 5 drachma up to 1oom drachma, a reminder that Greece has had problems with inflation in the past. The end of history, at least for this exhibition, is 2001 when Greece adopted the euro. But the country's present troubles suggest an important chapter to the story of Greek money is still to be written. Some reckon the drachma may roll off the presses again.

I

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Into Hades Athex Composite index, Jan 1st 2007=100

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This is no longer just a fantasy of die­ hard sceptics about the euro in Britain and Germany. Even Greeks concede that the big problem afflicting the economy, now in its fifth year of recession, is the uncertainty about whether Greece can stay in the euro and get its act together. Savers are anxious that their cash might be forcibly converted to a new Greek currency. By November the Greek banking system had lost a quarter of the deposits it had two years earlier. To fill the gap, the banks have borrowed €43 bil­ lion ($56 billion) of emergency funds from the Greek central bank on top of €73 bil­ lion of secured loans from the European Central Bank (ECB). Credit remains in short supply because banks have had to cut loans and raise borrowing costs. Informal credit arrangements between firms are breaking down. Foreign suppliers now de­ mand cash payment upfront, making li­ quidity even scarcer. Few investors or businesses are brave enough to make long-term bets on the Greek economy in these conditions. The stockmarket has fallen steeply (see chart 1). "You can buy good companies for pocket money," says one business chief. Assets are cheap but they would become cheaper still were Greece forced out of the euro. Capital spending is down by almost half from four years ago; house building has fallen by two-thirds. The one bright spot is tourism: visitors to Greece were up by 10%

last year, in part because tourists steered clear of the unrest in north Africa. There are hopes that the economy might recover next year if Greece's place in the euro is confirmed. Agreement on a big new support package from the euro zone and the IMF would put some minds at rest. But a deal on new money cannot be thrashed out until the IMF in particular is sure that Greece's public finances are on a sustainable path. That depends, among other things, on private-sector creditors signing up to a bond-exchange deal that will see half of the face value of their Greek paper written off. A deal is proving elusive. Bondholders think Greece's European rescuers should share in the pain. The ECB has purchased around €40 billion of Greek government bonds, at a discount to their face value, as part of its programme to stabilise bond markets. lt stands to make a profit on them, which riles private bondholders. They also want a higher interest rate on the new bonds than officials are willing to sanc­ tion. Until a deal is done, Greece is stuck. From bad to worse

The ever-gloomier diagnoses of Greece's economy and public finances further com­ plicate negotiations. An IMF report pub­ lished at the end of last year said that a so% write-down on private-sector bonds, a tar­ get set at an EU summit in October, togeth­ er with €130 billion of extra official financ­ ing at low interest rates would give Greece a decent chance of getting its public debts down to 120% of G DP by 2020. But that assessment already looks too sanguine. The headwinds facing the econ­ omy are proving much stronger than had been forecast. Greece's GDP probably fell by 6% last year, far more than expected. A weaker economy has made it harder for ��

64

The Economist J a n ua ry 28th 2012

Fi nance and economics Austerity and the markets

The perils of prudence W A S H I N G TO N , D C

More evidence that austerity can backfire

TFor all the hand-wringing about

HE fiscal hawks should be pleased.

public profligacy, budget deficits across the rich world fell by about 1% of G DP last year. Moreover, that was almost all the result of policy actions (spending cuts and tax rises) rather than cyclical effects. Germany, France, Spain and Italy all managed to reduce their structural bud­ get deficits, the latter three thanks to austerity. All are expected to reduce those deficits further this year, the Internation­ al Monetary Fund said on January 24th. But this may not be good news. Austerity can unnerve markets, not calm them. The IMF studied the correlation be­ tween credit-default-swap spreads and a variety of economic indicators last year. Long-run indicators-for deficits, eco­ nomic growth and spending on pensions and health care-had little impact on spreads. But larger near-term primary deficits (which exclude interest) were associated with notably wider spreads. So, too, was weaker current-year growth. This is surprising. In theory solvency

�

Greece to meet its fiscal targets. Softer growth in the rest of the euro-zone econ­ omy has not helped. But the depth of last year's slump owes much to a shortage of li­ quidity, an influence which most eco­ nomic models ignore, says Yannis Stour­ naras of IOBE, an Athens think-tank. The Greek central bank's figures show that bank credit to households and private firms fell by 2-4% in the year to November. Banks suffering a drain of deposits have had to husband their liquidity. Official lending figures do not reflect the drying up of other sorts of credit. An informal system by which firms used postdated cheques to pay for supplies has broken down, in part because banks are warier of taking them

IJ

It isn't working Greece's:

20 10

2001

03

05

Source�: B�nk of Greece; Thomson Reuters

07

09

11

-Four-quarter moving average

should be a function of longer-term growth and fiscal trends, but markets instead seem to care more about the short term. Carlo Cottarelli and Laura Jaramillo of the IMF say tighter fiscal policy, by hurting the near-term growth outlook, could actually lead to wider, rather than narrower, spreads. Cut the deficit too aggressively, in other words, and the negative impact on growth and the rise in the cost of debt service from higher spreads could result in a higher, not lower, debt-to-GDP ratio. Mr Cottarelli and Ms}aramillo advise caution in interpreting these results: they may reflect circumstances unique to 2011. Their findings do not mean austerity should be avoided at all costs; but they do suggest it should be accompanied by steps to protect growth. And the study explains why the IMF is urging many countries with a choice not to press austerity further this year. "Decreasing debt is a marathon, not a sprint," Olivier Blanchard, the fund's chief economist, has observed. Pace yourselves. as collateral for short-term loans. Firms complain that the government is slow to pay value-added-tax (vAT) rebates, mak­ ing the liquidity shortage worse. Few for­ eigners will supply Greek customers on the basis of a credit guarantee from a Greek bank. So Greek importers, however solid, usually have to pay cash upfront. Some firms are finding ways round the stigma of being a Greek enterprise and the credit troubles that brings. The headquar­ ters of Aquis, a firm that runs hotels and re­ sorts in Greece, was recently moved to London by its founder, Ioannis Kent. It is now a UK holding company with a British bank account into which the firm's rev­ enues are paid. Other firms have delayed payments to suppliers and employees. A necessary fiscal squeeze is adding to the downward spiral and risks becoming self-defeating. The sorts of public spend­ ing that are likeliest to induce other economic activity, such as road­ building, have been cut, says Mr Stournaras. Big tax increases are not a sure-fire way of raising rev­ enue in a country where taxes are routinely avoided. The rate on restaurant meals was raised fromn% to 23%; such a sharp jump seems almost an invitation to cheat for cash-strapped small businesses. The IMF says a shortfall in vAT receipts suggests some firms are not complying. A

hike in car taxes prompted many drivers to hand in their licence plates. With so many uncertainties, the Greek economy cannot hope to attract the invest­ ment it needs to spur recovery. Until a deal on private-sector losses is finalised and im­ plemented, investors cannot rely on a sec­ ond bail-out package that will keep Greece in the euro. Even if a deal on losses is agreed in principle, a substantial number of holdout creditors could force the Greek government to implement a coercive re­ structuring. That might further unsettle bond markets and depositors. Banks will also have to be recapitalised after taking losses on their Greek bonds; no one is sure whether they will remain in private hands. Goodwill hunted

Slow progress on freeing up the economy and cutting the deficit has cast doubt on the ability of Greece's leaders to imple­ ment reforms. Last year the country moved up one place (to 10oth) in the World Bank's rankings of 183 countries for ease of doing business. Businessfolk call for some­ thing more radical to demonstrate the country's commitment to reform. One suggestion is immediately to shut down lossmaking or underutilised public entities. Another is to tackle the corruption and inefficiency of the tax system by out­ sourcing the job to foreign tax officials or to a private-sector tax consultancy. That would speed up much-needed use of cen­ tralised computer records and stop the face-to-face contact between tax collectors and taxpayers that begets bribery. A signal that banks would operate at arm's length to the state would also reassure potential investors. So would a high-profile assault on a closed industry. But Greece's economic problems are too big to be fixed quickly. Despite a j obless rate that has risen to 18%, Greece still has a current-account deficit of 10% of GDP (see chart 2). For an economy to have so much slack and yet consume more than it pro­ duces is a sign of chronic uncomp etitive­ ness. The IMF has said it will take more than a decade for Greece to become com­ petitive. Some reckon it would be easier for Greece to regain its edge by going back to the drachma and devaluing than by keep­ ing the euro and suffering grinding wage ��

The Economist J a n ua ry 28th 2 0 1 2

� deflation. The short-term disruptions would be outweighed by long-term gains. Most businesspeople see little merit in devaluation. "The empirical evidence is against it," says Efthymios Vidalis of SEV, Greece's main business federation. "Greece had two devaluations after join­ ing the European Union and the benefits were short-lived before inflation eroded them. It didn't work." There is another way. When the crisis struck, Apostolos Vakakis, the founder of Jumbo, a Greek retailer, faced a choice: cut costs by 20% or raise productivity by that amount. He chose to improve productivity.

Fi nance and economics

In return for a pledge not to cut jobs or wages, Jumbo's employees agreed to work harder. Each store is now staffed with few­ er workers, allowing the firm to open out­ lets at a faster rate. Many stress the importance of greater competition in bringing business costs down. In contrast to devaluation, the bene­ fits from opening up professions and in­ dustries to competition are permanent, says Mr Stournaras of IOBE. "It is the 'doing business' sort of competitiveness that mat­ ters," he says. Greek executives point to the lack of competition in trucking, where no new licences have been issued since 1971,

as an example of an industry that raises costs for other Greek firms. Public opinion also still favours the euro: more than 70% of Greeks say they want to stay in the single currency. But if Greece is to have the breathing-space it needs to right its economy, it has to con­ vince its rescuers that they are not throw­ ing good money after bad. A deal on priv­ ate-sector losses is only a first step; it seems likely that the euro zone will also have to stump up more money than expected to keep Greece going. It will be a while before the drachma printing plates on display in Athens can truly be confined to history. •

Buttonwood Sometimes it helps if investors are gloomy

B port on the level of confidence among

ARELY a week goes by without a re­

consumers, businesspeople and inves­ tors. Optimism is what's wanted-Keynes talked of the "animal spirits" that influ­ ence economic activity. Pessimists are routinely denounced as ]eremiahs. Those who try to bet on falling prices find their activities are restricted. A cheery disposition may be neces­ sary for societies to function. Daniel Kah­ neman, a psychologist and Nobel eco­ nomics laureate, has a chapter in his book "Thinking Fast and Slow" which de­ scribes overconfidence as "the engine of capitalism". No entrepreneur can be sure that his planned investment will succeed but if no one took a risk, new products and jobs would never be created. A cer­ tain blindness to the odds may be neces­ sary. According to Mr Kahneman, the chances of an American small business surviving for five years are just 35%. But ask individual entrepreneurs about their prospects and 81% think they have a better than seven-in-ten chance of success. This self-confidence may be innate, just as most people think they are better­ than-average drivers. And it would seem logical that the most optimistic people gravitate towards entrepreneurship. That is good for consumers, who can select from a wider variety of products. Even the failed businesses serve a purpose. Daniel Gross, a journalist, wrote a book claiming that bubbles were good for economies since they leave behind infra­ structure (canals, railways, fibre-optic ca­ ble) that can last for generations. But it is hard to make such a case for all bubbles. Anyone who has driven past a row of empty houses in the Irish country­ side will realise that optimism can lead to wasteful investment. And Mr Kahneman cites studies that show how overoptimis-

,.....

tic chief executives (as measured by the amount of stock they own) were more like­ ly to gear up their balance-sheets and pay too much for acquisitions. The problem with overoptimism was il­ lustrated by the investment-bank col­ lapses of 2008. The men who reached the top of such risk-taking organisations had, by definition, been successful in their pre­ vious bets. They believed this was due to skill, not luck, making them too sanguine about their ability to ride out the crisis. A further problem with optimism is thus that it is pro-cyclical. The greatest mo­ ment of success for optimists will occur at the peak of a boom, when they will feel their instincts have been justified. Previous house-price rises will make buyers more optimistic about borrowing more money; and banks will be more optimistic about the prospect of being repaid. Financial assets are highly unusual in that rising prices tend to elicit higher de­ mand. Analysts extrapolate recent rapid profits growth into the future, even though profits cannot rise faster than GDP indefi­ nitely. If markets were truly efficient, price­ earnings ratios should be lower than aver-

age at the top of the cycle, since investors should anticipate a reversion to the mean. Instead, high p/e ratios and rapid profits growth tend to go together. It used to be the role of central bankers to take away the punchbowl when the party was in full swing. Under Alan Greenspan, however, the Federal Reserve ended up spiking the punch with more rum by cutting rates whenever markets wobbled. The hope is that in future cen­ tral banks will keep an eye on asset bub­ bles under the guise of "macropruden­ tial" policy. This might involve the use of broader measures than just interest rates. For example, the Fed could pop housing bubbles by imposing a maximum loan­ to-value ratio for mortgages. But what if the bubble this time is in government bonds, not equities? The last time long-term Treasury bonds yielded 2.1% was in 1949. Investors who took the plunge into Treasuries then earned an an­ nual negative real return of 1.6% over the following 30 years. On this occasion, however, the central bank is one of the main purchasers of Treasury bonds in an effort to keep yields low. Such low yields could be attributed to optimism that American politicians will agree on a long-term plan to sort out the government's finances. But it seems likely that the main driver is pessimism about the outlook for other asset classes. In this case the gloom seems entirely beneficial. Low rates stimulate the econ­ omy and are good news for the American government, which can finance its deficit cheaply and without facing the dilemmas that beset the Italian and Spanish govern­ ments, which must impose austerity at a time of economic slowdown. But the pes­ simists can't expect to be thanked. Economist.comfblogsfbuttonwood

65

66

The Economist J a n ua ry 28th 2012

Fi nance and economics The Federal Reserve

Can you hear me now?

Behind the curtai n Federal Open Market Committee participants' judgment of appropriate target fed-funds rate*, %

- MEDIAl� FORECAST

T he Fed makes its views loud and clear

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W A S H I N G TO N , D C

APAN holds the modern record for years spent with interest rates at zero; they were on the floor from 2001 to 2006. America is on track to break that record. Having cut its short-term rate to near zero in late 2008, the Federal Reserve said on January 25th it will probably stay there "at least through late 2014", more than a year longer than its previous guidance. On the same day the Fed for the first time published projections of the year in­ dividual members of the Federal Open Market Committee, its main policymaking body, expect the federal-funds rate to start rising and the path it would follow over the next three years. The median forecast for a rise in interest rates is 2014 (see chart) but the accompanying statement implies it will probably be later. The Fed also took the long-awaited step of announcing an explicit inflation target­ something that many other central banks adopted years ago and that the Fed chair­ man, Ben Bernanke, has long advocated. The central bank said it prefers inflation of 2%, also the target (or the midpoint in a tar­ get range) of the British, Canadian, Swed­ ish and Israeli central banks. Mr Bernanke characterised these steps as a way to make monetary policy more transparent and predictable, and therefore more effective. But the practical consider­ ation is that the Fed needs new ways to kick-start economic growth. Promising lower rates for longer is one way to do this, because it will drive bond yields lower. Some officials have argued that the Fed could better steer private-sector expecta­ tions with a framework that more explicit­ ly committed it to lower unemployment or higher output. The Fed did not go that far but the inflation target (a word the Fed's of­ ficial documents didn't use but Mr Ber­ nanke did in a subsequent press confer­ ence) will help in two ways. First, 2% is at the high end of the range that officials previously considered accept­ able. Higher inflation implies lower, and thus more stimulative, real interest rates. Second, markets previously thought the Fed was so focused on inflation that it would tighten as soon as it topped 2%, no matter how high unemployment was. Mr Bernanke dispelled that notion by empha­ sising the Fed's equal attention to unem­ ployment. Should inflation overshoot 2% while the economy is unacceptably weak, the Fed will take its time about bringing it back down.

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The increased transparency is helping. Since the Fed committed itself in August to two years of near-zero rates, the ten-year Treasury yield has fluctuated around 2% despite a run of better-than-expected eco­ nomic news. The yield dropped on news of the Fed's new projections, b efore rising back up again. But this flurry of activity still may not be enough. The Fed actually lowered its projections for economic growth to be­ tween 2.2% and 2.7% in 2012; it projects growth of 2.8-3.2% in 2013. Unemploy­ ment, now 8.5%, is seen edging below 8% only by the end of 2013. Inflation, mean­ while, will be at or below the new target of 2%. With unemployment too high and in­ flation still weak, more monetary stimulus is easily justified. Mr Bernanke left the door open to that option. The odds are that he will walk through it. •

Deutsche Borse and NYSE Euronext

Competing arguments What should investors make of faltering merger plans?

F B6rse

OR the chief executives of Deutsche (DB) and NYSE Euronext, this week's hobnobbing in Davos was strictly business. A $9.5 billion plan to unite the two exchanges was derailed in early De­ cember when European Commission staff revealed they were likely to advise block­ ing it on competition grounds. The ex­ changes are lobbying hard to persuade the 27 EU commissioners to ignore their staff and approve the deal. A decision is due to be made on February 1st. On the face of it, investors should sup­ port the commission's recommendation to stymie the deal. Its competition wing is mandated to stop mergers that are likely to raise prices, reduce quality or dull innova­ tion. In this case the concern is that the ex­ changes' derivatives businesses-DB's Eu-

rex and NYSE Euronext's Liffe-would share over 95% of European trading for some assets. There may also be concerns that a merged exchange would be able to force investors to use its clearing facilities (for which it could ratchet up charges) once trades have been made. But there are reasons to think that the deal could be beneficial to investors. Ex­ changes are platforms on which buyers and sellers can meet, so a lower number of exchanges, which increases the potential for buyer-seller matches, can be better than a fragmented system. In addition, making all trades on one exchange could lower investors' costs. This is because some assets (gold and equities, say) tend to be negatively correlated, so risks offset each other somewhat. An investor wager­ ing that both gold and equities will go up should need to provide less collateral if a single exchange is used. Economists advis­ ing the exchanges estimate investors could reduce collateral-posting by €3 billion ($3.9 billion), a likely annual cost saving of roughly €300m. Nor would a merger necessarily mean increases in trading charges. The biggest in­ vestors are vital to the exchanges (the five largest NYSE clients make over 20% of total trades). These investors could move to non-European venues if charges rise, or they could set up their own platforms to deal with each other. And since costs of en­ try are not prohibitive, plenty of other es­ tablished exchanges could be tempted into Europe if venues there started to look very profitable. The threats of switching or en­ try should keep prices to large investors competitive. And since regulators would take a dim view of any price discrimina­ tion, small investors should be protected from high charges, too. If these are all decent points for the ex­ changes to make, other arguments are weaker. The exchanges suggest regulation will be easier post-merger, so the deal sup­ ports financial stability. This is disingenu­ ous. Regulators are wary of mammoth in­ stitutions that are too big to handle. And in a crisis some diversity in the system tends to enhance stability. Nor should investors be particularly impressed by the DB-NYSE argument that Europe must have a unified exchange to compete with large or quickly growing ex­ changes in Chicago, Hong Kong and Brazil. The idea that competition law should be overridden by industrial policy to create a local champion that exploits economies of scale has often been used in merger cases. But the evidence does not support it: in­ creasing size does not always make a more efficient firm, and governments have a mixed record when it comes to picking winners. The commission should allow the merger only if the benefits for investors stack up, not because Frankfurt is jealous of Chicago. •

The Economist J a n ua ry 28th 2 0 1 2

Fi nance and economics

Private eq uity u nder scrutiny

Bain or blessing? L O N D O N A N D N EW Y O R K

T he buy-out industry is under attack for destroyingjobs. lts returns to investors are the real problem

F STEVE SCHWARZMAN thought it was I valid in 2010 to compare Barack Obama's

"war" against business to Hitler's invasion of Poland, what can he be thinking now? Private-equity executives must be hoping the boss of Blackstone will keep his opin­ ions to himself. More bad publicity is the last thing the industry needs. Other Repub­ lican presidential candidates are compet­ ing to see who can say the most damning thing about Mitt Romney's career at Bain Capital. Newt Gingrich's supporters have even made a sort of horror movie about what happens when private-equity firms like Bain Capital get their hands on other­ wise healthy companies. The buy-out bit of the industry, which buys mature companies, fixes them up and sells them on, is the one on trial (few have a bad word for venture capital, which in­ vests in start-ups). It is charged with de­ stroying the jobs of ordinary people while enriching the likes of Mr Romney. Examples of dud deals are not hard to come by. The tax code's treatment of debt (with interest on debt payments being tax­ deductible) and private equity's thirst for profits have at times driven the industry to saddle companies with too much debt. Be­ tween 2004 and 2011 private-equity firms heaped more debt on their companies so they could take out a staggering $188 billion in dividends for themselves, according to Standard & Poor's Leveraged Commentary & Data, which tracks the industry.

But private equity isn't employment's grim reaper. Buy-out firms usually set their sights on companies that they can im­ prove, which means they may buy weaker or more bloated ones in the first place. A re­ cent NBER working paper looked at em­ ployment after 3,200 leveraged buy-outs in America. It found that private-equity ownership resulted in both more rapid j ob destruction and faster job creation than other forms of ownership. Two years after a buy-out, employment declines by 3% on average; if acquisitions, divestitures and new sites are included the losses are only 1% of initial employment. Other research has found that wages do not rise as quickly at private-equity-owned firms, probably because buy-out firms try to control costs

I

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Inflows up, returns down US private-equity buy-out funds By vintage year. 1•1arch 201 1

Capital-weighted average IRR•, %

Fund commitments. Sba

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2000

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*Internal rate of returni datl from Burg iss

67

after a takeover. But wages also don't plummet, which may be why unions that used to oppose buy-outs have moderated their criticisms. In any case, it is not the mission of buy­ out firms to create jobs. Their mandate is to produce higher risk-adjusted returns, and this is where private-equity firms should be judged more harshly. The industry has long boasted about its earth-shattering performance. Investors, and public-pen­ sion funds in particular, have piled into the asset class. But the bulk of investors' capi­ tal has gone into funds that were raised when asset prices were at peak levels (see chart 1). Although fears of a bloodbath among bubble-era buy-outs have not yet been realised, returns for most of these funds are going to be middling at best. Nor is there conclusive evidence that private equity consistently outperforms public companies, although certain high­ performing firms undoubtedly do. A re­ cent attempt to analyse private-equity per­ formance, by Robert Harris of the Univer­ sity of Virginia's Darden School, Tim Jenkinson of Oxford University's Said Business School and Steven Kaplan of the University of Chicago's Booth School of Business, concludes that it is "very likely" that private equity outperforms the s&P s a o (after fees). But the outcome looks dif­ ferent depending on which database is used. These vary wildly (see chart 2 on next page), and none has returns for all funds. The study emphasises a new data set, which could make things look rosier because the worst-performing funds may not be sufficiently represented. T he bigger issue There is also a question about how private­ equity firms calculate their returns. The in­ ternal rate of return (IRR) is the usual mea­ sure. But according to a 2010 study by Peter Morris, a former banker, entitled "Private Equity, Public Loss?", it is rare for two firms to calculate IRR in the same way. This can complicate any attempt to compare funds. IRRS can also overstate the actual returns investors realised, according to Ludovic Phalippou at Amsterdam Business School, since the measure implies that the return was achieved on all the investor's cash, even if some of it was given back early and reinvested at a lower rate. The s&P sao may not even be a fair benchmark for private-equity firms, says Mr Phalippou, since most buy-out firms purchase midsized companies, which have performed better than the big firms included in the s&P sao. An index of mid­ cap stocks could offer a more accurate comparison, but also a higher hurdle for private-equity firms to jump. Why would investors put money with private-equity managers who aren't that good? It could be that investors herd mind­ lessly into asset classes. But some of it may ��

68

The Economist J a n ua ry 28th 2012

Fi nance and economics

I

B

Pick-a-payout lRR' by vintage year as of Ma"h 2011, %

US private-equity buy-out funds Average

- Preqin

Cambridge Associates - Robinson & Sensoy1

Venture Economics

- Burgiss

60

1984

90

95

2000

05

08

'Internal rate of return, capital Source: "Private Equity Performanre", by Robert weighted I Private dataset as of June 2010 Harris etal, September 201 1

� also reflect the way the industry manipu­ lates data. "Every private-equity firm you talk to is first-quartile," quips Gordon Fyfe, the boss of PSP Investments, a C$58 billion ($58 billion) Canadian pension fund. Oliver Gottschalg of HEC School of Management in Paris looked at soo funds, and 66% of them could claim to be in the top quartile depending on what "vintage year" they said their fund was. The vintage year is supposed to be when the fund has its final "close" and stops fund-raising. But some firms may decide to use the year they started raising the fund or had their first "soft" close (when a fund is no longer offi­ cially open to new money), if it allows them a more favourable benchmark. If investors can work out a way to place their money with funds that are actually in the top quartile, it is probably worth the fees and the extra risk of investing in this il­ liquid, leveraged asset class. But that is a big if. David Swensen, the man who runs Yale's $19-4 billion endowment and a not­ ed proponent of alternative investments, has written that "in the absence of truly su­ perior fund-selection skills (or extraordi­ nary luck), investors should stay far, far away from private-equity investments." Abuzz about fees Buy-out executives have always claimed their interests are perfectly aligned with those of their investors, since they can only eat if their investors do. But that has changed as private-equity firms have morphed from small outfits into behe­ moths managing billions of dollars. Priv­ ate-equity firms usually charge a 2% annu­ al fee to manage investors' capital and then take 20% of the profits. Big firms can now support themselves just from manage­ ment fees. A study by Andrew Metrick at Yale School of Management and Ayako Ya­ suda at the University of California, Davis finds that private-equity firms now get around two-thirds of their revenues from

fixed fees, regardless of performance. If all that wasn't bad enough for inves­ tors, the prospects for future returns look dim. Higher debt has accounted for as much as so% of private equity's returns in the past, according to a 2011 study co-writ­ ten by Viral Acharya of New York Universi­ ty's Stern School of Business. But banks are not lending as much as they did five years ago, increasing the amount of equity that firms are having to stump up (see chart 3). That will cap returns. "Employees are go­ ing to make less money, and firms are going to make less money. Returns are going to be much more mundane," is the gloomy pre­ diction of the boss of one of the largest private-equity firms. Prices have also remained painfully high. Last year the average purchase-price multiple for firms bought by private equity was 8-4 times earnings before interest, tax, depreciation and amortisation, higher than it was in 2006. That's because the in­ dustry is sitting on $370 billion in unused funds, or "dry powder", that firms need to spend soon or risk giving back to investors, which means there is fierce competition for deals. Many transactions are between private-equity firms, which does little good to investors who have placed money with both the seller and the buyer. With the option of financial engineer­ ing basically gone, private-equity firms have no choice but to improve the busi­ nesses they buy. Every private-equity firm boasts about its "operational" skills but sceptics question whether private-equity executives are that good at running compa­ nies. A senior adviser at a big buy-out firm and former boss of a company that was bought by private equity says he disagrees that buy-out executives are good managers of businesses: "They're even less in touch with the real world than public-company

I

II

Debt's all folks Debt contribution to US leveraged buy-outs, %

100 90 80 70 60 50 40 +

1987 90

95

2000

05

08

Source: St•ndard & Poor's leveraged Commentary & Data

managers. They're a group of very clever, very analytical people paid lots of money whose general feel for the businesses is pretty poor." Their edge, he says, comes from having a fixed investment term, which helps focus managers' minds. With the landscape bleaker than it was, many private-equity firms are reinventing themselves. Most buy-out firms now prefer the fluffy title of "alternative asset manager". They have started to do more "growth equity" deals, taking minority stakes in companies and using less debt. This has been their strategy in emerging markets like China, where control and highly leveraged deals are not as welcome, but now the approach is also increasingly being used in the West. Big American firms like KKR, Carlyle and Blackstone have all expanded or started other units focused on things like property, hedge funds and dis­ tressed debt. Many private-equity firms will quietly fade away, although Boston Consulting Group's infamous prediction in 2008 that 20-40% of the 100 largest buy-out firms would go extinct has not yet come true. That is probably because private-equity firms take a long time to die. There are 827 buy-out firms globally, according to Preqin, a research firm. They will not all be able to raise another fund. European private-equ­ ity firms are particularly vulnerable be­ cause they have not diversified as much as their American competitors. But Mr Romney's candidacy will en­ sure that American firms feel more politi­ cal heat. Executives' special tax treatment, under which their profits are taxed as capi­ tal gains rather than income, will almost certainly go. The limelight has not yet scared off the 236 buy-out funds that are in the market trying to raise another $172 bil­ lion. But it is not as much fun as it was. "Back in 2005 fund-raising was like having a velvet carpet with a rope," says one buy­ out boss. "You had a bouncer and only let the prettiest people in. Now it's buy one, get one free, and free entrance before 11." • Papers cited in this a rticle can be found at economist.comjp rivateequity12

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70

The Economist J a n ua ry 28th 2012

Fi nance and economics

Free exchange

\

Shake it all about

Which emerging economies have the most monetary and fiscal wiggle-room?

TAmerica have already taken their toll on the emerging world.

HE downturn in the euro area and the wobbly recovery in

2012. India, Poland and South Africa are tipped to have deficits of around 4% or more. We graded each country on all five indicators. We then added Setting China's still-bouncy economy to one side, the average up the scores to produce an overall measure of monetary ma­ growth rate in other developing countries is estimated to have noeuvrability (rankings for the individual indicators can be slumped to an annual rate of less than 3% in the fourth quarter of found at www.economist.com/wigglen). 2on, from 6.5% in the first quarter. Some of that slowdown was Next we devised a fiscal-flexibility index, combining govern­ the result of policy tightening to cool overheating economies and curb inflation, but it also reflects weaker exports and reduced cap­ ment debt and the structural (ie, cyclically adjusted) budget def­ icit as a percentage of GDP. The most profligate governments, by ital inflows. If the euro-area debt crisis worsens, things will get emerging-market standards, are those of Brazil, Hungary, Egypt, nastier for emerging economies. The good news is that whereas most rich countries have little India, Pakistan and Poland, with debts close to 6o% or more of or no room to cut interest rates or to increase public borrowing, G DP. The last four countries also have huge structural budget def­ icits of 6-9% of GDP, leaving governments little room to respond emerging markets as a group still have lots of monetary and fiscal firepower at their disposal. That room for manoeuvre served de­ to another downturn. In contrast, Russia, Singapore and South veloping countries well during the downturn of 2008-09: mone­ Korea have ample scope for a fiscal stimulus. tary and fiscal easing was more effective in boosting demand Some economists argue that China could not be saved by a big fiscal stimulus like that in 2009. Although its official government than it was in the rich world, thanks to healthier private-sector debt is only 27% of GDP, this excludes bank lending to local gov­ balance-sheets. Although the emerging markets have less room ernments, which could push the total above 6o% of GDP. But the for easing now than they did in 2008, when they collectively ran Chinese government also has vast assets, notably its shares in a small surplus on their budgets, their average budget deficit last state-owned enterprises, so its net fiscal position remains healthy. year was only 2% of GDP, against 8% in the G7 economies. And The average of these monetary and fiscal measures produces their general-government debt amounts on average to only 36% our overall "wiggle-room index". Countries are coloured in the of GDP, compared with n9% of GDP in the rich world. A healthy aggregate picture masks some big differences, how­ chart according to our assessment of their ability to ease: "green" ever. Some governments have much more scope to loosen policy means it is safe to let out the throttle; "red" means the brakes need to stay on. The index offers a rough rank­ than others. An analysis by The Economist ranks 27 emerging economies according to ing of which economies are best placed The wiggle-room index to withstand another global downturn. It their monetary and fiscal wiggle-room. Room to ease fiscal and monetary p o licy• suggests that China, Indonesia and Saudi We began by using five indicators to as­ Minimum ftexibilit.\�100 sess each country's ability to ease mone­ Arabia have the greatest capacity to use tary policy. The first was inflation, which monetary and fiscal policies to support 0 60 80 100 40 20 growth. Chile, Peru, Russia, Singapore ranges from 2% in Taiwan to 20% or more ypt Eg and South Korea also get the green light. in Argentina and Venezuela (using private­ India Poland s ector estimates for the former rather than B razi l the government's dubious figure). Lower Red alert Vietnam food prices have reduced inflation in At the other extreme, Egypt, India and Po­ Pakistan land have the least room for a stimulus. many countries, but it remains above 5% in Turkey Argentina, Brazil, Hungary, Turkey, Paid­ half of them. Our second measure is ex­ Argentina cess credit: the gap between the growth stan and Vietnam are also in the red zone. Hungary South Africa rate in bank credit and nominal GDP over Unfortunately, this suggests a mismatch. Taiwan the past year. This looks most alarming in Some of the really big economies where Venezuela Argentina, Brazil, Hong Kong and Turkey. growth has slowed quite sharply, such as Czech Rep. In contrast, Chinese bank lending is now Brazil and India, have less monetary and M exi co fiscal firepower than China, say, which rising more slowly than GDP. Colombia has less urgent need to bolster growth. In­ The third monetary indicator is the real Malaysia Thailand interest rate. This is negative in about half dia's Achilles heel is an overly lax fiscal Philippines policy and an uncomfortably high rate of of the economies, but is over 2% in Brazil Hong Kon g inflation. The Reserve Bank of India has and China. Fourth, we look at currency Peru movements against the dollar since sensibly not yet reduced interest rates de­ Russia mid-2on. Nine countries, including Brazil, spite a weakening economy. In contrast, Si n gapo re Hungary, India and Poland, have seen Brazil's central bank has ignored the red South Korea Chile double-digit depreciations, with the risk light and reduced interest rates four times China since last August. In its latest move on that higher import prices could push up in­ Ind on esia January 18th, the bank signalled more flation. Our final gauge is the current-ac­ Sa udi Arabi count balance. If global financial condi­ cuts ahead. That will support growth this 'Based on inflation. interest rates, year but at the risk of reigniting inflation tions tighten, it would be harder to finance Sources: The Economist; credit. excha nge rates, cu rrenta«cunt balance, budget flU; Haver Analytics; a large current-account deficit, and so in 2013. Desirable as it is to keep moving, balance and government debt !�IF; UBS harder to cut interest rates. Turkey is the ignoring red lights is risky. • Interactive: Compare these emerging economies across most vulnerable country on this measure, different indicators at Economist.comfwiggle12 with a deficit of 9% of GDP forecast for Economist.comfblogsjfreeexchange

I

a

71

Also in this section 72 Studying em bryonic stem cells 72 Flu research and pu blic safety 73 Savi ng bees

For daily a n a lysis a n d debate on science and techno logy, visit Economist.comfscience

Visible-light commu nication

Tripping the light fantastic

A fast and cheap optical version of Wi-Fi is coming

A MONG the many new gadgets unveiled .1"'\. at the recent Consumer Electronics

Show in Las Vegas was a pair of smart­ phones able to exchange data using light. These phones, as yet only prototypes from Casio, a Japanese firm, transmit digital sig­ nals by varying the intensity of the light given off from their screens. The flickering is so slight that it is imperceptible to the hu­ man eye, but the camera on another phone can detect it at a distance of up to ten me­ tres. In an age of Wi-Fi and Bluetooth, flashing lights might seem like going back to sending messages with an Addis lamp. In fact, they are the beginning of a fast and cheap wireless-communication system that some have labelled Li-Fi. The data being exchanged by Casio's phones were trifles: message balloons to be added to pictures on social-networking sites. But the firm sees bigger applications, such as pointing a smartphone at an illu­ minated shop sign to read information be­ ing transmitted by the light: opening times, for example, or the latest bargains. Yet that is still only a flicker of what is possible. Last October a number of compa­ nies and industry groups formed the Li-Fi Consortium, to promote high-speed opti­ cal wireless systems. The idea is that light can help with a looming capacity problem. As radio-based wireless becomes ubiqui-

tous, more and more devices transmitting more and more data are able to connect to the internet, either through the mobile­ phone network or through Wi-Fi. But there is only a limited amount of radio spectrum available. Using light offers the possibility of breaking out of this conundrum by ex­ ploiting a completely different part of the ele ctromagnetic spectrum, one that is al­ ready ubiquitous because it is used for an­ other purpose: illumination. Lighten the darkness To turn a light into a Li-Fi router involves modulating its output, to carry a message, and linking it with a network cable to a modem that is connected to a telephone or cable-broadband service, just like a Wi-Fi router. Incandescent light bulbs and fluo­ rescent tubes are not really suitable for modulation, but they are yesterday's light­ ing technology. Tomorrow's is the light­ emitting diode. LEDS are rapidly replacing bulbs and tubes because they are more ef­ ficient. And because they are semiconduc­ tor devices, tinkering with their electronics to produce the flickering signals required for data transmission is pretty straightfor­ ward, according to Gordon Povey, who is working on light communication with Ha­ rald Haas and his colleagues at the Univer­ sity of Edinburgh, in Britain.

The rate of data transfer is also good. Dr Povey's group is already up to 130 megabits a second (faster than some older Wi-Fi rou­ ters) over a distance of about two metres, using standard LEDS. Dr Povey, who is also the boss of VLC, a firm set up to commer­ cialise the technology, thinks such devices should be able to reach 1 gigabit per second (Gbps), and do so over greater range. Spe­ cially constructed LEDS would be even faster. The Li-Fi consortium reckons more than 10 Gbps is possible. In theory, that would allow a high-definition film to be downloaded in 30 seconds. Dr Povey believes that adapting exist­ ing LEDS to work with the sensors and light sources-cameras, ambient-light detectors, screens, flashbulbs, torches and so on-al­ ready found in smartphones and similar devices will be the fastest way to bring Li-Fi to market. VLC has already produced a smartphone app which allows low-sp eed data transmission between a pair of iPhones. It has also made an experimental optical transceiver that plugs into a laptop to receive and send light signals. Later this year it will bring out Li-Fi products for firms installing LED-lighting systems. There are limitations to using light, of course. Unlike radio, light waves will not penetrate walls. Yet for secure applications that could be a bonus. And light bulbs­ some 14 billion of them around the world­ are almost everywhere and often on. As they are gradually replaced by LEDS, every home, office, public building and even streetlight could become a Li-Fi hotspot. Having a line-of-sight connection with the LED in question would undoubtedly im­ prove the signal, but light reflected from walls or ceilings might often be enough. In any case, having a good line of sight helps ��

72

The Economist J a n ua ry 28th 2012

Science and technology

� Wi-Fi as well. And spotting a nearby light

in order to sit next to it is certainly easier than finding the location of a Wi-Fi router. Communication, though, is a two-way street. That means the LEDS involved in Li-Fi would need photo detectors to receive data. Some LED systems have such sensors already (to know when to turn on at night). But even if LEDS are not modified Dr Povey reckons hybrid systems are possible: data could be downloaded using light but uploaded (typically a less data-intensive process) using radio. In an office, for exam­ ple, an LED-powered desk lamp could work as a Li-Fi router, able to link up with any networked device placed on the desk. A big advantage of light is that it can be used in areas which contain sensitive equipment that radio signals might inter­ fere with, such as aircraft and operating theatres. LEDs in the ceiling of an airliner would not only allow internet access but could also transmit films on demand to in­ dividual seats, removing the need for lots of expensive and heavy cabling, thus sav­ ing airlines fuel. That alone could be enough to, as it were, make this idea fly. •

Em bryonic stem cells

Looking up

Stem-cell research is now bearing fruit

F the University of Wisconsin isolated

OURTEEN years ago James Thomson of

stem cells from human embryos. It was an exciting moment. The ability of such cells to morph into any other sort of cell sug­ gested that worn-out or damaged tissues might be repaired, and diseases thus treated-a technique that has come to be known as regenerative medicine. Since then progress has been erratic and (be­ cause of the cells' origins) controversial. But, as two new papers prove, progress there has indeed been. This week's Lancet published results from a clinical trial that used embryonic stem cells in people. It follows much disap­ pointment. In November, for example, a company in California cancelled what had been the first trial of human embryonic stem cells, in those with spinal injuries. Steven Schwartz of the University of Cali­ fornia, Los Angeles, however, claims some success in treating a different problem: blindness. His research, sponsored by Ad­ vanced Cell Technology, a company based in Massachusetts, involved two patients. One has age-related macular degenera­ tion, the main cause of blindness in rich countries. The other suffers from Star­ gardt's macular dystrophy, its main cause

in children. Dr Schwartz and his team coaxed embryonic stem cells to become retinal pigment epithelium-tissue which supports the rod and cone cells that actual­ ly respond to light-then injected so,ooo of them into one eye of each patient, with the hope that they would bolster the natural supply of these cells. The result was a qualified success. First and foremost, neither patient had an ad­ verse reaction to the transplant-always a risk when foreign tissue is put into some­ one's body. Second, though neither had vi­ sion restored to any huge degree, each was able, four months after the transplant, to distinguish more letters of the alphabet than they could b eforehand. Whether Dr Schwartz's technique will prove truly useful remains to be seen. Ex­ perimental treatments fail far more often than they succeed. But the second paper, published in Nature by Lawrence Gold­ stein of the University of California, San Diego, and his colleagues, shows how stem cells can be of use even if they do not lead directly to treatment. Since 2006 researchers have been able to reprogram adult cells into an embryonic state, using proteins called transcription factors. Though these reprogrammed cells, known as induced pluripotent stem (iPs) cells, might one day be used for treatment, their immediate value is that they are also an excellent way to understand illness. Us­ ing them, it is possible to make pure cul­ tures of types of cells that have gone wrong in a body. Crucially, the cultured cells are genetically identical to the dis­ eased ones in the patient. Dr Goldstein is therefore using iPS cells to try to understand Alzheimer's disease. The brains of those with advanced Alz­ heimer's are characterised by deposits, known as plaques, of a protein-fragment called beta-amyloid, and by tangles of a second protein, called tau. But how these plaques and tangles are related remains unclear. To learn more, Dr Goldstein took tissue from six people: two with familial Alzheimer's, a rare form caused by a known genetic mutation; two with spo­ radic Alzheimer's, whose direct cause is unknown; and two unaffected individuals who acted as controls. He reprogrammed the cells collected into iPs cells, then nudged them to become nerve cells. In three of the four Alzheimer's patients these lab-made nerve cells did, indeed, show higher levels of beta-amyloid and tau-and also of another characteristic of the disease, an enzyme called active GSK3beta. Since he now had the cells in culture, Dr Goldstein could investigate the relation­ ship between the three. To do so he treated the cultured cells with drugs. He found that a drug which at­ tacked beta-amyloid directly did not lead to lower levels of tau or active GSK)-beta; but a drug which attacked one of beta-am-

yloid's precursor molecules did have that effect. That is useful information, for it sug­ gests where a pharmacological assault on the disease might best be directed. In the short term, at least, iPs-based studies of this sort are likely to yield more scientific value than clinical experiments of the type conducted by Dr Schwartz, even though they are not treatments in themselves. That will, though, require many more pluripotent cells. And at least one firm is selling a way to make billions of iPs cells for just that purpose. Its founder, appropriately, is Dr Thomson. •

Flu research and pu blic safety

Influenza and its complications When, if ever, are scientific results too sensitive to make public?

I taken

N DECEMBER the scientific world was aback by an odd request. The American government, in the shape of the country's National Scientific Advisory Board for Biosecurity (NSABB), called on the world's two leading scientific journals to censor research. Nature and Science were about to publish studies by research­ ers who had been tinkering with HSNl in­ fluenza, better known as bird flu, to pro­ duce a strain that might be able to pass through the air between people. The NSABB fretted that were the precise meth­ ods and detailed genetic data to fall into the wrong hands, the consequences would be too awful to contemplate. They suggested that only the broad conclusions be made public; the specifics could be sent to vetted scientists only. HSNl is undoubtedly dangerous. Some ��

A danger not to be sneezed at

The Economist J a n ua ry 28th 2 0 1 2

� 6o% of the 570 recorded human cases have been fatal (though non-fatal ones are less likely to be recorded). On January 2oth, therefore, the research teams' leaders, Ron Pouchier of the Erasmus Medical Centre, in Rotterdam, and Yoshihiro Kawaoka of the University of Wisconsin-Madison, bowed to public pressure. In a joint statement published in both Nature and Science, which was also signed by 37 other leading flu experts, they announced a voluntary 6o-day moratorium on all similar research. The aim of this self-imposed suspension, they explained, was to give organisations and governments time "to find the best sol­ utions for opportunities and challenges that stem from the work." For a start, that means working out a way to disseminate the sensitive nitty-grit­ ty to the right people, a condition that both publications said must be met if they are to remove these details from the public ver­ sions of the papers. It also involves decid­ ing how, if at all, future research should be carried out. These and other topics will be discussed at a summit that the World Health Organisation (wHo) hopes to hold in Geneva, in February. The signatories are hoping that by showing themselves to be acting responsibly in this way they will prevent heavy-handed regulation from sti­ fling their field. Even before interested parties convene in Switzerland, though, fierce debate has got under way. In the January 19th issue of Nature, ten experts, including Dr Pouchier, weighed in on the matter. Science launched a similar policy forum. One im­ mediate conclusion is that flu researchers are divided among themselves. Some are frustrated by what they see as overblown misgivings by the NSABB. Others praise the NSABB's intervention as prescient. One prominent critic, Peter Palese, of the Mount Sinai School of Medicine in New York, recalls his own work in 2005 on the reconstruction of the Spanish-flu virus. Spanish flu was an epidemic that peaked in 1918, and which may have claimed as many as 100m lives. At the time, the NSABB held its nerve, apparently concluding that the benefits of full disclosure outweighed the risks. Dr Palese points out in Nature that his success prompted many other re­ searchers to enter the field. The resulting surge of papers revealed that the virus is vulnerable to existing seasonal-flu vaccine and common drugs, allaying fears that mischief-makers would conjure it up and wreak havoc. The researchers in Rotterdam and Mad­ ison have shown that viruses containing haemagglutinin (a protein which causes red blood cells to clump together) from H5Nl strains can be passed through the air between ferrets. (When it comes to flu, fer­ rets and humans are very much alike.) They also identified the genetic markers of the lethal strain and showed that not all

Science and technology Colony collapse disorder

Bee off A possible explanation of why beehives sometimes vanish

H From time to time a hive simply

ONEYBEES are sensitive creatures.

Looking for the cause

Dr Pettis and his colleagues knew from previous reports that exposure to a pesticide called imidacloprid has a bad effect on honeybees' ability to learn things and wondered whether it might be causing other, less noticeable, damage. Since one thing common to colonies that go on to collapse seems to be a greater variety and higher load of parasites and pathogens than other colonies, they wondered in particular whether it might be weakening the insects' immune sys­ tems, and thus allowing infections to spread through a hive. To find out, they gave 20 hives protein food (a substitute for pollen, which is fed to developing larvae) that had been spiked with imidacloprid. In ten cases the dose was five parts per billion (ppb); in the other ten it was 20 pp b. Previous experiments have shown that neither dose perceptibly harms bees. A further ten hives were given unspiked food as a control. Then, when the young bees emerged a few weeks later, Dr Pettis collected them and fed them with spores of a fungal parasite called Nosema. Twelve days later, he killed them and estimated the extent of their infestation. Both of the groups that had been exposed to imidacloprid harboured an average of 700,000 parasite spores in each bee. Bees from the control colonies, by contrast, harboured fewer than 200,000 spores in their bodies. The insecticide, in other words, was exposing bees to infestation, and thus to a much greater chance of dying prematurely. Whether this is actually the reason for colonies collapsing remains to b e deter­ mined. But it is a plausible hypothesis, and is likely to get beekeepers buzzing with interest.

strains are as deadly. In a comment article in Nature Dr Kawaoka stresses that such in­ formation is crucial to the development of effective vaccines and drugs. It also en­ ables authorities to monitor outbreaks of bird flu for the dangerous mutations and so nip a potential epidemic in the bud. Michael Osterholm, of the University of Minnesota, and Donald Henderson, of the University of Pittsburgh, however, ar­ gue in Science that H5Nl's human-fatality rate means any benefits that might flow from the research are dwarfed by the risks. Although some research is warranted, they say, there is no need to share the muta­ tion data "outside of a small select group of established researchers already work-

ing within the WHO network." The WHO, for its part, said in a state­ ment to Science that research like that of Dr Pouchier and Dr Kawaoka is "an important tool for global surveillance efforts". The or­ ganisation also worries that limiting access to relevant findings would be difficult to square with its recently updated pandemic influenza preparedness framework. This agreement, which stipulates that countries which provide virus samples should also receive the benefits of research, was pre­ ceded by four years of rancorous debate. If anything can be said for certain, then, it is that the gulf between those in favour of tighter controls and those against will be hard to bridge in a mere two months. •

gives up the ghost and vanishes. Colony collapse disorder, as this phenomenon is known, has been getting worse since 2006. Some beekeepers worry that it may make their trade impossible, and could even have an effect on agriculture­ since many crops rely on bees to polli­ nate them. Climate change, habitat de­ struction, pesticides and disease have all been suggested as possible causes. Noth­ ing, though, has been proved. But the latest idea, reported in Naturwissen­ schaften by Jeff Pettis of the Bee Research Laboratory in Beltsville, Maryland, sug­ gests that this may be because more than one factor is involved.

73

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Also in this section 76 Fiat and the Agnelli family 77 Revolution in Egypt 77 Crime fiction in Cairo 78 The future of Europe 78 Weegee's photographs

Prospera, o u r o n li n e b log o n books, arts and culture, a ppears every day. For a n a lysis a n d debate, visit Economist.comfculture

Queen Elizabeth II

Royal bow

Why the queen has to be seen to be believed

B Queen Elizabeth II who acceded to the

EING on show is a serious business for

throne 6o years ago next month. On royal tours and walkabouts, she is careful to choose bright colours and small-brimmed hats, glides through crowds "like a liner" and seemingly never tires. "Oh look! She's keeled over again," the queen once noted at a stifling-hot palace reception, spotting her then prime minister, Margaret Thatch­ er, pale and slump ed in a chair. On several occasions she has been urged to retreat behind more obtrusive lay­ ers of security. Each time she has refused with something between a joke and a mot­ to for her six decades on the throne, telling aides: "I have to be seen to be believed." Yet for the Bs-year-old monarch, pictured above with Prince Charles shortly before her coronation, belief requires dis­ tance, too. Younger generations of royals have kissed and told. But the queen has never given an interview. Though some of her 12 British prime ministers were con­ vinced they forged a special bond during weekly audiences with their sovereign, her personal politics remain unknown. Over the years, various aristocrats, cousins and horse-racing grandees have been more or less plausibly identified as her friends. Even among such intimates, boundaries are observed, for fear of cross­ ing an unseen line and triggering a stare of blank, silent rebuke. "She is never-you know-not the Queen," advises an un­ named friend, qu� ted in the opening lines of a new biography by the BBC's senior

The Real Elizabeth: An Intimate Portrait of Queen Elizabeth II. By Andrew M a r r.

Henry Holt; 349 pages; $32. Published in Britain as "The Diamond Queen: Elizabeth II and Her People" by Macmillan; £25 Queen Elizabeth II: Her Life in Our Ti mes. By Sarah B radford. Viking; 305 pages; £20 A Brief Life of the Queen. By Robert Lacey. Duckworth Overlook; 166 pages;

£9. 99. To be published in America in May as "The Queen: A Life in Brief" by Harper Perennial; $15. 99 Our Queen. By Robert H a rd m a n .

Hutchinson; 356 pages; £20. To be published in America in April as "Her Majesty: Queen Elizabeth II and her Court" by Pegasus; $27. 95 Elizabeth the Queen: The Life of a Modern Monarch. By Sally Bedell Smith . Random House; 663 pages; $30. Penguin;

£6. 99

political interviewer, Andrew Marr. Yet as a constitutional monarch, ruling with the tacit consent of the majority, she is not the only judge of the trade-off between necessary display and indispens­ able discretion. The public have a say as well. Some of the queen's closest brushes with disaster have involved a lack of visi­ bility, most painfully in 1997 when she remained in Scotland with the royal family

after the death of Diana, Princess of Wales. She only returned to London after pleas from her new, young prime minister, Tony Blair (and lynch-mob demands to "Show Us You Care" from the tabloids). The double nature of the queen-an unusually private woman with extraordi­ nary public duties-poses a test for all who try to write about her. Including Mr Marr's book, five new biographies have been pre­ pared for 2012, the queen's diamond jubi­ lee year. The authors boast of watching the queen at work, interviewing officials from the royal household and of trawling through archives. They quote family mem­ bers, friends and people with a claim to know the queen. In the process, all five biographers wrestle with the question neatly framed by their subject herself: if to see the queen is to believe in her, what vantage point al­ lows the most authentic experience of faith? Which queen is the most "real", the private woman or the public figure? Each offers a different answer. Two of the authors, Sarah Bradford and Robert Lacey, are veteran royal historians, whose 2012 biographies draw on previously published work. With the frankness of an old pro, at one point Ms Bradford names different schools of royal-watching. There i s the "work o f the Queen" genre, a s pio­ neered by the 1969 television film "Royal Family", which showed the monarch working through boxes of state papers, preparing state visits or relaxing with her family. Alas, she explains, once the public had seen inside royal drawing rooms, they soon wanted to peer into the be droom. Thus arose the "royal soap opera" genre. Ms Bradford takes readers on a brisk, as­ sured canter through the familiar land­ marks of both genres, adding a dose of his­ tory as she goes. Mr Lacey, who has been writing about the queen for nearly 40 years, advertises his slim volume as a "pleasant afternoon's reading", which it is ��

76

The Economist J a n ua ry 28th 2012

Books and arts

� not. At once knowledgeable and jaun­ diced, Mr Lacey seems slightly sick of his royal subjects, as do the unnamed court­ iers and insiders whom he quotes. Robert Hardman, a royal correspon­ dent for the Daily Mail, offers a convincing tour of the British monarchy as an institu­ tion, apeing the vantage point of the fly-on­ the-wall documentary. His access pro­ duces an interview with Prince William and several lesser scoops-a rarity in the world of royal biography, in which the same anecdotes turn up in each book. But access has its limitations. The young prince is more loyal than revelatory about his grandmother, explaining that her "gravi­ tas" awes even her family, that she offers good advice and was "so excited" by her 2on state visit to Ireland. Some lesser sources appear to be quoted largely to thank them for their time. Sally Bedell Smith, an American soci­ ety biographer, offers her readers the illu­ sion of knowing the queen as a friend. Ms Bedell Smith brightly describes her own brief chats with the monarch at a Washing­ ton garden party and a London reception, before sprinkling her account with minute indiscretions from other people who have met her. The elder President Bush reveals that Elizabeth II is "rather formal" but not "standoffish". A witness describes how a puppy defecated in front of the queen dur­ ing a visit to a Kentucky horse-breeder, breaking the ice. Nancy Reagan recalls a breakfast with the queen, Prince Philip and Prince Charles at Windsor Castle; she was surprised that everyone poured their own cereal from the box. It is reported that the queen likes a travel rug round her knees and used to wear a hard hat when watch­ ing stallions cover her mares (now she stands on a viewing platform, after health and safety advice). This footling stuff is only of any interest because it is about the queen. But-fatally-those same domestic details have nothing to do with why Eliza­ beth II, as queen, is interesting. Mr Marr, a former political editor of the BBC and author of some shrewd books on modern Britain, sets himself a more ambi­ tious task: to explain what the queen's role and position tell us about her subjects. It is an admiring portrait, of an unfashionably dutiful monarch who in her weekly audi­ ences offers prime ministers what he calls "a kind of higher therapy"-a chance to share anxieties or explanations which will never leak, with someone who has read al­ most every state secret of the past 6o years (and so has heard worse before). He de­ scribes the queen and her strong sense of vocation, as a monarch "God-called" to give her life to her people as a sacrifice. Only by understanding that calling, he writes, can the queen be understood. In perhaps a claim too far, Mr Marr em­ phasises the comfort offered by the queen as a symbol of the continuing British state.

By representing those who did not vote for the current government or did not vote at all, she strengthens democracy, he sug­ gests. It is a clever thought, but may over­ state the degree to which most Britons suffer from constitutional angst. But a symbol she certainly is. And in modern Britain-a restless, exhibitionist place-Mr Marr's Queen Elizabeth stands out for her discretion, and for understand­ ing that symbols are "better off keeping mostly quiet". There is a lesson there for her heir, the Prince of Wales, Mr Marr suggests sharply. Mr Marr palpably likes the queen, whether for touring the country to greet and thank people mostly ignored by "Lon­ don power brokers", or for relaxing when her work is done with "a glass of some­ thing cheerful". Yet liking is not really the point. In Mr Marr's words, there is only a little space, though "an interesting space", between the queen and the woman who lives her life. Her calling gives her mean­ ing. She "is what she does". Mr Marr's sober conclusion feels right. To adapt the que en's one-liner: for all that the spectacle and unattainable glamour of royalty still fascinates (and helps sell books), for Britain's jubilee monarch the show is a means to an end. Being seen is about being believed. • Fiat and the Agnelli family

Near-death experience .

Mondo Agnelli: Fiat, Chrysler, a n d the Power of a Dynasty. By Jen nifer Clark.

Wiley; 360 pages;

$29. 95 and £1 9.99

T ESS than a decade ago, Fiat, the largest L private manufacturing company in Ita­ ly, seemed bound for the scrapheap. The carmaker had celebrated its first 100 years in 1999 and had weathered other financial storms in the recent past. However, when it had to negotiate a huge convertible loan with its bankers in 2002 the prospect that it would progress much further into its sec­ ond century looked slim. Yet Fiat survived and, in sorting itself out, was also able to save another stricken carmaker. Fiat's own turnaround and its acquisi­ tion of a troubled Detroit motor manufac­ turer, Chrysler, nearly three years ago offer an encouraging story of businesses with their backs to the wall. For many Italians, though, the Fiat saga is as much about the Agnelli family that controls it (with a 30-4% stake). The ingredients of the story include wealth, glitz, glamour, suicide, substance abuse and a multi-million-euro inheri­ tance row. Gianni Agnelli (pictured above), a grandson of the founder and Fiat's chair-

Vroo m, vroom

man from1966 until1996, revelled in a play­ boy's life in the 1950s and 1960s and remained a style icon for Italians until his death in January 2003. Jennifer Clark, a Milan-based business journalist, has written the first account in English about Fiat and the Agnellis since Alan Friedman, then Milan correspondent for the Financial Times, published "Agnelli, Fiat and the Network of Italian Power" nearly a quarter of a century ago. Mr Fried­ man examined Fiat's place in Italy's web of financial, industrial and political relation­ ships, covering the company's arms busi­ ness and its prominent Libyan share­ holders. Fiat is still in the public eye today, but Ms Clark avoids sensitive political issues. And she takes care not to offend the family although her book does venture into delicate matters, in particular the sui­ cide of Agnelli's only son, Edoardo, and the ongoing row over Agnelli's will. His only daughter, Margherita, has instructed law­ yers to fight both her mother, Marella Ag­ nelli, and her eldest son,J ohn Elkann, Fiat's chairman since 2010. (Mr Elkann is a direc­ tor of The Economist's parent company). Ms Clark's assessment of Agnelli as "charming, intelligent, curious" and yet unable "to make the tough managerial decisions that the company needed" has the ring of truth. Poor decision-making at the top was one of the reasons why Fiat floundered in the early years of this century, although deaths in the family played a part. (Giovanni Alberto, elder son of Gianni Agnelli's younger brother and heir, Umberto, died of cancer in 1997 at the age of 33, and Umberto himself died in 2004,just 16 months after becoming chair­ man.) That Fiat had five CEOs in two years speaks of grim times. With the arrival of the fifth, Sergio Marchionne, in June 2004, the management churn ended, Fiat got to ��

The Economist J a n ua ry 28th 2 0 1 2

� grips with its problems, took control of Chrysler and made progress in putting it on track. Mr Marchionne now joins Vitto­ rio Valletta who ran Fiat for 20 years after the second world war and Cesare Romiti who did so in the 1980s and 1990s as man­ agers to whom the family owes much. The frantic period of crisis and cure be­ tween 2000 and the present, when trusted octogenarian advisers, Gianluigi Gabetti and Franzo Grande Stevens, also helped the family keep control of the firm, is Ms Clark's focus. While the emphasis is on the Agnellis and their firm, she was kept busy on both sides of the Atlantic, speaking not only with Fiat folk in Italy but also with several of the key characters at Chrysler. Ms Clark says her book was rushed into print to keep pace with developments in Detroit. Hurried editing shows in erratic chronology, direct speech whose sources are unclear and easily avoidable errors. Even so, Ms Clark writes a cracking busi­ ness yarn and warns that for Fiat-Chrysler "much still remains to be done". •

Revolution in Egypt

Square eyes

Cairo: My City, Our Revolution. By Ah daf So ueif. Bloomsbury; 202 pages; £14.99

Tten by the victors, but it is the observant HE big themes of history may be writ­

bystanders who fill in the details. When Hosni Mubarak was overthrown in Cairo a year ago, among those watching was Ahdaf Soueif, a novelist born in Egypt and mostly resident in London. She missed the first three days as well as some of the post­ natal struggles of the new era. As a liberal leftist she is at best a partial victor, given that Islamists took control of the streets after the big battles were won. So her view of the revolution may never dominate the new textbooks now being prepared in Egypt. The bearded men who will most likely dictate what is in them, however, cannot entirely ignore what she recorded during the initiah8 days that felled the tyrant and his cronies. Well­ observed details have an unmistakable ring of truth and revisionist historians ignore them at their peril. Ms Soueif has collected her notes in a book that above all conveys what it felt like to be in Tahrir Square, to face the police on the Nile bridges, to stumble into makeshift hospitals filled with bloodied youths. She has an eye for ephemera at the edge of a vast stage: that tear-gas canisters become more not less potent when they pass their expiry date, that in July last year a Saudi flag appeared in Tahrir Square, that the

Books and arts New thri ller

Wreathed in smoke The Golden Scales. By Parker Bila l. Bloomsbury; 397 pages; $25 and £11.99

Pstraight to the dark heart of Cairo. ARKER BILAL whisks the reader

From the maze of alleys in the medieval bazaar to sand-blown, half-finished luxury housing developments, the Egyp­ tian capital is a menacing place where betrayal swirls like an army of djinns. Makana is a poverty-stricken Suda­ nese political exile living alone on a rickety houseboat on the Nile. He is commissioned by Hanafi, a violent and corrupt Cairene oligarch, with finding Adil Romario, a star football player. Meanwhile, Liz Markham, the daughter of a British aristocrat, has been tortured and murdered while searching for her daughter, who went missing in Cairo more than 20 years earlier. A former policeman himself, Makana is no naif, but he rapidly finds himself in a perilous world peopled with Egypt's ultra-rich, Islamic militants and Russian organised crime. It's a heady mix, but one that Mr Bilal pulls off with verve. A London-born literary novelist, Parker Bilal (whose real name is Jamal Mahj oub) has also lived in Cairo and Sudan. His prose has a subtlety that is rarely found in crime novels: an old man "screwed up his face so that all the lines drew together, like a net being drawn in"; metal rods on a construction site are scattered like "enormous burned match­ sticks"; naked light bulbs on an electrical flex resemble "strange fruits on a vine". The novel is set in pre-Arab-spring Cairo

soldiers took possession of any us dollar bills they came across as evidence of demonstrators being foreign agents. She captures the deep contempt of the youths for the old rulers, quoting a teenage acquaintance as saying of the Mubarak men: "Before they open their mouths they're liars; they breathe lies."And she re­ cords imaginative chants of revolutionar­ ies marching through hard-up districts of the city trying to win allies by warning the residents: "Prices up and no one cares I Next you'll sell your bed and chairs." The lifeblood of Cairo visibly quickens during the days and months she chroni­ cles. Her tone can be bombastic, breathless and laden with pathos, just as it was on the city streets. The narrative has a rushed, unfinished quality, much like the revolu­ tion itself. She inserts a flash-forward half­ way through the account of the 18 days of

and the city i s vividly evoked, its smells and sounds almost seeping from the pages. Characters such as Okasha, a policeman who is Makana's friend and ally, and Sami, a terrier-like reporter, are nuanced and b elievable though the story flags a little in the middle-always tricky territory for a crime novel-and there are perhaps one too many meaningful meet­ ings with long looks across the table wreathed in cigarette smoke. In the end there is justice, of a sort. Some evildoers are punished, others walk free protected by higher authorities,just as they prob­ ably would in real-life Cairo. The twist at the end is subtly signalled. Makana, too, has his demons. His journey, as he learns to live with them, stays with you.

revolution, in which she picks at what fol­ lowed, especially the rise of the Islamists. All of it adds to the sense of drama. The most successful passages juxtapose the personal and the political. The narra­ tive of street fighting is interleaved with personal memories of a previous age: here the house of a beloved aunt, there the studio where she acted in a television drama. The reader gets a visceral sense of the dislocation the revolutionaries felt in their own city. There is little clever analysis in the book, but that hardly matters. In years to come it will be a reminder to liberals-now once again in the opposition following the recent election victory of Egypt's Islam­ ists-of their most glorious hour. It should serve as a heartening reminder of what they are capable of achieving when united and courageous. •

77

78

The Economist J a n ua ry 28th 2012

Books and arts The future of Europe

A declinist's case

After the Fall: The E n d o f the European Dream and the Decline of a Conti nent. By Walter La queur. Thomas Dunne Books; 322 pages; $26. 99. To be published in Britain in

February; £18.99

Awho now lives and works in America, DISTINGUISHED European historian

Walter Laqueur has turned into a leading prophet of European decline. His new book, "After the Fall", stands as a summary of many pet themes: that the European Un­ ion has a weak economy with too lavish a welfare state and little capacity for reform, a shrinking population and, worst of all, too many Muslim immigrants. Mr Laqueur makes many telling points. The euro crisis (which, like most observers, he did not foresee) has laid bare many of the continent's economic ills. It has con­ firmed the insouciance of Mediterranean countries, in particular, over the urgent need to improve their competitiveness. Europe's demographic outlook is worry­ ing, with an ageing population dependent on a shrinking workforce-a picture that gets worse as one moves eastward. And no European country has been a shining success at assimilating immigrants, especially (but not only) from Muslim countries. Yet overall the author's gloom is still ex­ cessive. Europe's economic p erformance over the past decade has not been appre­ ciably worse than America's, for example. Although it has a few basket-case coun­ tries, it also has (in Scandinavia and Ger­ many, for instance) some of the world's strongest and most competitive econo­ mies. Moreover, the euro crisis is leading to more extensive reforms to repair battered public finances, increase liberalisation and bolster competition than would have seemed possible a few years ago. A bigger objection is the book's repeat­ ed and excessive stress on the supposedly damaging effects of Muslim immigration. Mr Laqueur stops short of subscribing to the worst fears of "Eurabia" once fashion­ able in right-wing American circles. But he overstates Islam's spread (there are per­ haps 2om Muslims in Europe, just 4% of its current population of soom). And he is surely wrong when he argues that Mus­ lims will not assimilate, that sharia law may become widespread or that large parts of many European cities will come to resemble north Africa. An ageing conti­ nent needs immigrants. Moreover, both Turkey (which Mr Laqueur mostly tra­ duces) and the Arab spring (which he bare­ ly mentions) suggest that reform and liber-

al democracy can, albeit with difficulties and arguments along the way, be made compatible with Islam. The author's harangues against Muslim immigration disfigure what is otherwise an interesting and provocative book. So do several small errors that should have been picked up by a more careful publisher. The siloviki are not the political class in Russia, but a specific group linked to its security services; Greece joined the EU in 1981, not 2000, and Croatia will j oin in 2013, not 2011; the former mayor of London is called Ken not Neil Livingstone and the mayor of Amsterdam is Job not]eff Cohen. In his conclusion Mr Laqueur concedes that "the prophets of declinism have been frequently wrong." Nothing daunted, he goes on cheerily to assert that the EU may break up. Yet though his predictions may be dubious, his analysis is worth reading and pondering, especially by those who before the euro crisis were fond of declar­ ing that Europe was showing the world a way to a better future. •

Weegee' s photographs

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