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Leaders
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How to set Syria free
On the cover Getting rid of Bashar Assad requires a united opposition, the creation of a safe haven and Western resolve: leader, page 11. In Syria the resistance grows and the blood flows, pages 25-28. How Israel views the Arab spring, page 50
Asia
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39 Venezuelan politics
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55 Finland's new president A conservative first
40 Brazil's airports
56 Greece's woes
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Fasten your seat belts
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Teenagers' argot
57 Charlemagne 1789 and all that
Pakistan In daring to take on the army, the Supreme Court is striking a blow for the rule of law: leader, page 13. Pakistan has a lotgoingforit, but optimism about its future is nevertheless hard to sustain, says our special report, after page 48. A clutch of experts ponder the country's fragile future in a new book, page 83
•• Contents continues overleaf
The Economist February 11th 2012
4 Contents 75 Credit cards in China
Britain
Citi building
58 The coalition Pulled hither and thither
59 Quantitative easing
America's jobs churn
59 Weak beer Brewers' droop
Science and technology
60 Bagehot The death of meritocracy
of recovery have multiplied, but the risks have not yet gone away: leader, page 12. Employment springs to life; will it fade again? Page 34. The number ofjob-to-job moves by American workers tells a bleak story: free exchange, page 77. Down to the wire in Athens, page 56
61 Swiss banking secrecy Don't ask, won't tell
The modern matchmakers Professor Facebook
80 Pollution in China Clearing the air
62 Copyright and the internet
Dating and sex The sdence of internet matchmaking, page 79. Sexual liberation in 18th century England, page 82
81 Why zebra are striped Horse sense
ACTA up
Books and arts
Business 63 Model economics
82 The first sexual revolution
The beauty business
Beauty and the beasts
65 Glencore and Xstrata Ore inspiring
Pleasure principles
83 Pakistan's future Resilient mess
83 Mitt Romney The puzzler
84 Documentaries on Russia
65 Underpaid bosses
Off balance
They really exist
66 Aircraft and pollution China snubs the EU
67 India's telecoms scandal Megahurts fashion models and a global talent pool are changing the catwalk, page 63. Men are spending money on their looks too, page 64
79 Sex and love 80 Social networking
International
64 Cosmetic treatment for men
Model economy Brainy
Taxi economies
77 Free exchange
Has it worked?
Rich-world economies Signs
76 Building competitiveness
68 Corporate governance Not King Coal
70 Schumpeter Of companies and closets
Finance and economics
Local hero
85 Jewish fiction Books of laughter and forgetting
92 Economic and financia1 indicators
Statistics on 42 economies, plus a closer look at football wealth
Obituary
73 Buttonwood
94 Wislawa Szymborska
The lump oflabour
Poland's muse
74 Short-selling
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The Economist February 11th 2012 7
The world this week Politics
famine was officially declared. Aid efforts have been ham pered by the Shabab, the al Qaeda-affiliated group that controls swathes of Somalia. Into the PAN
Josefina Vazquez Mota won the primary for Mexico's ruling National Action Party (PAN), and will be its candi date in the July 1st presidential election. She is the first female presidential contender from any of the three main parties. China and Russia blocked an Arab League-backed UN Secu rity Council resolution that condemned the violence in Syria and called for President Bashar Assad to cede powers. Government forces com menced the worst assault on protesters yet, firing rockets and heavy weaponry at rebel held areas of Horns and leav ing scores dead. In response America closed its embassy and several European coun tries and Gulf states withdrew their ambassadors from Syria.
Brazil auctioned a 51% stake in
three airports, including Sao Paulo's main international airport, in deals worth 24.s billion reais ($14.3 billion). The winning bidders included the pension funds of big state owned companies and oper ators based in Argentina, France and South Africa.
Egyptian officials said 43
charity workers, including 19 Americans, would be put on trial for illegally receiving foreign funds. Critics con demned the move as an at tempt by the ruling military council to clamp down on foreign support for pro-democ racy groups. Cairo continued to be roiled by battles between police and protesters, follow ing the deaths of 74 people in clashes at a football match in Port Said that the military council blamed on elements of the old regime. In South Africa an appeals panel at the ruling African National Congress backed the five-year suspension ofJulius Malema, the firebrand leader of the party's youth wing. Mr Malerna was suspended in November for tarnishing the party's image and sowing division. He is likely to appeal to the national executive. The UN said that Somalia's famine had ended but warned that a third of the population still requires emergency aid. Tens of thousands of people have died since July, when
Striking police in the Brazilian state of Bahia said that unless their pay demands were met, carnival celebrations later this month would have to be called off. Murder rates have doubled since the strike began. Smokescreen on the waters China issued a second water
border between Sudan and South Sudan. The rebels claimed they were keeping the Chinese safe and demanded that China ask Sudan to stop bombing the South Kordofan region. Yousaf Raza Gilani, Pakistan's prime minister, appealed against a charge of contempt brought by the Supreme Court, in a case that could potentially plunge the country into a political crisis. Mr Gilani is accused of failing to reopen a corruption investigation against the president, Asif Ali Zardari. The court readied a panel to hear the appeal. America and Japan revised a
2006 accord on relocating the us Marines' Futenma air base in Okinawa, after the process had stalled because of local opposition. Under the new plan America will transfer some troops to Guam without waitingfor progress on relocat ing the Futenma base on Oki nawa, which had been a pre condition for the transfer. Decoupiing the issues resolves the question of relocating troops, but does not settle the controversy over the proposed site of the new air base. A dozen militants were killed in an airstrike in the Philip pines, including senior mem bers of the Jemaah Islamiah and Abu Sayyaf groups. Among them was Zulkifli bin Hir, a Malaysian with a bounty of $sm on his head. The Philip pines also suffered an earth quake that killed1s people.
pollution alert within a month, when phenol, a dan gerous chemical, leaked into the Yangzi river near Shanghai. In Guangxi province six peo ple were arrested and seven officials sacked after cadmium spilled into the Longjiang river. The spill occurred last month but was not reported for two weeks, during which time people continued to use the affected water. Twenty-nine Chinese work ers who had been abducted in Sudan were freed. They were handed over to the Red Cross by a rebel group fighting on the
The Republican presidential nomination race took another unexpected turn when Rick Santorum won party caucus es in Colorado and Minnesota,
two states that plumped for Mitt Romney in the 2008 primaries. The caucuses in Nevada went as expected, with Mr Romney claiming victory on so% of the vote. The Obama administration was set to announce an agree ment with five big banks over alleged abuses in housing foreclosure practices. The revelation in 2010 that the banks evicted some home owners without following proper procedures caused a public furore and led to an investigation by ali so state attorneys-general. A panel of federal appeals judges upheld a lower court's ruling that a 2008 ballot initia tive in California that banned same-sex marriage in the state was unconstitutional. The issue is likely to rumble on all the way to the Supreme Court. Real pros Finland's presidential election
was won by Sauli Niinisto, the main centre-right candidate. Assuaging fears over the rise of Finnish Euroscepticism, both he and the Green runner-up, Pekka Haavisto, are pro-Euro pean Union and pro-euro. The Socialist Party in Spain chose Alfredo Perez Rubalcaba as its new leader. The Socialists are languishing behind the ruling People's Party, which won an absolute majority in November's election. The government led by Roma nia's prime minister, Emil Boc, stepped down. The president, Traian Basescu, chose as his replacement a former head of the intelligence service, Mihai Razvan Ungureanu. Chris Huhne resigned as Brit ain's energy minister after prosecutors said they would charge him with perverting the course ofjustice over a speed ing incident. Mr Huhne, a Liberal Democrat, was a con stant critic of Conservative policies at the coalition gov ernment's cabinet meetings. David Cameron, the prime minister, said he had "made �� the right decision" to resign.
The Economist February 11th 2012
8 The world this week
Business
Glencore and Xstrata un
veiled the details of their proposed $90 billion merger, which would create a giant in mining and natural resources. The offer of a share swap would result in Glen core owning 55% of a newly com bined company to be headed by Mick Davis, Xstrata's chief executive. The companies have longstanding business links, but there was some criticism of the deal from institutional investors in Xstrata, who worry that it is a takeover on the cheap. Rio Tinto announced a record
underlying annual profit of $15.5 billion. But the mining company also booked an $8.9 billion charge related to the falling value of its aluminium business.
China's inflation rate unex
weakness" of the labour mar ket as it does not count people who have given up looking for work or can find only part time employment.
pectedly crept up in January, to 4.5% from 4.1% in December, mostly because of higher food prices. Inflation is a headache for the central bank, which only recently started to loosen monetary policy as prices looked to be under control. Adding to the mix, the IMF this week urged Beijing to ready a stimulus plan in case the glo bal economy worsens.
The trading of shares in Alibaba was suspended amid rumours that the Chinese e-commerce firm is to buy back the 40% stake held in it by Yahoo! It is thought that Ali baba has obtained loans from a syndicate of banks to buy back some or all of that stake, which could be worth $13 billion. Meanwhile, Yahoo! took more steps to restore investor confidence, as Roy Bostock announced he was stepping down as chairman.
Putting it in perspective
I
US unemployment rates
%
Including marginally attaclred worke� Total
lttllllll!tllt J f M A M J J A S 0 » D J 2011
18
15 12 9
6
China barred its airlines from taking part in Europe's emis sions-trading scheme (ETS), hardening its opposition to an attempt to get carriers to pay for carbon emissions on flights into and out of the EU. Russia, America and India are also opposed to their airlines' inclusion in the ETS.
�
2012
Souru; US BuroauoflaboutSlatl'�
Ben Bernanke warned that America's labour market was
Paying div;dends BP posted a 38%jump in quar
terly profit, to $7-7 billion, and increased its shareholder divi dend for the first time since the 2010 disaster at one of its oil wells in the Gulf of Mexico. A trial that will apportion liabil ity for the oil spill among BP and its partners is due to start in Louisiana on February 27th, unless the company reaches a settlement before then.
still a "long way" from recov ery, despite the unemploy ment rate falling to 8.3% in January, the lowest for three years. Stockmarkets had surged in response to the employment data, with the Dow Jones index reaching its highest mark since May 2008. But the Fed's chairman re minded Congress that the official figure "understates the
Air France was forced to can
cel about half its long-haul flights because of a four-day strike by pilots and crew, who walked out in protest against government plans to require them to give at least 48-hours advance notice of strike action.
UBS went further than most
other banks and reduced its bonus pool by a comparatively large 40% (and by 6o% at its investment-banking division), as it reported that net profit in 2011 had fallen by almost half, to SFr4.2 billion ($4.6 billion). But the Swiss bank will pay "special" share bonuses to around 5% of its most senior bankers as it fights to retain talent amid a downsizing of its investment bank. The Bank of England stood poised to launch a third round of expansionary asset pur chases, or quantitative eas ing, to help the ailing British economy. The British Retail Consortium reported that shoppers drastically reduced spending in January after splashing out at Christmas.
Verizon announced a venture with Coinstar, the owner of
the handy Redbox DVD rental kiosks in American super markets, in which the pair will combine forces to challenge Netflix's dominance in the business of streaming and renting films online. Coinstar, which also operates in-store coin-sorting machines, saw its profit surge in the fourth quar ter of last year. Groupon released its first set
of earnings since going public in a much ballyhooed initial public offering. Although revenue at the online discount site almost trebled in the final quarter of 2011 it made an unexpected net loss of $43m. Its share price sank. Jackpot! Caesars Entertainment,
which owns Caesars Palace and other glitzy places where people can lose money, floated a small amount of shares in an IPO. The debt-laden com pany's casinos are in America and Europe, rather than fast growing Asia. It abandoned a more ambitious flotation in 2010, but this week's gamble paid off: its share price rose by 71% on the first day of trading. Other economic data and news can be found on Pages 92-93
. H9WEY£R, Nr/ CENTRAL
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11
Ho-w to set Syria free Getting rid of Bashar Assad requires a united opposition, the creation of a safe haven and Western resolve N HOMS they are burying I their dead under cover of
darkness, for fear that the mourners themselves will be
Army (FSA), mainly soldiers who have deserted the regime. The most direct answer is to even up the fight by flooding Syria with arms or, perhaps, bombing Mr Assad's troops in their barracks. But such a focus on firepower would play into
come the next victims. Syrian government forces are setting out to strike the city's makeshift
Mr Assad's hands: the grounds on which he would most like to fight are military. Foreign bombing would satisfy outsiders' urge to do something-anything-to show their outrage. But
are no match for the army's tanks. And yet the butchery seems only to fire the conviction among the city's inhabitants that state violence must not prevail against the popular will.
Qaddafi's forces. In Syria it would have less military value. The time may come when supplying weapons to the oppo sition makes sense. But such a policy would not suddenly turn
clinics, where the floor is al ready slick with blood. The rebels in Horns have guns, but they
The outside world, to its shame, has shown no such resolve. A vote on February 4th, in the UN Security Council, condemn ing Syria's president, Bashar Assad, and calling on him to hand powers to his deputy, was defeated thanks to vetoes from Rus sia and China. For Mr Assad, this was the impunity he needed
to redouble the killing. Earlier a ramshackle mission to Syria by the Arab League had ended in bickering. Division has eviscer ated international co-operation just when the turmoil whipped up by the Arab spring makes it essential. The people of Syria deserve better. With the number of dead rapidly climbing above 7,000, the world has a responsi
even in Libya, which had a front-line and a terrain more vul nerable to aerial attack, bombing took a long time to weaken
the opposition into a fighting force. And a country awash with weapons would be plagued by the very violence that the
world was seeking to avoid. The guns that flooded into Af ghanistan to arm locals against the Soviet Union helped create
the chaos that spawned the Taliban. Far better to attack Mr Assad's regime where it is vulner able-by peeling away his support, both at home among Syr ia's minorities and abroad, especially in Russia, its chief de fender on the UN Security Council. Both Syria's Alawites and
Vladimir Putin cling to this dictator because they think that, despite his faults, he is better than the alternative. Yet under Mr
bility to act. It also has an interest. Syria occupies a vital posi tion in the Middle East, jammed between Turkey, Jordan, Iraq, Israel and Lebanon, and allied with Russia and Iran. The coun
Assad Syria has no future. Before the Arab spring his attempts to modernise the economy enriched a coterie of his cronies but did little for ordinary Syrians. Were he to see off today's
bloody reckoning if Syria's Sunnis, the largest group, are victo rious. A lengthy civil war in Syria would feed mayhem and re
Stand up as one
try is a cauldron of faiths, sects and clans seething with grudges and mistrust. Many of Syria's minorities are shelter ing with Mr Assad's Alawite sect only because they fear a
uprising, he would be left ruling over an isolated, impover ished and angry country. Surely the opposition can offer enough Syrians of all creeds a better future than that?
ligious strife in an unstable part of the world. So shifting Mr Assad from power as fast as possible is essen tial. It is too late for him to negotiate an accommodation with
To make that promise credible, Syria's fractious opposition must unite. A contact group of outside powers and the opposi tion could channel money into Syria, as well as help with com
permanent distrust of most of his people. Any freedom they gain would immediately become a means to resist him. For the
Kurds and Christians who back Mr Assad that they will be saf er and more prosperous without him. The Russians would also begin to shift ground. Mr Putin enjoys standing up to the
his people by overseeing reform and an increase in democra cy. Mr Assad's repeated resort to violence has earned him the
good of Syria and the region, therefore, the aim must be both to dethrone Mr Assad and also to minimise the loss of life. The pity is that, just now, those goals are at odds. Bombing and other sorts of hand-wringing As tyrants go, Mr Assad has two advantages (see page 25). One
is his willingness to do whatever it takes to put down the rebel lion. Whereas the troops in Cairo's Tahrir Square would not fire into the crowd, Syrian soldiers are steeped in blood. Al though some have switched sides rather than kill their compa triots, Mr Assad commands crack units and a relatively loyal officer corps, as well as tanks, heavy artillery and an air force. Syria's rebel irregulars could not beat them in a head-on fight. His second advantage is others' lack of unity-not only at
the UN and in the Arab League, but also among Syria's opposi
tion. The Syrian National Council is a divided gaggle of exiles, with only limited authority in a place they still call home. In side Syria there is a ragtag of militias, gangs and the Free Syrian
munications and logistics. With a single voice and a credible leader, the opposition could seek to reassure the merchants,
interfering West, not least for domestic political reasons (see next leader), but sticking with a doomed leader could cost Rus sia its naval-supply base in Tartus and its arms exports. The
more senior officials and army officers defect from the regime, the more likely Mr Putin is to change sides too.
To help persuade them, Turkey, with the blessing of NATO and the Arab League, should create and defend a safe haven in north-western Syria. The FSA can train fighters there, and a credible opposition can take shape. Turkey seems willing to do
this, providing it gets Western support. The haven would be
similar to that created for the Kurds in northern Iraq; Mr Assad
would suffer only if he attacked it. A haven carries risks, if only because the opposition is so fractious. But it is likely to cause less bloodshed than joining the civil war directly or letting Mr Assad slaughter his people at will. And a free patch of Syria would be powerful evidence that Mr Assad's brutal days are numbered. •
12 Leaders
The Economist February 11th 2012
Change in Russia
A Moscow spring? Both Vladimir Putin and the West should heed the message behind the protests in Russia IG, peaceful demonstrations in the run-up to a presiden· tial election may look like signs of a healthy democracy. Not in
B
Russia. Rather, the protests in Moscow reflect growing disen·
chantment with the system of "managed" democracy under Vladimir Putin, who plans to return as president next month. The protests have two striking features. First, they are re· strained and orderly, as befits their mostly middle-class, inter· net-using participants. A few rabid nationalists aside, these are
not revolutionaries demanding the overthrow of a regime, as in 1917. They are ordinary Russians who have enjoyed the fruits of a decade of economic growth but yearn for more political freedom, a more accountable state, less vote-rigging and less corruption. They have been driven on to the streets by the fear that Mr Putin, who was president in 2ooo·o8 and then let Dmi· try Medvedev rule for four years, will now stay in power until 2024, without even a glimmer of hope for reform.
A second feature is that the protesters have no obvious leaders who might replace Mr Putin. They are not calling for
his overthrow, or even backing another candidate in the elec· tion (partly because liberals have been barred from standing). Unlike the sweeping "colour" revolutions in Ukraine and Georgia or the Arab spring, the protesters have narrow, specific
demands, such as a rerun of December's Duma election and the dismissal of the election commission's boss, that show a broader wish for the rule of law and for properly functioning
institutions in Russia. The demonstrators seek evolutionary not revolutionary change, a point they could underline were they more willing to negotiate with liberal voices in the estab·
lishment, instead of spurning them (see page 53).
As for Mr Putin, he has so far been wise to respond cau· tiously, not confrontationally. The protests are being allowed to continue. There have been no threats to use force. State tele· vision has begun giving airtime to opposition figures even as it still disparages them. There is talk of returning to a limited sys· tern of elected regional governors, scrapped in 2004.
But there are clearly limits to Mr Putin's tolerance. He has re· jected demands for a new Duma election. He seems deter·
mined to win the presidential election on the first round, even though this will require more overt rigging. The fear is that he may react to post-election protests not with renewed dialogue
but with a crackdown. And the chances of this are raised be· cause Mr Putin, with all his talk about stability, has given no sign that he is ready for liberalising reform. The likelihood of
slower economic growth in future will undermine his legiti· macy in the eyes of many ordinary Russians; if dissent in·
creases, the odds of fresh repression are worryingly high.
Let Russians free themselves The West is in an awkward position. Although Russia would benefit from the rule of law and fair elections, the West cannot afford to be seen cheering on the protesters. Mr Putin was elected and, until recently, popular. In Russia, more than in most countries, critics are often depicted as tools of America. Already the Kremlin has accused the new American ambassa· dor of openly consorting with the protesters. But the West should still be blunt in warning Mr Putin of the consequences of any resort to force after the election. That
means tough, specific sanctions if need be. The Russians are rich and sophisticated enough to sort out their politics them· selves. Open repression, however, must be resisted.
•
The rich world's economy
Not quite p arty time Signs of recovery have multiplied, but the West's economies are not yet out of danger
I
MSCI World index
S terms, October 3rd 2011•100
-'---'---'--+---'-'- 90 Oct Nov Oec Jan Feb 2011 2012
NEW self-assurance has spread through financial markets. The MSCI index of glo·
A
hal stocks is up by more than 7% since the start of the year and by almost 20% since early October. Bond yields in Spain and Italy, the two biggest of Europe's em·
battled peripheral economies, have fallen to their lowest lev· els in three months. Greece's fraught negotiations with its cred· itors have dulled the rally this week-but only a bit. Given that a huge sovereign default could occur in scarcely more than a month, there is strangely little nervousness. Why the exuberance? In part it reflects genuinely good eco· nomic news, especially in America, where January's far stron·
ger-than·expected employment figures, along with upbeat sta· tistics from manufacturing and services, suggest that recovery in the world's biggest economy really is gaining momentum
(see page 34). The cheerier mood is also based on a belief that the European Central Bank (ECB) has vanquished the worst dangers for the single currency with its massive provision of three-year liquidity to the region's banks. Calamities that seemed all too plausible a couple of months ago, such as the collapse of a big European bank or a series of failed bond auc· tions leading to the imminent fracturing of the single currency itself, now seem highly unlikely. In addition, the market rally is a natural reaction to the fact
that central bankers have doubled down on their commitment to cheap money. The Federal Reserve recently made clear that it does not expect to raise interest rates until the end of 2014, ��
The Economist February 11th 2012
Leaders 13
�much later than expected. The Bank of England, which was due to meet on February 9th after The Economist went to press, is likely to launch another round of bond-buying. The ECB, which meets the same day, may cut rates again soon. Will the good news last? Recent history suggests caution. A year ago America's economy was widely expected to acceler ate, boosted by the Fed's second round of bond-buying. In
December 31st and a slew of automatic spending cuts kick in. Together they would amount to a fiscal tightening of almost 4% of GDP, more than enough to drag the economy down
stead growth slumped, pulled down by a combination of out side shocks (higher oil prices as a result of the Arab spring,
again. At the same time America needs a credible plan to fix its medium-term finances, a plan that would include tax reform
disrupted supply chains after the Japanese earthquake) and policy errors at home and abroad (wrangling over America's
and measures to rein in spending on health care and pensions. The political calendar makes all this hard enough. A stronger economy will tempt politicians to even more partisan rigidity. The dynamic is not dissimilar in Europe, where the ECB's
debt ceiling and the ever-deepening euro mess). Too soon to celebrate America's economy is in better shape this time, not least be cause households have reduced their debt further and the housing market is closer to a bottom. But the euro zone's debts are bigger than ever; many of its economies are in recession. And the list of potential spoilers is uncomfortably similar to that of a year ago. Tensions with Iran could spawn a 2012 oil shock. Meanwhile, the risk of policy mistakes remains worry ingly high on both sides of the Atlantic: central bankers may have saved the day, but politicians could still mess things up.
both of which are set to expire at the end of February. Failure to extend them might not kill the recovery, but would surely weaken it. Far more dangerous is the budget debacle looming later in the year. Under current law the Bush tax cuts expire on
bold provision of liquidity has calmed nerves and limited the severity of the bond crisis and the recession. The trouble is that the ECB's success has reinforced Germany's conviction that its preferred solution to solving the single currency's underlying problems-namely, a hefty dose of austerity for all-is the right one. A lasting solution for the euro will require a more bal anced approach, one which includes a greater focus on growth. Unfortunately, today's calm makes it less likely that German politicians will countenance such a shift, with the re sult that the euro zone's troubles will fester. It may sound churlish to dwell on the potential for politi cians to spoil the party when, at last, the news is better than ex
In America that could happen because good economic news, oddly enough, reinforces partisan gridlock. With unem ployment falling and optimism rising, both Republicans and Democrats in Congress have less incentive to set aside elec tion-year posturing. The most imminent decision is whether
pected on both sides of the Atlantic. Sadly, based on the recent past, it's plain prudent. This newspaper will be ready to cele brate only when politicians, and not just central bankers, start
to extend the payroll-tax cut and unemployment insurance,
making the right choices.
•
Pakistan's army and the law
The men in blacl{ v the men in green In daring to take on Paldstan's army, the Supreme Court is strildng a blow for the rule of law
I
FTIKHAR CHAUDHRY, Paki-
stan's chief justice, is not short of chutzpah. In 2007 he was
sacked as a troublemaker by Pervez Musharraf, the former military dictator, after pursuing investigations
into
suspected
killings by the security forces. The movement for his reinstatement played a big part in bringing Mr Musharraf down and restoring civilian government. But Mr Chaudhry has also been at odds with the new administration-so much so that President Asif Ali Zardari's men have painted him as a stooge of the army. Now the judiciary is taking on the military establishment as well. It may be because Mr Chaudhry's court is sensitive to these slurs on its independence; it may be because it has genuin ely come round to the view that the powers of the army need to be curbed. Either way, this development is to be applauded: as our special report this week argues, the army's belief in its impunity is one of the country's biggest problems. The seeds of the army's excessive power lie in Pakistan's origins. Born out of India, and created through a bloody partition, the country has always feared being swallowed up by its bigger neighbour. As a result, it has had since inception an army that is too big for the country's size, greedy for resources
and dangerously interventionist. The army's perception of itself as the guarantor of national security has led it to abuse its position. For half of Pakistan's 64-year life, it has governed the country; for the other half, it has rigged elections, financed politicians it favoured and un dermined those it didn't. Politicians who want to make peace with India are a particular target. The army's power shapes Pakistani foreign policy, too. Soldiers are more focused than civilians on the military threat from India, and that fear has dangerously influenced the coun try's dealings abroad. Pakistan plays a double game in Afghan istan, where the Taliban are at once its enemies (because they are the enemies of its ally America) and its friends (because they are the enemies of its enemy India). And few doubt that the Pakistani army's intelligence wing, the Inter-Services Intel ligence (ISI) has also been in cahoots with groups responsible
for atrocities in India as well. The Supreme Court's political role is another consequence of the way the army has distorted the country's political life. Long periods of military rule, when the courts were the civilians' only defence against the soldiers, boosted the relative power of the judiciary while weakening the politicians. This has been compounded by Mr Chaudhry's determination to pursue corruption charges against President Zardari. In a coun try as riddled with graft as Pakistan, it is hard to complain ��
14 Leaders
The Economist February 11th 2012
� about a judge trying to ferret out wrongdoing. But since Mr Zar dari enjoys constitutional immunity, the practical effect of the judge's onslaught will be to tie up the rest of the government's term-unlikely to last until its natural conclusion next year with constitutional haggling. At last the right target So it is a relief that the Supreme Court is now turning its fire on the armed forces as well. It is to hear three petitions relating to
stanis are likely to hear will surprise them. However, each case does touch on a different aspect of the many ways in which the security services have abused their power over the past few decades. Even the suggestion that soldiers accused of abuses might be brought to book would begin to erode the army's sense of impunity. I t could also set the stage for Palruvlndal 1..-\TI. rkTcclmbl &lu.:anon ·''''' Vuo..•t••uul Echo;auo>n Awh.>m) (If. \'T\ \, •�uch • uq;y". 1bc ('10\lllnn I 'C'!i"'!Uil>k lur unplcnu:mlns tht ,.-..:ulmLtl ��.;,u, Scr ..d•Tnbol he� hIS 0 lc.!dlllg rol.: In monUturllll: u:tl\ill, "' · rl•< lIII(Ctll o(rh.b lOflljlOIICUI b Jirt" ) ' '"'"•:a muh.• n>niUtolllt& >V>tm• ,md '�onuuWIIQiflou "ratt'f.) ""' wiU b.-lr:tvolw..t ut rhOnllll.tn tl � complex f»VJtl.'•hlr. I'rvhdc·•"> in Gcun:ln W\IIIIJ be��� .tucr.
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Tht tom�nt/1hc {)(ouochC' (;nd},o:fufi l'lsr lruC'l'rtlri()IUI" IA•'-'JtU>ICWrt-.cit (l,IZ) lomblI w;u fonurd Oil
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The successful candidate will be creative and possess the ability to recognise new cross-border opportunities and identify gaps in the market. Preferably, the individual 1vill have experience in developing digital product solutions that facilitate e-commerce and digital business. The appointee will be qualified with an undergraduate degree in any discipline, with a second
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background to bu1ld on and further d e .. e lop key artas of
!>tronger linkages across the SchOOl. Informal enqwr!S mJy
be mJd" to Professor Simon Guy.
Head of School (Simon guyf'rnanc:hesteracuk),
P10fessor Da111d Hulme (daVId
[email protected]),
or Profe�sor Graham Haughton
(graham hau�htonfln'I<Jnch!Ster"'uk) For fu�r Information and to apply for th�e vacancies
please visit our website. Ifyou are unable to apply online please request an application form by calling +44 (o)161 275 8838
or emafling hrreaultment4Pmanc:hesteuc.uk quoting the refe-enc:e number.
Closing date for both posts: 30 March 2012. For further onformatoan on the xhool,and for mformc�llon on the School's und�rgraduate, postgr.lduJte taught
and postgradu1te rt!>ear(.h programmes 1n the areas of.Aidutecture, PIJnn1ng c1nd L.unds with disabilities are equally encouraged to apply. All applications will be treated In the strictest confidence. Closing date Is February 19, 2012.
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Economist Intelligence Unit Regional director
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Not everyone agrees with Mr Umar that the privatisation of the banks has been a success. Most of the big ones are indeed doing very well. But they are doing so by indulging in what Ra kesh Mohan, a former deputy governor of India's central bank, dubbed "lazy banking": simply investing their deposits in gov ernment bonds. Mian Mohammad Mansha, chairman of MCB, a large and highly profitable commercial bank, says it is lending less than half its deposits. Most of its assets are in treasuries, which he understandably sees as a better investment than loans to state-owned companies. For small businesses-which means 70% of Pakistan's firms-credit is hard to come by. So Kamran the tailor is lucky to have made contact with Ta meer, which is backed by Britain's aid agency, DFID. With the for mal banking sector doing well by lending to the government and big companies, small business is neglected. The economy does not collapse, says Werner Liepach of the ADB, because so much activity is shifting into the informal sector. Moneylenders-usu rers-are having a field day. According to Yaseen Anwar, the go-
ment and a big cause of social unrest. At the other end of the economic scale from Kamran, Asad Umar, who besides his role at the Pakistan Business Council is boss of Engro, a big Pakistani conglomerate, also has access to credit. Even so, Engro's ammonia-urea fertiliser plant in northern Sindh-the biggest in the world and the largest private-invest ment project in Pakistan-shut down only four days after it start ed production in December 2010 and was closed for half of last year because its feedstock, natural gas, was unavailable. Yet En gro's fertiliser business is profitable, so subsidised is the price it pays for the gas. Engro has promised to cut its fertiliser prices as soon as it has a reliable supply of gas. Neither gas nor generating capacity Neither gas nor generating capacity need be in such need be in such acutely short supply. The power cuts are largely the result of bad acutely short supply. The power cuts are largely the policy and mismanagement. What started result of bad policy and mismanagement as a financial problem is now crippling the real economy. The electricity industry is beset by "circular" debts. Fuel suppliers are owed money by gen vernor of the SBP, 56% of Pakistan's adult population have no ac erators who are owed money by distributors who cannot get cess at all to financial services, with a further 32% served only informally-among the lowest levels of financial penetration in consumers to pay. At the end of November last year unpaid elec the world. tricity bills reached 326 billion rupees. Among the big defaulters were the railways, the prime minister's secretariat, the army and There is a crying need for microfmance, and not just for its the IS!. traditional purpose of providing seed money for the poor start ing their first, tiny business but as working capital for small firms. A lot of the electricity used is never billed in the first place. Estimates of "transmission and distribution" losses-in large Just over the road from Kamran, Tahir Mahrnud has borrowed measure a euphemism for theft-vary from 11% to 37% of total 30,000 rupees, like Kamran at an annual interest rate of 20%, to supply, according to the central bank, the State Bank of Pakistan expand his thriving business of designing and decorating custo (SBP). About two-thirds of generation comes from inefficient, mised motorcycle petrol tanks. But so far the number of active high-cost oil-fired plants. Generating costs have doubled in the micro finance borrowers stands at just 2m or so. past two years. In the long run much hope is invested in the What enables banks to be lazy is the government's appetite planned Diamer Bhasha dam and hydropower plant in the for borrowing. Its deficit in the fiscal year that ended in june 2011 north of Pakistan-held Kashmir, backed by the Asian Develop was 6.6% of GDP, if electricity subsidies are included. The budget ment Bank (ADB). But it will be hugely expensive, at an estimat for the current fiscal year sets a target of a deficit of 4%, but that is ed $12 billion, and worries some observers because of the risk of likely to be missed by a wide margin for the third year run earthquakes. And it is opposed by India (because of where it is). ning. The target had been For Mr Umar, the solution to both the gas and electricity cri ot emerging ses are obvious: deregulate and finish privatising the energy agreed with the IMF, which in GOP per person, annual average market. He points out that there is never a shortage of phos November 2008 approved a growth, 1990-2011,% phate-based fertiliser because it is in the private sector, with standby arrangement of $11.3 prices set by the market. He also cites two examples of privatisa billion for Pakistan. The ar Chi na tion working in Pakistan: telecommunications, where the cost of rangement was put on hold in May 2010, by when $7.6 billion a call from Karachi to Lahore is now s% of what it used to be; and India banking, where some 85% of assets are now held in private had been disbursed, and termi lndoresia banks, compared with only 10% in 1990. nated in September 2011. Pakistan The IMF withdrew be It is true that the government's performance in running cause the government failed to businesses is poor. Government-owned companies are piling up
�
12
The Economist February 11th 2012
��
PAKISTAN
�
So the government does not have much to spend and, as the SBP noted in its annual report, risks being caught in a debt trap because it is borrowing for recurrent as well as capital spending. Spending on health, welfare and education is further constrained by a big outlay on defence, which accounts for near ly 20% of the 2011-12 budget expenditure, compared with less than 8% for education. Some analysts worry that the fiscal deficit is about to take a dire toll on Pakistan's external accounts. This month the first re payment to the IMF, of $1.2 billion, falls due. Fears that this is going to precipitate a crisis seem overblown. But Pakistan's cur rent account-in a small surplus last year-is likely to tilt into deficit. The healthy flow of repatriated income from overseas workers may be reduced by the deterioration in the world economy and by Saudi Arabia's plan, if implemented, to Try harder cap remittances. Pakistan's net female school enrolment rate Exports did surprisingly well in 2010,% 2010, despite the floods, thanks in large • Secondary measure to a rise in the price of cotton. That trend has reversed, and with the 70 power shortages plaguing the textile in 60 dustry, and falling glohal demand, exports are unlikely to maintain their growth. It is 30 possible that Pakistan, which has foreign 20 exchange reserves to cover four to five 10 months of imports, will run into balance 0 of-payment difficulties in the next couple d'4imal}5 Se o o 0 0 0 0 o > 0 0 0 0 0 0 0 0 o 0 0 0 0 o o � O OOOoo>o000o0000000 0 " 0 I O O O O O O O i o O o 04 0 0 o o O O o W o o 0 0 0 0 . 0 o 0 0 � 0 0 0 0 0 0 0 � > o 0 0 0 0 0 0 0 o o O o 0 0 1
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Sources: CLSA; The Economist
!Based on number of regionalareas granted !Owned by Idea
shambles. Applications for licences lan guished in government files. On Septem ber 23rd 2007 the Department of Telecom munications was sitting on 167 of them. (India's regime splits the country into 23 re gions, so each firm typically seeks multiple licences.) The next day the department said any further applications would need to be received by October 1St. Another 408 applications were hurriedly made. What happened next, according to the Supreme Court, "leaves no room for doubt that everything was stage-managed". The deadline was retroactively changed. Those on the shortlist announced on January 1oth 2008 were givenjust hours to respond to the news. Of the 16 firms on that list, 13 mysteriously already had bank drafts ready to pay the nominal upfront fee, which were dated before the public an nouncement had been made, according to India's Comptroller and Auditor General (CAG). It reckoned they were given ad vance notice. It also noted that 13 of the 16 firms made "false and fictitious" state ments about their finances. Safeguards failed. Requests for advice from other arms of the state circulated, but behind this mirage of due process, the De partment of Telecommunications was out of control. To evade scrutiny from its critics inside the government, the department de layed a meeting and announced its deci sion before the rescheduled date. In 2007 Mr Raja, the safari-suited telecoms minis ter, received a cringingly meek letter from the prime minister, Manmohan Singh, ex pressing concern. Within hours he bashed out a dismissive reply and carried on re gardless. Of the 122 licences granted, 85 went to six new entrants, including several property firms, two of which promptly made fortunes by selling stakes in the li cences to foreigners. CA G found that a year later none of the six had met its obligation to roll out a network. For the telecoms industry the judgment creates chaos. The cancelled spectrum must be returned within four months, and then auctioned off. After a bout of mergers it is now in the hands of eight firms and af fects 67m customers (7% of India's total) and 30% of 2G spectrum capacity, accord ing to Deepti Chaturvedi of CLSA, a broker. Six of those firms could fail without the suspect licences (see table). One executive reckons the total capital invested by those half-dozen in acquiring customers and kit might amount to $10 billion. Their legal position appears weak: a buyer of illegitimately acquired goods has no one to blame but himself. Worryingly, though, the Indian government is making soothing noises to these firms, as if the way to improve India's investment climate is to rescue foolish investors. If principle wins out, the best these firms can expect is to be allowed to sell ��
The Economist February 11th 2012
68 Business
� their customers and kit to the remaining operators and be refunded the modest fees they paid to the government; or, if they are still keen and not incriminated by other cases, to be allowed to bid in fresh spec trum auctions. The court has demanded those auctions take place as soon as possi ble. To be credible they should be open to all operators, and the highest bidders should win, subject to antitrust limits. This may benefit the big fish. But even after the exit of smaller fry there would still be six or seven big firms competing-plenty by global standards. India has proved it can hold clean auctions: a 3G one in 2010 was widely praised. By insisting that an auction is the only fair way to allocate spectrum, the Supreme Court has cast into question other licences granted before 2009 by different means, in cluding those of Reliance Communica tions and the Tata group, two giant firms. And there are grave doubts about the tele coms bureaucracy. "There is no reason to believe much has changed," says one exec utive. "They have completely lost the plot," says another. Once a freewheeling industry, mobile is fast maturing, with sedate growth and high levels of debt, partly as a result of those 3G auctions in 2010. All operators bar one, Bharti Airtel, make weak returns on capital in India. Yet for bureaucrats, mobile is still something to be controlled. The De partment of Telecommunications and TRAI, the regulator, want to lean on opera tors to buy more of their kit from local manufacturers. They are also talking about officials setting tariffs. Reports of the death of the licence Raj were greatly exaggerated,
I I
it seems. On February 3rd the prime minister, who is widely held to be clean, said the country had moved "substantially for ward" in dealing with corruption, but that there was still "a long way" to go. He hopes to pass an anti-corruption bill-though this has so far been blocked by bickering in par liament. Some Indians think that all this is a healthy sign of a free and noisy democra cy at last getting to grips with a problem. Some protest that the scale of graft has been exaggerated. Yet after the 2G scandal that is surely a complacent view. It has taken the courts, not the political system, to act. Industry seems to be gripped by a culture of denial. Executives make pious statements in pub lic and sling mud in private. There is anec-
dotal evidence that corruption is rife in most industries that interact with the gov ernment: those that require licences, access to natural resources or changes in the law. One government mandarin talks of a vast backlog of vital projects, such as mines and industrial plants, some of them half-finished, that break current rules and are possibly bent. Officials don't know whether to turn a blind eye or blow their whistles and cause mayhem. The suspi cion of widespread graft is corrosive for business. Is it safe to take over another firm or is it a legal time bomb? Do investors dare give cash to an indebted company with a ripe reputation but a promising project? Can a foreign firm ever be sure that its Indi an partner is clean? These are uncomfort able questions. •
Corporate governance
Not King Coal JAKARTA AND LONDON
The Rothschild-Bakrie marriage hits the rocks
I
N AN early episode of "Sergeant Bilko", a 1950s TV comedy, the eponymous hero rents an empty store. His fellow soldiers, convinced that the army's "smartest operator" sees a business opportunity, beg to be made partners. Not all do well out of the deal. Nat Rothschild also has a name that inspires confidence among investors. The scion of a European banking dynasty (some of whose members own stakes in The Economist), Mr Rothschild raised £707m ($1.08 billion) to create his own empty store, a London-listed "cash shell" named Vallar. He then used the cash to buy stakes in two coal-mining ventures in Indonesia associated with the Bakrie group, a family-owned conglomerate. Bumi PLC, the British-based company that emerged with Mr Rothschild as co-chairman, appealed to cautious punt ers who might otherwise have shied away from risky commodity bets in faraway places. But the marriage of Brit ish finance and Indonesian business is on the rocks, and investors are sore. On February 3rd the Bakrie family and Samin Tan, an Indonesian busi nessman, called on Bumi's shareholders to unseat Mr Rothschild from the board. The move came after months of board room strife, which began when the Bak ries sold half of their stake to Mr Tan, to pay off debts. It worsened last November when Mr Rothschild called for "a radical 'cleaning up'" of the "balance-sheet and corporate culture" of Bumi's Indonesian affiliate. Bumi's share price is down by two-fifths from a year ago. Few in Indonesia were surprised by the clash. The Bakries have commercial
and political clout, and are used to getting their own way. (Aburizal Bakrie, the head of the family, will probably run for presi dent in 2014 as the nominee of the late president Suharto's old party.) In Britain the spat has added to investors' concerns that a "premium" London listing is too easily awarded to companies that have controlling shareholders, as well as risky operations, in unstable places. Mining and oil companies account for some 30% of the value of London's stock market, about twice the global weighting. Some of them are established firms, such as BHP Billiton, BP and Shell, but they also include a newer breed of mining stocks, such as ENRC and Bumi, which are ostensibly British companies but the balance of power among shareholders lies elsewhere. The clashes between Mr Rothschild and his Indonesian partners show that his model of bolting British governance standards onto a foreign firm is "defective", says a fund manager in London. Fund managers who don't like the way a company is managed can in princi ple steer clear of it. But a company that qualifies for a London listing is also a candidate for inclusion in stockmarket indices, such as the FTSE 100, an industry benchmark. Low-cost funds that track such indices are obliged to buy these stocks whatever their merits. And "ac tive" fund managers can ill afford to steer clear of too many mining stocks or their portfolios might trail the overall market. Set-ups like Bumi's seem designed to tap into this captive pool of capital. Ernest Bilka would admire the ingenuity. But investors deserve better.
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The Economist
70 Business
Schumpeter
February 1 1th 2012
Of companies and closets
Being gay-friendly is cheap and good for business
I
N "LITTLE BRITAIN", a television comedy, Daffyd Thomas, who insists he is "the only gay in the village", tries to expose the ho mophobia of his fellow Welsh villagers by wearing outrageous clothes (bright red rubber shorts are a favourite) and picketing the local library. But he is constantly frustrated: the inhabitants of Llanddewi Brefi are all either tolerant or gay themselves. The corporate world is not yet as gay-friendly as Llanddewi Brefi. But attitudes have changed dramatically. Some 86% of For tune soo firms now ban discrimination on the basis of sexual ori entation, up from 61% in 2002. Around so% also ban discrimina tion against transsexuals, compared with 3% in 2002. The Human Rights Campaign (HRC), an American pressure group, measures corporate policies towards sexual minorities in its annual "equal ity index". Of the 636 companies that responded to its survey this year, 64% offer the same medical benefits for same-sex partners as for heterosexual spouses. Some 30% scored a fabulous 100% on the group's index. Progress has taken place in a wide range of industries. The 100% club predictably contains plenty of talent-driven outfits such as banks and consultancies (including Mitt Romney's old employer, Bain & Company). But it also includes industrial giants such as Alcoa, Dow Chemical, Ford, Owens Corning and Ray theon. Lord Browne, the boss of BP who resigned after his sex life made headlines in 2007, said he always remained in the closet be cause "it was obvious to me that it was simply unacceptable to be gay in business, and most definitely the oil business." Today Chevron, one of BP's toughest competitors, has a10o% rating. Companies are competing with each other to produce the most imaginative gay-friendly policies. American Express has an internal "pride network" with more than 1,000 members. Cisco gives gay workers a bonus to make up for an anomaly in the American tax code. (If you are married, the cost of various insur ance premiums is deducted from your pre-tax income, but if you are merely a partner it is deducted from your post-tax income.) Some companies vocally support gay marriage. In the past fort night Lloyd Blankfein, the boss of Goldman Sachs, has accepted an invitation from HRC to become its first corporate spokesman for gay nuptials, and seven big companies, including Microsoft and Nike, have written to Congress to support the idea.
What caused this corporate revolution? Pressure groups such as HRC and Britain's Stonewall can take some of the credit. But mostly it happened because changing attitudes in society at large have reduced the cost of being gay-friendly, and raised the re wards. A generation ago in the West, creating a gay-friendly work place might have upset heterosexual staff. Now it probably won't. But failing to treat gays equally is very likely to drive them to seek employment elsewhere. Since they are perhaps 5-10% of the glo bal talent pool, bigotry makes a firm less competitive. Being fair to gays is arguably simpler than being fair to wom en. Women really do differ from men in the amount of time, on average, that they take off to raise children. And there is no obvi ous answer to questions such as: "how much paid maternity leave should a small firm offer?" From an employer's perspective, gays do not differ from straights in any way that matters. Sylvia Ann Hewlett and Karen Sumberg of the Center for Work-Life Policy, a think-tank, have tried to quantify the benefits of inclusiveness to companies. They discovered that 47% of gays who have come out of the closet say that they are "very trusting" of their employers, compared with 21% who are still in the closet. Some 52% of closeted gays said that they felt stalled in their ca reers, compared with 36% of non-closeted gays. This makes sense. It is hard to give your best if you have to con ceal an important part of who you are. Straight workers routinely plaster their offices with pictures of their families, which not only creates a pleasant working environment but also broadcasts the message: "I have kids. Please don't sack me." Closeted gays find it harder to socialise with colleagues and build informal networks. They waste energy inventing excuses. "You have to watch every thing you say and how you say it," says one closeted executive. "You have to be excellent at the pronoun game." Being gay-friendly can attract gay customers, too. Witeck Combs Communications, a consultancy, estimates that gay Americans spend $835 billion a year. In 2001 Merrill Lynch created a private-banking team that focused exclusively on the gay market, courting gay non-profits and providing seminars on financial planning for domestic partners. Within five years the group had brought in more than $1 billion of business. Out of the closet and into a cubicle
The revolution is far from over. Nearly half of the respondents to the Center for Work-Life Policy's survey are still in the closet. And even the most enlightened companies cannot make up for intol erance in the rest of the world. It is hard to reach the top of a big company without serving a stint abroad. But homosexuality is still illegal in 76 countries-including such vibrant business hubs as Dubai and Singapore-and is punishable by death in Saudi Arabia, Iran and parts of Nigeria. Still, the gay revolution in the workplace is remarkable. In most places, companies are more liberal than governments. In America, for example, until last year soldiers could be kicked out of the army for being gay, and 29 states still allow discrimination on the basis of sexual preference. In the coming years, the revolu tion is likely to gather pace. Younger workers are far more relaxed about homosexuality than their parents were. Indeed, many young heterosexuals would feel uncomfortable working for a firm that failed to treat gays decently. Companies vying to recruit them will bear this in mind. • Economist.comfblogsfschumpeter
71 Also in this section 73 Buttonwood: The lump of labour 74 Short-selling: the naked truth •
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