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3

7 The world this week Leaders 1 1 Emerging-market multinationals The rise of state capitalism

38 Justice in Turkey N ot fo r s o m e

38 Justice in Spain Investigati n g the i nvestigator

40 Charlemagne G e r m a ny's d o m i n a nce

12 The euro crisis returns Salve Italia

13 Taxing the rich in America The politics of p lutocracy

13 Nuclear Iran N ot q uite too late

14 Corporate anonymity On the cover The spread of state capitalism in the emerging world will cause increasing problems: leader, page 11. The West's economic woes have coindded with the rise of a new breed of company i n China and other rising powers: see our spedal report after page 48. American fears of Asian innovators, page 64 The Economist online Dai ly a n a lysis and opi nion from

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Li ght a n d wrong

Letters 16 On the City, productivity, sin taxes, Kolkata, euphemisms

Mi ne, a l l m i n e

Nation of s h o p critics

28 John Lewis capitalism The feeli n g is m utual

28 Extradition The ti es that bi n d

29 Schools in Wales

43 Online piracy Sto p pi n g S O PA

44 Mexico's drug war N ot so fast

44 Red-light cameras You're o n film

45 Bankrupt schools 45 Executive clemency

M erkel wants to save it, s h e m ust h e lp Italy's Mario M o nti: leader, page 12. A decent p r i m e m i nister has restored Italy's good n a m e , page 3 5 . France's downgra de, page 37. Germany now stands a lone. But its power may wea ken the e u ro zo n e: C h a rle m a g n e , page 40. A m e rica is recove ri n g from the debt bust faster t h a n Europe: Free exc h a n g e, page 75

The pardoner's tale

46 Lexington

The Americas 47 Mexico's legislature The siesta congress

48 Guatemala's president Quick m a rch

48 Oil i n Canada What goes a ro u n d

Down in the va lleys

30 Labour's fiscal rethink Plan B

30 The Leveson inquiry The p ress responds

The high street B rito ns do n't Spedal report: State capitalism The visible hand After page 48

31 Exports and the economy Made in B ritain The bea uty of t h e bori n g Alex Salmond, Little E n g la n d e r

to toke port in "a severe contestbetween intelligence, which pressesforward, and an unworthy, timid ignorance obstructing ourprogress. "

Europe 35 Italy's prime minister

Editorial offices in London and also:

36 The cruise-ship tragedy

Atlanta, Beijing, Berlin, Br ussels, Cairo, Chicago, Hong Kong, Johannesburg, Los Angeles, Mexico City, Moscow, New Delhi, New York, Pans, San Francisco, Sao Paulo, Singapore, Tokyo, Wa s hington DC

Soak or swim

The euro If Germa ny's Ang ela

South Caroli n a's p ri m a ry

Britain 27 Town-centre retailing

32 Bagehot

First published in September1843

W h o are t h e 1 %?

42 Opti mal tax rates

Studyi n g o n a s h oestri n g

Briefing 23 Booming Mongolia

31 David Hockney

Volume 402 Number 8768

United States 41 Income inequality

A good p rofessor i n Rome Wrecked

36 Russian protests Puti n 's people

37 French politics Down a n otch

wa nt it to decay, but n eith e r d o t h e y li ke t o shop i n it. Those desires a re h a rd to reconcile, page 27 . The J o h n Lewis way, page 28

Middle East and Africa 49 Sanctions and Iran B e leagu ered but u n bowed

50 Persian isolation A sad o ld city

5 1 Shia Islam A sense of lo neli n ess

51 Israel and Palestine Tod d li n g to talks

52 Israel and Azerbaijan Odd but useful fri e n d s

53 Education i n South Africa Sti ll dysfu n cti o n a l

53 Protests in Nigeria Let them have fuel

Mongolia The country that is li kely to grow faster than a ny other i n t h e n ext deca de, a n d h o w i t i s changing, for better or worse, pages 23-25

37 Riots in Romania Anger management

��

Contents continues overleaf

4 Contents

The Economist Ja n ua ry

Asia 54 Taiwan's elections It's alrig ht, Ma

55 Satire in South Korea La m p o o n i n g the pols

55 Urbanising China A nati o n of city s lic kers

56 Parental abduction in Japan C h i ld-sn atchers

Israel Even i n the start-up nati o n , it is h a rd to tu rn young companies into adults, page 61. The n eed for m o re Israelis w h o work, p a g e 6 2 . Ta lks with t h e

57 Reform in Myanmar Follow my lead

58 Banyan Pakista n 's ga m e of chicken

Finance and economics 71 American banks Losi n g a ltitude

7 2 Buttonwood Corpo rate i r rati o n a lity

73 Greece's debt-holders Volu nteers wa nted

73 Austrian banks Vi e n n a 2 . 0

74 China's economy Two twists in the d ragon's tai l

74 Trade statistics

International 59 Corporate anonymity

A progress report o n d e leveragi n g

U lti m ate p rivilege

60 Demography Cutti n g carbon emissions

60 Dissent about prohibition In na reo veritas

Science and technology 78 Exercise and Longevity Worth a ll the sweat

79 Polio A Rotary e n gi ne

Business 6 1 Israeli technology What n ext for the start-u p nati o n ?

Indian energy Power i s essenti a l for t h e cou ntry's lo n g-term growth, a n d that m e a n s coal. B ut electricity i s u n li ke ly t o flow fast e n o u g h , pages 68-70

62 Demography and business in Israel The promised la n d n eeds people

64 Confidence in America G lass h a lf em pty

64 Asian technology D o n 't fear it

65 Flat-panel screens Cracki n g u p

65 Aircraft Leasing If it flies, rent it

66 Opening a business in Brazil Why m a ke it si m p le?

66 Tequila in Mexico Storm in a s h ot glass

Pity the boss Chief executives a re m u ch less powerful t h a n page 67

79 Forensic science Ig n o r a n ce i s b liss

80 Solar energy

The s h ackled boss

Briefing 68 Energy in India The future is black

of Ra uf D e n ktas h, leader of the Turkish -Cypriots, page 94

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7

Politics

lion is missing from its ac­ counts. Officials admitted a discrepancy, but said this was due to poor record-keeping, not corruption.

A reward for good behaviour

In an effort to press Iran harder to make it halt its nuclear programme, the European Union agreed in principle to block imports of Iranian oil. Iran urged Arab countries not to increase their production in response to the sanctions. America is also seeking the support for the measure from other big importers of Iranian oil, notably China. Syria's president, Bashar Assad, announced an amnesty for all crimes committed since the beginning of the ten­ month uprising against him. It would apply to protesters and army deserters who turn themselves in by the end of January. Mr Assad has offered amnesties before but almost no one responded. Russia said it would veto any moves in the UN Security Council to impose sanctions on Syria or authorise the use of force.

Strikes brought Nigeria to a halt after the government removed the country's fuel­ subsidy regime, causing petrol prices to soar. Under pressure from trade unions, President Goodluck }onathan agreed to lower prices again but said the subsidies would eventually be phased out entirely. At least 51 people, mostly women and children, were killed in clashes in South Sud an's ]onglei state, which lies near the border with the north. The violence is part of a deadly cycle of cattle raids and revenge attacks between some of the country's ethnic groups. In response to concerns raised by the IMF, the Angolan gov­ ernment denied that $32 bil-

America restored full diplomatic relations with Myanmar after the military­ controlled civilian govern­ ment released scores of politi­ cal prisoners and announced a ceasefire with a rebel group. Meanwhile, Aung San Suu Kyi, leader of the country's democ­ racy movement, declared that she would stand for a by­ election seat in parliament.

pagal-Arroyo, who was arrest­ ed late last year on charges of corruption and electoral fraud.

Punching through Otto Perez Molina, a former general, was sworn in as president of Guatemala. He has promised an "iron fist" against crime in the country, which is one of the world's most violent. Venezuela announced that it would withdraw from the International Centre for Settle­ ment of Investment Disputes, a tribunal run by the World Bank that serves as the arbitra­ tor for foreign-investment contracts. In a recent judgment in another tribunal the coun­ try was ordered to hand over $908m to Exxon Mobil.

Ruffled feathers

Ma Ying-j eou was re-elected as Taiwan's president, defeating Tsai Ing-wen, the country's first female presidential candi­ date, in a closely fought elec­ tion. Mr Ma has worked to improve Taiwan's relationship with China and used his first term to strengthen the coun­ tries' economic ties. His party, the Kuomintang, also retained its control of the legislature. Pakistan's Supreme Court summoned Yousaf Raza Gi­ lani, the prime minister, to appear on charges of con­ tempt. Mr Gilani is accused of ignoring instructions to open a corruption case against the president, Asif Ali Zardari. Mr Gil ani insists the president has immunity. His government is determined to hang on, although the army's patience is wearing thin.

An impeachment trial began in the Philippines of the Su­ preme Court chief justice, Renato Corona. The televised trial is part of President Be­ nigno Aquino's campaign against corruption. Mr Corona was appointed by Mr Aquino's predecessor, Gloria Maca-

The European Commission said it would begin legal pro­ ceedings against the Hungar­ ian government over a central­ bank law, the forced early retirement of judges and the treatment of its data-protec­ tion ombudsman. Viktor Orban, Hungary's prime min­ ister, delivered a conciliatory speech to the European Parlia­ ment and pledged to work with the commission.

A spat between Romania's president and a popular offi­ cial in the health ministry triggered protests across the country. Amid violent scenes in Bucharest, the capital, the government backtracked on a controversial health-care reform but failed to stamp out the demonstrations. A Turkish court convicted and jailed three men involved in the 2007 murder of Hrant Dink, an outspoken Turkish­ Armenian j ournalist. But Mr

Dink's family and others main­ tain that state officials were involved in the killing, and are continuing to press for a full investigation. The British government scrapped an inquiry by a former judge into the alleged participation of MIS and MI6 in the rendition and torture of terror suspects, after new claims emerged that intelli­ gence officers had helped to send two Libyans back to the Qaddafi regime in 2004. The government promised to hold a new inquiry once the police complete their inve stigation into the Libyans' allegations.

An XL headache The Obama administration rejected the proposed route for the controversial Keystone XL pipeline that would stretch from Canada to the Gulf coast, but said the companies behind the project could reapply. The White House wants to delay a final decision on the issue, which has pitted environ­ mentalists against those who say it will create thousands of jobs, until after November's election. Wikipedia and other websites shut down their operations for 24 hours to protest against an online piracy bill in Congress that they argue will curtail internet freedoms and give big media companies the power to have sites closed down that infringe copyright. ]on Huntsman withdrew from the race to be the Republicans' presidential candidate. A moderate, Mr Huntsman had failed to attract much support from Repub­ lican primary voters. In his withdrawal speech he called for an end to party bickering and endorsed Mitt Romney, whom he described last October as a "perfectly lubri­ cated weather vane" on important issues. Sarah Palin did Mr Romney's longer-term presidential ambi­ tions no harm by endorsing Newt Gingrich in the South Carolina primary, which is being held on January 21st.

��

The Economist Ja n u a ry

8 The world this week

Business Standard & Poor's downgrad­ ed its credit rating for the Euro­ pean Financial Stability Facili­ ty, the euro zone's bail-out fund, cutting it by one notch to AA+. The move was triggered by s&P's decision a few days earlier to strip France and Austria of their AAA status and further reduce the ratings of seven other countries in the currency block. s&P had given ample warning that the euro zone would receive a mass downgrade, but politicians reacted angrily, saying that it undermined their efforts to resolve the crisis. As a result of s&P's down­ grade, Portugal j oined Greece as the second euro-zone coun­ try to be accorded "junk" status by all rating agencies. The outlook brightened some­ what for UniCredit's rights issue when it emerged that a fund in Abu Dhabi was in­ creasing its stake in the Italian bank to 6.5%. UniCredit's share offering is a crucial test of the markets' willingness to invest in the euro zone's banks as they work to meet higher capital requirements by June.

Help is on the way The IMF discussed ways to raise more funds from its mem­ ber countries in response to the euro crisis. The fund is seeking an extra $sao billion on a voluntary basis to help meet the anticipated demand for bail-out loans. The World Bank cited the threat from the rich world's debt woes and consequential slowdown in capital flows to emerging markets in its latest assessment of the global economy. The bank now thinks GDP in the developed world will grow by 1-4% this year (down from a previous estimate of 2.7%) and by 5-4% in developing countries (down from 6.2%). Federal authorities in America arrested seven people in New York, California and Mas­ sachusetts in connection with

an alleged insider-trading scheme at several hedge funds. The scheme is said to have included trades in Dell.

Top of the heap

I

American banks Market capitalisation, $bn January

18th 2012

Wells Fargo J PMorgan Chase

Citigroup Bank of America US Bancorp Goldman Sachs

Or4080 120 160

Source: Bloomberg

The worsening investment environment at the end of 2011 took its toll on the fourth­ quarter earnings of America's banks .JPMorgan Chase and Citigroup did worse than exp ected, posting declines in net profit of 23% and 11% re­ spectively, compared with the same period in 2010. Goldman Sachs said its net profit was down by 58%. But Wells Fargo, which has a smaller invest­ ment-banking business than its rivals, saw net income jump by 21%, to $4.1 billion. China's economy grew by 9.2% last year, which was somewhat slower than the 10-4% it chalked up in 2010. The news came with the usual health warnings about the

reliability of official Chinese growth statistics. Meanwhile, China's stock of foreign­ currency reserves fell at the end of the year for the first time since 2003, albeit by only $40 billion, to stand at a new total of $3.18 trillion. The International Energy Agency reported that the demand for oil fell in the final quarter of 2011 for the first time since the depths of the fi­ nancial crisis. The agency also noted the potential risk to oil supplies if new tensions with Iran lead to disruption to trade through the Strait of Hormuz. Royal Bank of Scotland sold Aviation Capital, its aircraft­ leasing business, to Japan's Sumitomo Mitsui Financial Group for $7.3 billion. The sale will help RBS to reduce its non-core assets as it works to rectify its balance-sheet. Avia­ tion Capital attracted several bids. With a fleet soon to reach 300, it is one of the world's biggest lessors of aircraft. Airbus said that 2011 had been its most successful year yet, as it delivered 534 aircraft to airlines and booked 1,419 net orders (new minus cancelled). That compares with Boeing's delivery of 477 planes and 8os net orders, making it the fourth

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2 1st 2012

year in a row in which the European aerospace company has bested its American rival on both measures. Boeing, however, took more orders for bigger jets, thereby closing the gap in terms of revenue. Jerry Yang resigned from the board at Yahoo!, which he helped to found in 1995 and led as chief executive for two years until]anuary 2009. Once a shining star in the internet firmament, the Taiwanese­ born Mr Yang had become a target of investor criticism at the troubled company. In 2008 his opposition to a $48 billion takeover bid from Microsoft brought him a heap of oppro­ brium; Yahoo! is now worth $20 billion.

Turn around? Eastman Kodak filed for bankruptcy protection; the once-dominant photographic company has been struggling in the digital market. Kodak produced the first camera for consumers in the 188os and in 1976 held 90% of the market for film. It listed $6.8 billion in liabilities in its bankruptcy, from which it hopes to emerge next year after selling off some of its patents.

Other economic data and news can be found on Pages 9 2- 93

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The rise of state capitalism The spread of a new sort of business in the emerging world will cause increasing problems

0

VER the past 15 years striking corporate headquarters have transformed the great cities of the emerging world. China Central Television's building resembles a giant alien marching across Beijing's skyline; the 88-storey Petronas Towers, home to Malaysia's oil company, soar above Kuala Lumpur; the gleaming office of VTB, a banking powerhouse, sits at the heart of Moscow's new financial district. These are all monuments to the rise of a new kind of hybrid corporation, backed by the state but behaving like a private-sector multinational. State-directed capitalism is not a new idea: witness the East India Company. But as our special report this week points out, it has undergone a dramatic revival. In the 1990s most state­ owned companies were little more than government depart­ ments in emerging markets; the assumption was that, as the economy matured, the government would close or privatise them. Yet they show no signs of relinquishing the command­ ing heights, whether in major industries (the world's ten big­ gest oil-and-gas firms, measured by reserves, are all state­ owned) or major markets (state-backed companies account for 80% of the value of China's stockmarket and 62% of Rus­ sia's). And they are on the offensive. Look at almost any new industry and a giant is emerging: China Mobile, for example, has 6oom customers. State-backed firms accounted for a third of the emerging world's foreign direct investment in 2003-10. With the West in a funk and emerging markets flourishing, the Chinese no longer see state-directed firms as a way-station on the road to liberal capitalism; rather, they see it as a sustain­ able model. They think they have redesigned capitalism to make it work better, and a growing number of emerging-world leaders agree with them. The Brazilian government, which embraced privatisation in the 1990s, is now interfering with the likes of Vale and Petrobras, and compelling smaller compa­ nies to merge to form national champions. South Africa is also flirting with the model. This development raises two questions. How successful is the model? And what are its consequences-both in, and be­ yond, emerging markets? The law of diminishing returns

State capitalism's supporters argue that it can provide stability as well as growth. Russia's wild privatisation under Boris Yelt­ sin in the 1990s alarmed many emerging countries and encour­ aged the view that governments can mitigate the strains that capitalism and globalisation cause by providing not just the hard infrastructure of roads and bridges but also the soft infra­ structure of flagship corporations. So Lee Kuan Yew's government in Singapore, an early expo­ nent of this idea, let in foreign firms and embraced Western management ideas, but also owned chunks of companies. The leading practitioner is now China. The tight connection be­ tween its government and business will no doubt be on dis­ play when the global elite gathers in the Swiss resort of Davos

next week. Among Westerners there, government delegates often take the opposite view to those from the private sector: Chinese delegates from both sides tend to have the same point of view, and even the same patriotic talking-points. The new model bears little resemblance to the disastrous spate of nationalisations in Britain and elsewhere half a cen­ tury ago. China's infrastructure companies win contracts the world over. The best national champions are outward-look­ ing, acquiring skills by listing on foreign exchanges and taking over foreign companies. And governments are selective in their corporate holdings. Overall, the Chinese state has loos­ ened its grip on the economy: its bureaucrats concentrate on industries where they can make a difference. Let a thousand mobiles bloom

Yet a close look at the model shows its weaknesses. When the government favours one lot of companies, the others suffer. In 2009 China Mobile and another state giant, China National Petroleum Corporation, made profits of $33 billion-more than China's 500 most profitable private companies combined. State giants soak up capital and talent that might have been used better by private companies. Studies show that state companies use capital less efficiently than private ones, and grow more slowly. In many countries the coddled state giants are pouring money into fancy towers at a time when entrepre­ neurs are struggling to raise capital. Those costs are likely to rise. State companies are good at copying others, partly because they can use the government's clout to get hold of their technology; but as they have to pro­ duce ideas of their own they will become less competitive. State-owned companies make a few big bets rather than lots of small ones; the world's great centres of innovation are usually networks of small start-ups. Nor does the model guarantee stability. State capitalism works well only when directed by a competent state. Many Asian countries have a strong mandarin culture; South Africa and Brazil do not. Coal India is hardly an advertisement for ef­ ficiency (see pages 68-70). And everywhere state capitalism fa­ vours well-connected insiders over innovative outsiders. In China highly educated princelings have taken the spoils. In Russia a clique of "bureaugarchs", often former KGB officials, dominate both the Kremlin and business. Thus the model pro­ duces cronyism, inequality and eventually discontent-as the Mubaraks' brand of state capitalism did in Egypt. Rising powers have always used the state to kick-start growth: think of Japan and South Korea in the 1950s or Ger­ many in the 1870s or even the United States after the war of in­ dependence. But these countries have, over time, invariably found that the system has limits. The Chinese of all people should understand that the best way to learn from history is to look at its long sweep. But it may take many years for the model's weaknesses to become obvious; and, in the meantime, it is likely to cause all sorts of problems. Investors in emerging markets, for instance, need to watch out. Some may be taking a punt on govern­ ments as much as companies. State-capitalist governments ��

The Economist Ja n ua ry

12 Leaders �can be capricious, with scant regard for minority share­ holders. Others may find their subsidiaries or joint ventures in emerging markets pitted against state-backed favourites. Another concern is the impact of the model on the global trading system-which, at a time when the likely Republican nominee for president wants to declare China a currency ma­ nipulator on his first day of office, is already at risk. Ensuring that trade is fair is harder when some companies enjoy the support, overt or covert, of a national government. Western politicians are beginning to lose patience with state-capitalist

2 1st 2012

powers that rig the system in favour of their own companies. For emerging countries wanting to make their mark on the world, state capitalism has an obvious appeal. It gives them the clout that private-sector companies would take years to build. But its dangers outweigh its advantages. Both for their own sake, and in the interests of world trade, the practitioners of state capitalism need to start unwinding their huge holdings in favoured companies and handing them over to private in­ vestors. If these companies are as good as they boast they are, then they no longer need the crutch of state support. •

The euro crisis returns

Salve Italia If Germany's Angela Merkel wants to save the euro, she must do more for Italy's Mario Monti

S

ADLY, the lull proved but brief. The first two weeks of the year were surprisingly calm for the storm-tossed euro zone. But a gale is blowing again. First a series of downgrades from Standard & Poor's, a leading debt-rating agency, coincided with a stand-off in the "voluntar y" restructuring talks between Greece and its private bondholders. Now there are signs of a continent-wide recession. The euro crisis is back. Indeed, the next few weeks could be decisive for the single currency's future. Several euro-zone governments must sell huge amounts of debt in bond auctions. They are also due to wrap up negotiations over the new "fiscal compact", demand­ ed by Chancellor Angela Merkel of Germany to enforce bud­ get discipline, at a European Union summit at the end of Janu­ ary. And the brinkmanship in Greece's debt talks could yet lead to a disorderly default (see page 73). What happens in Greece could be dramatic and painful, es­ pecially for the Greeks. If their country is forced out of the euro zone after a chaotic default it will cause problems for every­ one. Yet Greece is small and its creditors see a restructuring as inevitable. The crucial country is Italy. Italy is too big for the existing rescue fund to bail out. (Spain is at risk too, but its debt is a lot smaller and the markets are more confident it will be repaid.) Italy is unique in its combina­ tion of size and punishingly high bond yields (currently 612%). It is hard to see the euro surviving were the world's third-big­ gest debtor judged unable to pay its creditors. The immediate consequence of this for Mrs Merkel is that any sort of restructuring of Greece must therefore come with a credible plan to "backstop" Italy (and other weak countries), at least in the short term. Without such backing, the markets will simply move on, perhaps very quickly, from Greece to Italy, and the many banks that have lent to it. A credible firewall from the European Central Bank (and possibly the Internation­ al Monetary Fund) would stop them. But staving off contagion is not enough. Italy also needs lower interest rates on its bonds. Sadly, the country epitomises the economic and political problems in Mrs Merkel's strategy of relying on fiscal austerity to save the euro. In economic terms, Italy's main problem is not public pro­ fligacy. Its debt may be huge, but it is running a primary budget

surplus (ie, before interest payments), its overall budget deficit is much smaller than France's, and its recent budget puts it on course to eliminate that deficit in 2013. Under a new govern­ ment, led by Mario Monti, a former European commissioner, Italy has regained the place at the top European table that Sil­ via Berlusconi lost (see page 35). Mr Monti has not merely pushed through a tough budget, but he is also embarking on a difficult, if overdue, set of liberalising and structural reforms to open up sheltered parts of the economy to competition. Grow-and carry the people with you

It is growth, or rather the lack of it, that is Italy's weakness. Within the euro, it has suffered a big loss of competitiveness as unit labour costs have shot up, largely because productivity has been stagnant or even fallen. And as elsewhere across the euro zone, austerity is not helping. Italy's public sector is trying to deleverage at the same time as the private sector is cutting spending, producing a nasty recession. The drive to cut bud­ gets and debt as a proportion of GDP becomes ever harder as the denominator shrinks, especially if the answer from Mrs Merkel is always still more austerity. In contrast, America has largely avoided this trap by deferring its public-sector deleve­ raging into the future (see page 71). Structural reforms are essential, but Italy also needs stron­ ger demand. Mr Monti is not asking the Germans to embark on reflation, because he knows they will say no. But he is urg­ ing them to liberalise their own service industries, which should boost consumption. And he wants to see lower interest rates on Italy's debt, to pacify taxpayers facing bigger bills and special interests that will lose from more competition. This re­ quires more support for bond markets by the European Cen­ tral Bank or by an expanded bail-out fund. If the economic arguments do not persuade Mrs Merkel, then the politics should. Mr Monti runs a "technocratic" gov­ ernment that lacks a single elected politician. For the moment, he has strong support both from Italian voters and from the main political parties (which naturally prefer to see him taking the blame for imposing austerity and structural reforms). But democratic consent for such harsh measures rests on being able to show Italians that they will ultimately benefit. Mr Monti says resentment in Italy of Germany as a "ring­ leader of European intolerance" is already rising. For the euro a populist revolt in debtor countries would be the biggest threat of all. Mrs Merkel should remember that. •

The Economist J a n ua ry

Leaders 13

2 1 st 2 0 1 2

Taxing the rich in America

The politics of plutocracy America's rich should pay more, but there is no need to raise their income-tax rates

1

America's:

percentage share of income earned by top 1% ofearners

N AN ordinary American pres-

I idential election, a candidate

who had earned a fortune in business and then paid an absurdly low tax rate would barely raise eyebrows. Americans have long considered wealth something to admire and pursue, not vilify and redistribute. Alexis de Tocqueville said he knew "of no country . . . where a profounder contempt is expressed for the theor y of the permanent equality of property." But this is no ordinary election. That so much scrutiny has fallen both on how Mitt Romney earned his fortune (in the ruthless world of private equity) and his tax rate (15%, less than what some middle-class families pay) is a sign something has changed. For that, credit a decade in which the median family in America saw its real income fall by 7%, even as the top 1% grabbed a share of national income unseen since the 1920s (see page 41), and a level of unemployment that, though falling, re­ mains troublingly high. Not many Americans like the tactics or fashion choices of Occupy Wall Street, but quite a few share the movement's opinion that the economy is tilted in favour of the wealthy. And so the rich are now a campaign issue. Barack Obama calls for "millionaires and billionaires" to "pay their fair share": introduce a minimum tax rate on millionaires and re­ turn the top income-tax rate to 39.6% from 35%, and the other 98% of Americans would not have to pay more, he claims. Re­ publicans shoot back that raising any taxes would destroy jobs and business confidence. They think you can fill the budget hole by spending cuts alone; many want to cut taxes further. Neither side is talking sense. America's rich should indeed pay more tax; but marginal rates should not go up. History shows that deficit reduction works best when most

2515005 ---1913 30 50 70 90 20 9-"'-'---->.....J'---'-'--'--'-� 0

of the burden falls on spending cuts. That means that middleclass entitlements will have to be reduced, no matter what Mr Obama tells his supporters. But, just as in every other budget squeeze, a portion must come from higher taxes, no matter what the Republicans say. Democrats say only the top 1% need pay more; that's mis­ leading. Others will have to pay too. But more of the increase should be shouldered by the rich who have done so well from recent trends. Technological change and globalisation have sharpened demand for the most skilled workers, in particular superstars, be they athletes or hedge-fund managers, thus sharply increasing inequality. Tax policy has exacerbated this trend instead of mitigating it. George Bush junior slashed top income-tax rates as well as rates on dividends and capital gains, which explains why Warren Buffett and Mr Romney have such low tax rates. Follow the money

However, restoring the top income tax rates, as Mr Obama pro­ poses, is not the best way of extracting extra revenue from the rich. It would raise revenues of about 0.3% of GDP and do nothing to make America's grotesquely complicated tax sys­ tem more efficient. It would be far better to close or limit loop­ holes and deductions, currently worth up to 7% of GDP, which distort behaviour (by, for example, encouraging people to take out big mortgages) and mostly benefit the affluent. Some de­ ductions, including mortgage relief, would have to be phased out in stages; but many could go immediately. In a similar way, equalising the rates on capital, dividends and ordinary income would make it possible to lower America's corporate tax rate, currently one of the rich world's highest. The result would be lower rates, more revenue and a more efficient and progressive tax system. If that's where the debate about wealth ends, it will have been worth it. •

Nuclear Iran

Not quite too late Against a rising tide of warlike rhetoric, negotiation must still be the aim of sanctions

R AN is facing sanctions of un­

I precedented severity. On De­

cember 31st Barack Obama signed into law measures de­ manded by Congress to punish any foreign financial institution transacting business with Iran's central bank, the conduit for most of its oil contracts. On January 23rd the European Union, which buys about a fifth of Iran's exported oil, is set to ban fu­ ture purchases. Under American prompting, Japan and South Korea, which together take a similar amount of Iran's oil, are looking for alternative supplies. These measures follow No-

vember's report by the International Atomic Energy Agency (IAEA), the UN's watchdog, detailing aspects of Iran's nuclear activity that make sense only if the aim is to be able to make nuclear weapons. The sanctions are also meant to show a jumpy Israel that there is an alternative to a military attack. This newspaper has favoured sanctions because an Israeli assault might start a regional conflagration, dragging in Ameri­ ca-and even then might not succeed. But given that a variety of sanctions over the past 30 years has failed to change Iran's behaviour, sceptics, and not just those in Israel, are entitled to ask if sanctions, or indeed anything short of an attack, is really likely to stop Iran getting a bomb now. That is the question posed by Republican candidates in America's presidential ��

The Economist J a n ua ry 2 1st 2012

14 Leaders �campaign, sensing a chance to depict Mr Obama as weak. There is no certain way of getting Iran to drop its quest for nuclear weapons. The latest sanctions will cause it more pain, but in the short run are unlikely to weaken its resolve. China, which is Iran's biggest trading partner and has little truck with sanctions, will probably take up much of the slack created by Europe and by America's Asian allies. Barter deals will get around restrictions on Iran's central bank. And the fragile economies of Europe and America would suffer if Iran's oil ex­ ports disappeared from the world market. Libya's oil may be flowing strongly again and the Saudis, ever eager to do Iran down, may pump a bit more. But a jittery oil market is likely to send prices higher, helping Iran but not oil consumers. Yet the latest sanctions are nevertheless worthwhile. Their impact may be cumulative and psychological rather than sud­ den and material. Iran's rulers may regard any sacrifice for the sake of the nuclear programme as bearable, but ordinary Irani­ ans, even if they patriotically support it, may feel differently and find ways to express their dissatisfaction. Iran's threats to close the Strait of Hormuz and punish Gulf producers who make up the oil shortfall suggest a regime under strain. Moreover time may not be on Iran's side (see page 49).

Though Israel says that the recent movement of centrifuges to a facility in a mountain near Qom suggests that Iran could pro­ duce a device this year, American intelligence apparently reck­ ons that Iran, however close to a breakout capacity, is still sev­ eral years away from having the right sort of missile warheads. Iran has been slowed by the sabotage campaign being waged, presumably by Israel and assorted Western agencies. It has also been rattled by the Arab spring. Don't forget the carrots

Iran's divided regime has yet to reach the point of asking itself whether sticking to its nuclear guns is really worth the pain. It may never do so. Yet the West should persist in reminding it of the gains it would enjoy if it were to eschew deceit and show flexibility, say by letting spent fuel from reactors be taken to neutral third countries. A "grand bargain", seemingly forgot­ ten, is still worth tabling. In exchange for Iran abjuring nuclear weapons, the West would stop seeking regime change. An end to Iran's theocracy is desirable, but the West is unlikely to get a nuclear deal unless it offers carrots as well as sticks. A bargain will be hard for Mr Obama to sell to voters; but he should ask the Republicans if they really want to start a war. •

Corporate anonymity

Light and wrong Incorporation with limited liability is a privilege.lt should not include anonymity

T IMITED liability-a commer­ L cial venture that protects its shareholders from personal bankruptcy-is one of the great­ est wealth-creating inventions of all time. The law allows com­ panies to borrow money, to take risks and to make contracts as if they were people, but without the human beings who own it going bust if things go wrong, as they would in an unlimited partnership. Limited liability allowed Elizabethan adventur­ ers to finance voyages to spice islands; it allows Silicon Valley technologists now to make similarly risky bets. But limited liability is a concession-something granted by society because it has a clear purpose. It is unclear why in parts of the world anonymity became part of the deal. Efforts to withdraw that unjustified perk deserve to succeed. In dozens of jurisdictions, from the British Virgin Islands to Delaware, it is possible to register a company while hiding or disguising the ultimate beneficial owner. This is of great use to wrongdoers, and a huge headache for those who pursue them (see page 59). Anonymously owned companies can buy prop­ erty, make deals (and renege on them), launch intimidating lawsuits, manipulate tenders-and disappear when the going gets tough. Those who seek redress run into baffling bureauc­ racy and a legal morass. Seeking real names and addresses means dealing with lawyers and accountants who see it as their job to shield their clients from nosy outsiders. Attempts to change this have bogged down. The campaign­ ers for reform are hardly anti-corporate zealots: they include the World Bank, the OECD (a rich-country think-tank), and an American senator, Carl Levin, who with the support of the ad-

ministration has introduced a bill to rein in the antics of states like Delaware (and a bunch of others including Wyoming and Nevada). But progress is slow, with reformers stuck in an argu­ ment about who should pay the costs of clarity. If you strip out the obvious self -interests of the jurisdic­ tions that make money from hiding people's identity, the main excuse offered is privacy. Hiding your identity can have honest commercial reasons: if everyone knows that Exxon Mobil, BP or another oil major is bidding for a patch of Texas, the price will go up. In some countries and industries revealing owner­ ship is dangerous. Besides, many libertarians would add, priv­ ate shareholders have the right to be just that. Owning up

Except that the rest of us are giving a limited company's own­ ers a perk. It does not seem unreasonable to ask who are the main recipients of this benefit (with, say, stakes above s%). Le­ gitimate concerns for owners' safety, such as biotech firms hunted by animal-rights activists, are rare. In many more cases, such as Caribbean holding companies controlled by well-connected Russians, greater transparency is on the side of democracy and freedom. If the owners of an enterprise really want to preserve their anonymity, they can still opt for an un­ limited option-but that will be their risk. Reform ought to be simple. Anyone registering a limited company should have to declare the names of the real people who ultimately own it, wherever they are, and report any changes. Lying about this should be a crime. Some dodgy places will tr y to hold out. But anti-money-laundering rules show international co-operation can work. You can no longer open an account at a respectable bank merely with a suitcase of cash. Let the same apply to starting a limited company. •

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Balancing the ledger S I R - Your leader on how to "Save the City" (January 7th) as the world's premier centre for global finance mentioned the potential for damage from political attacks, and you drove home your argument by pointing out that "California doesn't talk down Silicon Valley". Maybe so, but then Go ogle, Face book and Twitter have not plunged the world into the biggest recession since the Depression, demanded taxpayer bail-outs and then used the money to pay executives exorbitant bonuses. The St Paul's Institute shows that now even b ankers themselves think they are paid too much. The City's size crowds out other industries and draws talent into investment banking. We are far too dependent on the City, and the financialisation of the economy has brought us inequality and fragility. It is financiers who remind us so persuasively that we must diversify our portfolios. Doing so could save Britain. RAVIN T H A M B A PILLAI

for Occupy Lo n d o n ( Eco n o mics Worki n g G ro u p ) St Paul's C h u rchyard London

The real impetus that spurred London to international financial supremacy was the introduction of an interest equalisation tax in America in 1963 alongside the long-standing Regulation Q, which limited interest rates paid on American onshore deposits. Furthermore, the Soviet Union was unwilling to keep its dollar deposits in the United States, which had a long history of freezing the bank accounts of unfriendly countries in times of international crisis. Thus American regulatory and market-restrictive measures drove us deposits offshore. The first port of call was London. Once London had built up an international expertise in dollar bond issuance, distribution and underwriting, it became easy to transfer these skills to other currencies. The long history of unintended consequences SIR -

should warn regulators against trying to fix prices or rates in markets that generally function efficiently. M I C H A E L STERN

Di rector Investment Education

PLC

Manchester

After years of handwringing The Economist seems finally to have reached the panic stage in recognising the multitude of threats levelled against the City of London. Was it the Epiphany, or is this another example of Lord D'Abernon's observation that the English mind works best when it is almost too late? SIR -

Flexible hours, cross-training in a variety of skills and diversity in daily assignments make workers happier and more productive. All of this benefits employees and adds to, rather than detracts from, job satisfaction. Those who believe workers are being put upon need to visit some factory floors to see what is really being done out there. ALEXA N D E R BLANTON

Senior a n a lyst Clear H a rb o r Asset M a nagement New York

The smoking gun

FRED E LLIOTI

S I R - Your article on sin taxes in Britain ("The high cost of virtue", December 31st) took at face value claims by the Tobacco Manufacturers' Association that cigarette smuggling in Britain peaked in 2000 as a result of high taxes and a weak euro. In fact, the affordability of tobacco has not changed greatly in the past ten years, while cigarette smuggling has halved. Tobacco smuggling is weakly affected by price. Evidence shows that smuggling has decreased through better law enforcement and by curbing the tobacco industry's own activities. Questionable claims about smuggling are a standard tobacco-industry tactic to resist effective policies to cut smoking, a tactic we expect it will employ when the government consults people on the plain packaging of tobacco later this year.

Milford, Massachusetts

J EA N KI N G

ATILLA ILKSON

Naples, Florida

Schum peter missed the point about the "demonology" of finance (January 7th). The money is ours; it belongs to the taxpayer. The banking industry has been socialised by the Republicans, of all people. Schum peter cited Karl Marx. He should have referred to the Marx Brothers. Imagine that each brother runs a bank and invests in bonds. To cover themselves they buy default insurance. Groucho knows he is covered as he bought insurance from Chico, who's done the same from Harpo, and Harpo being no fool has got cover from Groucho. At the end of the movie they all need a shave and are begging on the street. SIR -

Director of tobacco control

Liberating work S I R - Contrary to what you suggest, America's productivity gains are not being "squeezed" out of workers ("Hard times, lean firms", December 31st). Nor are the gains the result of automation or computers, per se. Instead, the root of the improvement is coming from changes in the way work is performed, changes that simplify work. These include the elimination of layers of supervision and the empowerment of workers to make decisions that were previously reserved for the now-vanished higher-ups.

Ca n ce r Research

UK

B ETIY M C B RI D E

Director of policy B riti s h H e a rt Fo u n dati o n London S I R - If the government legalised prostitution it could have a new "sin tax" that would not diminish. Properly regulated brothels (women's needs should be catered for, too) would bring in income tax, national insurance, even value-added tax. Commercial arrangements ought to discourage the drunken encounters that lead to sexually transmitted infections and unwanted pregnancies, saving

money on both counts. And this would also lead to the partial replacement of emotionally charged marital affairs by the objective logic of the market, thus saving much misery and reducing the huge costs of family breakdown. CECIL S A N D E RS O N

Cheltenham, Gloucestershire

City living S I R - Regarding attempts to revive Kolkata, an intriguing question is whether Mumbai will suffer the same fate ("The city that got left behind", January 7th). Deteriorating infrastructure, cratered roads, worsening traffic, crumbling buildings, filthy beaches, ever-expanding slums, skyhigh rents and property prices, refugees pouring in daily, inadequate schooling, fractious politics, corruption and so on. It is a long list. TA RU N KATARIA

Chief executive, I n dia Religare Capital Markets Mumbai

Delicately expressed S I R - Your article on euphemisms ("Making murder respectable", December 17th) brought to mind the following crime report: She was decapitated and disembowelled. She was however not interfered with. RUSSELL D E N O O N D U N C A N

Thames Ditton, Surrey S I R - Football managers are no longer sacked. They "part company" with their club, for business reasons or to spend more time with their family. When one manager was found to be "seeing" the same blonde as his chairman, he was told his contract would not be renewed as he had "taken the club as far as he could".

Ashton-under-Lyne • M I K E PAVASOVIC

Letters are welcome and should be

addressed to the Editor at The Economi st, 25 StJames's Street, London SWlA l H G E-mail: [email protected] Fax: 0 2 0 7839 4092 More letters are available at: Economist.comfletters

Brazil's elder statesman

A long time in politics

Modern tragedy

Fer n a n d o H e n ri q u e Cardoso brought

The Rep u b lican can didates debate, the

A n ew fi lm version of"Cori o la n us" marks

macroeco n omic sta bility to B razi l a s

Republica n s of South Caroli n a vote in t h ei r

the di recto ria l debut of Ralph Fi e n n es ,

fi n a nce mi nister a n d then as president. A

p r i rna r y a n d the presi d ent d e livers his

w h o a lso p lays the title role. H e talks t o us

disti n g ui s h ed sociologist i n his fo r m e r

state-of-the-u nion a d d ress. In a week

a b o ut S h a kespeare's co nte m porary

life, h e s h a res his thoug hts o n B razil's

tee m i n g with politics, our corres p o n d ents

releva n ce and wonders w h ether people a re

m u ltiraci a l culture, the drug wa r a n d his

a n d b loggers provi d e live co m m entary o n

m o re i n terested in watchi n g tragedy

relati o n s h i p with the cu rrent president

a l l o ft h e acti o n

d u ri n g ti m es of eco n o m i c h a rdship

Economist.comjnode/21543084

Economist.comjblogsjdemocracyinamerica

Economist.comjnode/21543036

United States: The value of a good education

Europe: Down to earth

H ow m u c h would a h i g h school educati o n b e

A co rrupti o n case may e n co u rage Poles to

worth o n t h e free m a rket?

thi n k a little m o re soberly about thei r

Economist.comfnode/21543032

s h a le-gas revoluti o n

Finance: Owe dear A n u p dated i nteractive debt g raphic s h ows how deeply i n h ock t h e big eco n o m i es a re

Economist.comjnode/21524652

Economist.comjnode/21542918

Asia: Media after the meltdown

M BA diary: Start-up school for grown ups

Japan's h o p e lessly i n s u la r press club loses a

Business: Sharper focus

little g ro u n d , i n crea si n g ca n d o u r

How Fujifi lm m a n a ged to reinvent itself

Economist.comjnode/21542992

Economist.comfnode/21543030

Asia: Yam yesterday, yam today

Finance: Average common denominator

N epa l has ever felt itself a "yam between two

If the e u ro zone stays togeth e r, a n

boulders" (the gia nts In dia a n d Chi n a ) yet

oppo rtu nity fo r a different sort of

n o w h o pes to ben efit from its situati o n

convergence play s h o u ld em erge

Economist.comfnode/21543090

Economist.comjnode/21542968

Europe: We'll always have Prague

Technology: Difference engine Am erica needs to boost dwi n d li n g water

Tym o s h e n ko's h u sba n d , m a ke their h o m es i n

s u p p lies with reclai m e d stuff from sewage

t h e Czech Republi c

wo rks. H ow to sell the i dea to the p u b lic?

Economist.comjnode/21542916

Economist.comjnode/21543024

bri

schools a re i n co m pati b le

Economist.comfnode/21543028

Technology: Something bad out of Africa Google fails to live up to its m otto i n Kenya

Economist.comjnode/21542960

Middle East: Entering the fray T h e fath e r of Gilad S h a lit i s to sta n d for

Why so m a ny U krai n i a n s , i n cludi n g Yulia

fl u

It is a myth that entrepreneurs a n d b usi n ess

Israel's Kn esset

Economist.comfnode/21543094

Links to all these stories can be found at Economist.comf node/ 21543097

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Executive Focus

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lnfClfmv_ _:t-b.9_ __ l:�� - - --±'J.2 Sll __ .:.?:2_ _ _ _ -� Q_ _ _ _.?..�- - - - _l.Q.! _ _ _ Q;.� +1.4 03 +0.6 +1.4 0.78 -0.3 Nov +2.8 Dec +2.5 10.3 Nov -4.1 0.74 1.80 Euro area -83.2 Oct -0.5 +3.0 Oct +3.3 Dec +3.2 +2.9 03 0.78 4.0 Nov +1.4 +2.9 0.74 +10.5 03 -3.6 Austria 3.24 +2.6 -0.5 +2.0 0.78 +0.3 Sep +1.9 03 4.11 0.74 +2.9 Oct +3.5 Dec +3 . 3 -3.8 Belgiu m 7 . 2 Novll +1.6 +1.5 03 0.78 +2. 2 9.8 Nov -65.3 Nov 0.74 3.13 -5.8 +1.2 +1.6 +0. 9 Nov +2.5 Dec France -2.5 0.78 0.74 Germany +2.5 0 3 +2.0 +3.0 +3.6 Nov +2.1 Dec +2.4 6.8 Dec +189.6 Nov +5.2 -1.0 1.78 Greece -5.0 03 na -5.3 -7.8 Nov +2.4 Dec +2.9 18.2 Oct -28.9 Oct -8.4 -9.5 34.96 0.78 0.74 0.78 0.74 Italy +0.2 0 3 -0.6 +0.5 -4.1 Nov +3.3 Dec +2.8 8.6 Nov -76.6 Nov -3.7 -4.0 6.41 Netherlands +1.1 03 -1.0 +1.5 -1.2 Nov +2.4 Dec +2.4 5.8 Novtt +66.6 03 +6.7 -4.2 2.07 0.78 0.74 ��n_ _ _ _ .!Q� � - - .!!il_ .:t.O.:§. _ _ _ :],Q. t:!£_v_ .±_2� .Q!Oc_ _:t-l:_1_ _ _2_b2._N� - - --2_4_,Q. �t- - 3� - - - -,£;'2._ __ _2.�- - - - _Q.Z§ _ _ _ Q;.7_i _ Czech Republic +1.2 03 -0.3 +2.1 +5.4 Nov +2.4 Dec +1.9 8.6 Dec -5.6 03 -3.1 -4.6 3.50 19.9 18.0 5.80 5.52 Denmark +0. 1 03 -2.2 +1.0 -0. 1 Nov +2.5 Dec +2.7 4.2 Nov +22.1 Nov +5.8 -3.9 1.65 239 202 Hungary +1.4 03 +2.2 +1.5 +3.0 Oct +4.1 Dec +3.9 10.6 Novtt +1.8 03 +1.5 +1.2 9.68 6.00 5.80 Norway +3.8 03 +5.8 +0.8 -1.2 Nov +0.2 Dec +1.4 3.3 Oct§§ +70.2 03 +13.6 +13.1 2.14 Poland +4.2 03 na +3.8 +8.7 Nov +4.6 Dec +3.9 12.1 Novll -21.9 Nov -4.8 -6.0 5.69 3.39 2.87 Russia +4.8 03 na +4.0 +3.9 Nov +6.0 Dec +8.5 6.3 Novll +101 . 1 04 +5.0 -0.8 4.73 31.5 29.8 Sweden +4.6 03 +6.6 +4.3 +0.2 Nov +2.3 Dec +2.8 6.7 Novll +39 . 7 03 +6.4 nil 1.62 6.86 6.60 0.94 0.96 Switzerland +1.3 03 +0.9 +1.8 -1.4 0 3 -0.7 Dec +0.3 3.1 Dec +95.7 03 +13.2 +0.8 0.65 Turkey +8.2 03 na :!].5 :!:§.4 Nov +10.!! Dec +6.3 9. 1_0ctll -]].8 Nov .::J . 8 -1.8 9.42 1.84 1.55 Australia +2.5 03 +3.9 +1.8 +0.8 0 3 +3.5 0 3 +3.5 5.3 Nov -32.6 03 -2.2 -2.6 3.85 0.96 1.00 7.76 7.78 Hong Kong +4.3 03 +0.4 +5.4 +0.3 03 +5.7 Nov +5.1 3.3 Decll +13.6 03 +4.2 +1.8 1.26 India +6.9 03 na +7.6 + 5 . 9 Nov + 9 . 3 Nov +9.0 1 0 . 8 2010 -65.1 03 -3.5 -5.4 8.42 50.4 45.5 Indonesia +6.5 03 na +6.5 + 5 . 0 Nov + 3 . 8 Dec +5.3 6.6 Aug +3.6 03 +0.4 -1.0 4.021 tt 9,048 9,050 Ma laysia +5.8 03 na +4.5 +1.7 Nov +3.3 Nov +3.3 3.0 Oct +32.7 03 +10.4 -5.6 2.93ttl 3.11 3.05 85.7 Pakistan +2.4 2011.. na +2.4 -1.5 oct +9.7 Dec +12.2 5.6 2010 -0.2 03 -1.3 -5.9 90.2 15.041tt 1.28 1.28 Singa pore +3.6 04 -4.9 +5.1 -9.6 Nov +5.7 Nov +5.1 2.0 03 +49 .2 03 +17.7 +0.6 1.47 South Korea +3.5 0 3 +3.3 +3.8 +5.6 Nov +4.2 Dec +4.2 3 . 1 Dec +25.1 Nov +2.0 +2.4 3.75 1,142 1,110 Taiwan +3.4 03 -0.6 +4.4 -3.6 Nov +2.0 Dec +1.5 4.3 Nov +38.6 03 +8.0 -2.7 1.29 30.0 29.0 30.5 31.8 Thailand +3.5 0 3 +2.1 +2.5 _ .2. . 24 -1§.6 Nov +3.5 Dec_ _+.i_2_ .Q..8 Sep _ _ _+12.1 Nov_ _ +4.1 _ _ -2.9 4.32 3.98 Argentina +9 .3 03 +4.5 +8.5 +0.8 Nov +9.5 Dec• .. +9.9 7.2 0311 nil 03 -0.3 -1.4 na 1.77 1.67 Brazil +2.1 0 3 -0.2 +3.0 -2.5 Nov +6.5 Dec +6.7 5 . 2 Novll -49.3 Nov -2.2 -2.7 1 1 .50 Chile +4.8 0 3 +2.6 +6.3 +2.0 Nov +4.4 Dec +3.2 7.1 Novttll -1.2 0 3 -0.5 +0.2 2.291tt 496 492 1,823 1,842 Colombia +7.7 03 +7.1 +5.1 +5.0 Oct +3.7 Dec +3.4 9.2 Novll -9 .6 03 -2.7 -2.5 3.611 tt Mexico +4.5 03 +5.5 +3.9 +3.2 Nov +3.8 Dec +3.3 5.0 Novll -10.0 03 -1.9 -2.9 6.01 13.3 12.1 ���e� _ _ .:!j ,1_ � _ _ .i!!!_ .±?� _ _ _ .±.?:2_ � _+1_9_,Q .Q!Oc_ .:f:?£,_3_ _ _ � �� - - -+1..6 .,Q. Sll _ _ .:':§� - - --2, £.._ _ _ _§_.2?!.!!_ _ _ _ .2·� - - - -� Egypt +0.3 02 na +1.8 -1.8 02 +9.5 Dec +10.2 1 1 . 9 Q311 -4.1 03 -1.7 -10.0 8.071 tt 6.04 5.81 Israel +5.1 03 +3.4 +4.4 +2.3 Nov +2.2 Dec +3.3 5.6 03 +1.8 03 -0.1 -2.8 3.46 3.80 3.55 +6. 7 + 5 . 3 Dec +75.3 2010111 +25.9 3.75 3.75 na na Saudi Arabia +4.9 +14.3 +6. 7 2011 na na +1.4 +3.1 -4.1 South Africa +5.0 25.0 03 11 6.97 -5.5 7 .88 8.02 +2.4 Nov +6.1 Dec -11.6 03 +3.1 03

United States China Japan Britain

+1.5 +8.9 -0.7 +0.5

03

04

+2.0 +8.2 +5.6 +2.3

*% change on previous quarter, annual rate. tThe Economist poll or Economist Intelligence Unit estimate/forecast. tNational definitions §RPI inflation rate 4.8 in December. * *Year ending June. ttLatest 3 months. §§Centred 3·month average. . . *U nofficial estimates are higher. lttDollar-denominated bonds. Ill Estimate.

II Not seasona lly adjusted.

The Economist J a n ua ry

Economic and financial indicators

2 1 st 2012

Markets

% change on Dec 31st 2010

one in local in $ week currency terms United States (DJIA) +1.0 +8.6 +8.6 China (SSEA) -0.4 -19.2 -15.7 Japan (Nikkei 225) +1.2 -16.4 -11.9 Britain (FTSE 100) +0.6 -3.3 -5.2 � '!!d� (�I?_TS1) _ _ _ gl_??_:.? _ 2:.Q.i_ _ _:8]. _-1Q . §_ Euro area (FTSE Euro 100) 774.6 +2.1 -13.4 -18.1 Euro area (OJ STOXX 50) 2,390.6 +2.2 -14.4 -19.1 Austria (ATX) 1,960.6 +3.5 -32.5 -36.2 2,155.7 +0.7 -16.4 -20.9 Belgium (Bel 20) France (CAC40) 3,264.9 +1.9 -14.2 -18.9 Germany (DAX) * 6,354.6 +3.3 -8.1 -13.1 670.0 +6.5 -52.6 -55.2 Greece (Athex Comp) Italy (FTSE/MIB) 15,278.0 +2.7 -24.3 -28.4 Netherlands (AEX) 315.5 +1.2 -11.0 -15.8 Spain (Madrid SE) 842.2 -0.1 -16.1 -20.7 Czech Republic (PX) 902.4 +1.3 -26.3 -32.3 373.9 +1.4 -12.4 -17.0 Denmark (OMXCB) 18,150.3 +8.3 -14.9 -28.1 Hungary (BUX) 451 .1 +0.1 -7.3 -10.8 Norway (OSEAX) �land ��) _ _ _ _ 1_2,Q1� _ _:!i.1_ _ :l.J.& _-]1.0 Russia (RTS, $ terms) 1,488.4 +2.5 -12.5 -15.9 Sweden (OMXS30) 1,028.6 +1.9 -11.0 -13.7 Switzerland (SMI) 6,116.2 +1.8 -5.0 -7.3 Turkey (ISE) 54,384.8 +5.8 -17.6 -31.9 4,280.6 +0.9 -11.7 -11.0 Australia (All Ord.) Hong Kong (Hang Seng) 19,686.9 +2.8 -14.5 -14.5 India (BSE) 16,451.5 +1.7 -19.8 -30.9 Indonesia (JSX) 3,978.1 +1.8 +7.4 +5.7 �a§'�a _(_K�E.L _1 21?.!f .:Ql._ _:O.:l _:2:2_ Pakistan (KSE) 11,547.7 +5.6 -3.9 -8.6 2,795.4 +1.8 -12.4 -13.2 Singapore (STI) South Korea (KOSPI) 1.892.4 +2.5 -7.7 -9.6 Taiwan (TWI) 7,233.7 +0.6 -19.4 -21.6 1,051.6 nil +1.8 -3.3 Thailand (SET) Argentina (MERV) 2,862.2 +1.3 -18.8 -25.2 61,722.9 +2.9 -10.9 -18.1 Brazil (BVSP) Chile (IGPA) 20,451.2 +1.0 -11.0 -17.7 Colombia (IGBC) 13,468.0 +1.5 -13.1 -9.9 Mexico (IPC) 37,506.8 +0.5 -2.7 -12.3 �nezuela (f!C) __1Q,679.4 2:_Q.i_ +80.1 n.2_ 3,904.1 +3.7 -44.9 -47.0 Egypt (Case 30) 1,027.7 +0.7 -16.2 -22.9 Israel (TA-100) Saudi Arabia (Tadawul) 6,378.0 -1.7 -3.7 -3.7 +4.5 -15.0 South Africa (JSE AS) _21550.1 +2.2 Index Jan 18th 12,579.0 2,374.3 8,550.6 5,702.4

_ _ _

,

_

_

_

I

The Economist commodity-price

index

A roller-coaster ri d e for prices in 2011

January 1st 2008=100, $ terms Food

res u lted in several co m m odities rea ching

- All items

- Industrials

record Levels i n the early part of t h e yea r

1 60

before d roppi n g s h a r p ly i n t h e Latter h a lf. O u r do llar a ll-ite m s i n dex, which ex­ cludes oi l a n d precious m etals, e n d e d the year at its Lowest Level si n ce Septe m b e r 2010 a n d 23% off its p e a k i n February 2011. B u m p e r ha rvests in cereals, sugars a n d oils, coupled with falli n g d e m a n d , Led t o a d r o p i n food prices ( o u r fo od­

price i n dex fell by a ro u n d 15% from its

2011 high ) . The prices of i n d ustrial raw m aterials, m ea nw h i le, suffered beca use of concerns a b o ut the debt crisis in t h e e u ro a r e a , w h i c h risked causi n g a globa l downturn that would reduce d e m a n d for things such as i ro n ore a n d copper.

% change on Dec 31st 2010 Index one i n local i n $ Jan 18th week currency terms United States (S&P 500) 1,308.0 +1.2 +4.0 +4.0 United States (NAScomp) 2,769.7 +2.2 +4.4 +4.4 China (SSEB, $ terms) 221.1 -0.3 -30.4 -27.3 Japan (Topix) 735.0 +0.2 -18.2 -13.8 !!! ��_ (�� ��t l_OQ } _1.��- 21·1._ - _:7.& --�& World, dev'd (MSCI) 1.222.2 +1.5 -4.5 -4.5 Emerging markets (MSCI) 980.9 +3.4 -14.8 -14.8 World, all (MSCI) 310.9 +1.7 -6.0 -6.0 �o!!_d J!.o� u Ci !! 9!.0 .!!.1?L 'E?..:J 2:QL .2_6.1_ .:!:§.� 599.5 +0.4 +8.7 +8.7 EMBI+ (JPMorgan) Hedgefunds (HFRX) 1,121.3 +0.1 -7.9 -7.9 20.9 +21.1 +17.8 (levels) Volatility, US (VIX) 161.9 -8.2 +54.7 +46.3 CDSs, Eur (iTRAXX)t CDSs, N Am (CDX)t 109.7 -5.4 +28.8 +28.8 Carbon tradin EU ETS € 6.9 -2.7 -51.7 -54.3 _

_

11

10

09

2008

12

40

Source: The Economist

Other markets

_

'"'"'""''""'"''"''''"!!!!'"' ItII"II"'

_

*Total return index. tcredit-default-swap spreads, basis points. Sources: National statistics offices, central banks and stock exchanges; Bloomberg; CBOE; CBOT; CMIE; Cotlook; Oarmenn & Curl; EEX; FT; HKMA; ICCO; !CO; ISO; Jackson Rice; JPMorgan Chase; NZ WoolServices; Thompson Lloyd & Ewart; Thomson Reuters; Urner Barry; WSJ; WM/Reuters

The Economist commodity-price index 2005=100 % change on one one Jan 10th Jan 17th* month year Dollar index

�l_it:e�s- _ _ _}�,i

f2!2£ -

___

Industrials All. .

..Nf� �. .

Metals

_?�&. -

__

. . .163. ,4. ..1.(9 ..2 156.7

_

.Mli_5 _lJ\1.:_1

__ __

-.2V -.21.2

_

_:2.z.§_

-!1&

_ _

. . 169_.4. . .. . �9 ..2 . . . �21_.8 . .1.82.:4. . �6 ..0 . .. �_3 1 } 163.8 +10.8 -16.3

Sterling index All items

216.7

218.6

+7.0

-14.2

179.6

180.1

+7.8

-13.4

1 , 660.3

+2.7

+21.4

100.7

+3.6

+10.3

Euro i ndex All items

Gold

lllli..!£_ 1,638.1 West Texas Intermediate $ per barrel 102.3

•Provisional !Non-food agriculturals.

Indicators for more countries and additional series, go to: Economist.comfindicators

93

tent with treating them as underdogs and abrogating the equal rights they had been guaranteed, the Greeks intended to drive them off the island and then unite with Greece. Archbishop Makarios, their leader, and his EOKA guerrillas had sought that enosis violently for years before reluctant­ ly compromising. As a colonial lawyer in the 1950s, sharp and London-trained, Mr Denktash had prosecuted Greeks found running Greek-made dynamite in little boats off Paphos, and did not doubt that though they were fighting the British who then ruled Cyprus, their ultimate target was his own people. If enosis ever hap­ pened, he wrote, Turkish-Cypriots would be snuffed out like candles in a storm.

Rauf Denktash

Rauf Denktash, leader of the Turkish-Cypriots, died on]anuar y13th, aged 87

I south-western Cyprus, that the goddess

T WAS on the coast near Paphos, in

Aphrodite rose radiant from the sea-foam to waft abroad her message of harmony and love. Ironic, then, that it was also that spot of the coast that produced Rauf Denk­ tash, short, fat and immovable as a rock, whose face was set against every harmoni­ ous solution of the island's governance, unless it met his conditions first. His conditions were simple. Turkish­ Cypriot North Cyprus, covering roughly one-third of the island and emptied of its Greek inhabitants, was a republic equal in sovereignty, powers and rights to the much larger Greek-Cypriot part, and must be so recognised by the world. The fact that it has never been, except by Turkey, was not for want of effort on his part. After two de­ cades as the Turkish-Cypriots' wily chief spokesman and most intransigent "negoti­ ator" he declared, in November 1983, uni­ lateral independence, and ruled as a one­ man show for the next 22 years. Although he formally accepted the idea of a loose federation, a two-state settle­ ment was his overwhelming desire. Visi­ tors to his presidential palace, charmed by his bulky hand-kissing, his eagerly snap­ ping camera and the sweet canaries sing­ ing in his office, were also treated to hour­ long lectures on the atrocities inflicted by

Greek-Cypriots on Turkish-Cypriots be­ tween 1963 and 1974. Foreign envoys, in­ cluding the redoubtable Dick Holbrooke in 1998, were sent away with fleas in their ears. Even a bout of serious heart trouble in 2002 could not stop him passionately re­ sisting a careful Cyprus settlement ("dia­ bolical" to him) drawn up by Kofi Annan, then head of the United Nations. What he-like Greek hardliners-dis­ liked in all such schemes was that, first, they assumed the existence of a Cypriot nation. There was no such thing. Cypriot donkeys, yes. Certain Cypriot habits, such as his own favourite of dunking fried lady­ finger pastries in cognac and slurping the cognac, yes. But otherwise, he said, the is­ land consisted of Turks and Greeks living side by side. They had co-existed thus since the Ottomans had taken over in 1571, as sep­ arate communities speaking different lan­ guages. The Turks were Sunni Muslims, the Greeks Orthodox Christians. In his boy­ hood he had played with Greeks, but he had soon learned to distrust them, as they did him. They could put on a show of be­ ing "lovebirds"-as when Glafcos Clerides, his Greek-Cypriot counterpart and an old courtroom rival, joked and ate soup with him in 2001. But he knew their souls. The deep wish of Greeks, he said, was to colonise the Turks-and worse. Not con-

Friends to the north Their only hope was stiff resistance, partition-taksim, his war-cry-and the help of Turkey. Mr Denktash considered himself his own man, calling all the shots in his little patch. But it was only a Turkish invasion in 1974, in response to an abortive Greek coup, that had allowed his commu­ nity to consolidate its territory; it was only Turkish aid, to the tune of $4oom-5oom a year, that allowed his statelet to survive; and it was only the presence of 30,000 Turkish troops, turning tracts of northern Cyprus into a military camp, that made him feel secure. From the pool of his villa on Snake Island, wallowing gently, it was Turkey he looked to across the sea. From the late 19 50s he had fed intelli­ gence to Ankara about EOKA, and there­ after all his negotiating stands were checked with Ankara first. Hence, in part, his rocklike certainty. There were disagree­ ments: in particular, over Turkey's dream of joining the European Union, which Mr Denktash abominated because the EU in­ sisted on recognising only the Greek-Cyp­ riot part of the island, which had joined in 2004. Single-handed, he took great plea­ sure in impeding Turkey's application. But he made no secret of the fact that if Cyprus were to be ceded to any country, that coun­ try should be Turkey: because, he rea­ soned, Turkey had once owned it, while the Greeks, from Homer's time onwards, had merely settled there. As time passed, Mr D enktash got out of step with his people. He won his third term as president, in 1995, only in the second round. Despite his fulminations, Turkish­ Cypriots voted for the Annan plan, though the Greek-Cypriots did not. Northerners also rather liked the idea of joining the EU and, thereby, gaining some of the tourism and towering development they envied in the south. In some places the barbed-wire barriers between the communities began to be taken down. The "Cyprus problem", however, re­ mained-and remains. Mr Denktash, as long as he breathed, embodied it. •

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