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*For Business Users only. Advance payment applies. Official government fuel consumption figures in mpg (litres per 100km) for the C-Ciass Saloon range: urban 15.5(18.2)-50.4(5.6), extra urban 33.6(8.4)-76.3(3.7), combined 23.5(12.0)-64.2(4.4). C02 emissions: 280-117 g/km.
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3
6 The world this week Leaders 9 Facebook A fistful of dollars 10 The future of Fleet Street Fit to print 1 1 France's election Hey, big spender 1 1 China's economy Time for a prope rty tax
On the cover Facebook may be a good bet for investors now, but regulatory problems lie ahead: leader, page 9. How Mark Zuckerberg built such a gargantuan company so quickly-and the risks as well as rewards that lie ahead, pages 20-22. Africa embraces social media, page 48 The Economist online Daily analysis and opinion from our 19 blogs, plus audio and video content, debates and a daily chart
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10. The phon e-hacking sca ndal has led to ca lls for stricter rules. P u b lish e rs are scrambling for a so lution before one is imposed o n th em, page 23
47 Health care in Sierra Leone It's up to yo u 48 Race in South Africa Still an issue 48 Social media #AfricaTweets
Europe 3 1 France's presidential election And they're off 32 Germany's spooks Eyes on the left 32 Germany and eastern Europe Love in a cold climate
Islam Debate is growing a b o ut h omosexuality in the religio n, b ut in Muslim lands gays a re still suffering, page 56. A history of gay literature, page 79
33 Spain's regions The centre tries to h o ld
�� Contents continues overleaf
4
Contents
The Economist February 4th 2012
Asia
65 The Reserve Bank oflndia Pulli n g every lever
50 Papua New Guinea Desperate fling
66 Malaysia's central bank Sere n e but surprisi ng
50 Politics in Malaysia
67 China and rare earths Of metals a n d market
Najib at bay 5 1 Myanmar and Singapore Among fri ends Carlos Slim and Televisa Mexico suffers from two n ea r monopolies: o n e in telecoms, the other in television. It s h o u ld let t h em fight each
52 State elections in India UP, down, sideways 53 Banyan T h e devil i n the deep blue detail
other, page 59 China 54 Taxing property Pay a n d play 5 5 Tibetan unrest No power to pacify 5 5 Hong Kong and the mainland Dogs a n d locusts
International
India's central bank One of the country's best i n stituti o n s is a lso compli cit i n a govern ment bo rrowi ng binge, page 65. A rash of state e lecti o n s has n ational bearing, page 52
68 Buttonwood The war on finance 69 Weather derivatives Come rai n or s h ine 69 Investment banking B onfire of the bankers 71 Free exchange The ECB's bazooka
58 Neglected diseases Hot tropic
a lot going for it, but optimism about its future is nevertheless hard to sustain, says Simon Long
Principal commercial offices: Tel: 020 7830 7000
Science and technology 73 The nature of humanity What's a ma n ? 74 Synaesthesia Smells like Beethoven
7 5 Biomimetics
trauma Beaten but u n b owed
Next week We publish a special report on Pakistan. The country has
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Humans and apes Studies of
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6
Politics
A leaked German proposal to appoint a euro-zone commis sioner with the power to veto Greek budgets cast a shadow over a summit of European Union leaders in Brussels. Drama at the meeting itself was mercifully lacking, with the heads of government of all members bar Britain and the Czech Republic agreeing to sign up to a German-backed fiscal treaty. In a televised interview Nicol as Sarkozy, France's president, suggested that France needed German-style labour reforms to restore its competitiveness. He pledged to reduce the cost of employment and give employers greater flexibility to negotiate working hours with their staff. In the latest in a series of news paper articles, Vladimir Putin, Russia's prime minister and probable next president, said the Russian economy must diversify away from its depen dence on natural resources and towards high-tech pro ducts, but he insisted that the change should be led by state run firms. Mr Putin said little about corruption, the biggest drag on Russian prosperity. A court in Bucharest handed Adrian Nastase, Romania's prime minister from 2000 to 2004, a two-year prison sen tence for corruption. Vowing to appeal, Mr Nastase said he was the victim of a politicised judiciary. Tried and tested
Gingrich's 32%. The party establishment had rallied to Mr Romney's campaign in the week before the vote to halt the Gingrich insurgency that arose in South Carolina. Mr Romney's victory goes some way to restoring his status as the party's "inevitable" candi date, but its populist wing may still try to trip up the Romney machine in the forthcoming primary contests. The day after Mr Romney's victory Barack Obama un veiled a new proposal to help homeowners refinance their mortgages. Home foreclo sures had been an issue in the Florida primary. The proposal is a sign that the campaign for November's general election will soon get under way.
Dilma Rousseff, Brazil's presi dent, travelled to Cuba and met Raul Castro, the Cuban president, and Fidel Castro, his brother and predecessor. Her visit focused on trade and investment, and she did not meet any dissidents. A judge in Haiti ruled that Jean-Claude Duvalier, a former dictator who returned to the country last year after 25 years in exile, should stand trial on corruption charges, but not for human-rights abuses. NGOs seeking justice for the dic tatorship's crimes sharply criticised the decision. Getting ready to depart
Leon Panetta, America's defence secretary, said NATO forces in Afghanistan would withdraw from combat mis sions soon after mid-2013, up to 18 months earlier than had been previously planned for Afghan troops to take full responsibility for the security of the country. The Egyptian cabinet called an emergency meeting after 74 people were killed and hun dreds more injured in clashes between spectators from rival teams at a football match in the Egyptian city of Port Said. There was also violence at a game in Cairo. The police came under sharp criticism for fail ing to stop the trouble.
them has been scant. Just three of Japan's 54 reactors are oper ating at the moment. Indians started voting in state
Playing it safe
The ugly game
Pakistan's intelligence agen cies are continuing to help the Taliban, according to a leaked NATO report. Based on in terviews with 4,000 captured Taliban fighters, the document says that Pakistan knows where senior Taliban leaders are hiding. Pakistan's foreign minister rubbished the report.
elections. Turnout was high in Manipur, Punjab and Uttarakhand; campaigning is well under way in two other states about to go to the polls, including Uttar Pradesh, India's most populous state. The state elections are seen as a test of public opinion ahead of a general election, expected in 2014. Aboriginal protesters set fire to an Australian flag outside the national Parliament in Canber ra. This came a day after a group of aborigines and their supporters blocked the depar ture from a restaurant of the prime minister, Julia Gillard. Ms Gillard had to be shielded from the group as she was hurriedly escorted out of the building by security officers and bundled into a waiting car. Bedouin tribesmen released 25 Chinese workers they had kidnapped in Egypt's Sinai region, after the Egyptian government agreed to retry relatives of the tribesmen who have been imprisoned for a bomb attack in 2004. Earlier, 29 Chinese workers were seized by a group in Sudan. As Chi nese firms expand globally, the security of their employees is causing concern in China.
Pakistan's Supreme Court said
After a spike in violence, the Arab League suspended an observer mission to Syria that was meant to aid a peaceful end to a deepening ten-month conflict between the govern ment and protesters.
it was preparing to charge Yousaf Raza Gilani, the prime minister, with contempt for refusing to reopen a corruption case against President Asif Ali Zardari. Mr Gilani insists the president has immunity.
Iraq's main Sunni party re
The International Atomic Energy Agency voiced support forJapan's plan to restart some of the nuclear reactors that have been shut down since last year's meltdown at Fukushima. Japan has been conducting stress tests to gauge the safety of the reactors, but public support for restarting
turned to parliament and will resume talks with Shia leaders, following a protest over an arrest warrant for the coun try's Sunni vice-president.
Mitt Romney won the Repub
lican presidential primary in Florida by a wide margin, taking 46% of the vote to Newt
implementation of new EU sanctions aimed at forcing Iran to open its nuclear programme to scrutiny.
The Iranian parliament threat ened to halt oil sales to Europe, in an attempt to pre-empt the
Wukan, a coastal village in China's Guangdong province, began the process of electing their own local leaders. The villagers had led huge protests against corruption and a death in custody. In a surprise deci sion, limited to Wukan only, the provincial government allowed residents to hold an election.
��
The Economist
February 4th
Business
I
Internet IPOs 0
Selected, $bn
....... (Feb 2012) "' Facebook
The world this week
2012
(Aug 2004)
Go o gle
( Dec 2011)
Zvnga
(�lay 2011)
Renren
ers remain cautious, but they are spending more and busi nesses are responding by increasing their inventories. Xstrata received a takeover bid from Glen core, confirming
that the long-mooted pro posed mega-merger between the two mining giants is on again. A deal would drastically recast the mining industry.
Groupon
(Nov 2011)
(�tay 2011)
Linkedln
Sources: Dealogic; The Economist
Facebook at last began the process of launching its initial public offering, in the most eagerly awaited stockmarket flotation for years. The world's biggest social-networking site is seeking to raise $s billion in its IPO. That is about half the amount that analysts had speculated it would aim for, but the figure could rise. Face book revealed some financial data for the first time in its filing: its revenue last year was $3-7 billion, up from $2 billion in 2010, and it made a profit of $1 billion, up from $6o6m. Faint-hearted tweets
Users of Twitter expressed disappointment at its decision to censor content in countries where it breaks local laws. The microblogging site said it was doing this because as it contin ues to grow it will operate in countries "that have different ideas about the contours of freedom of expression". Thai land was the first country publicly to welcome Twitter's new policy. More than a year after his promotion was first mooted, Sony confirmed that Kazuo Hirai will become its new chief executive when Sir How ard Stringer steps down in April. Mr Hirai takes over the reins of an ailing company that has had four consecutive years of losses and a television division that loses $8o on each set it sells. America's economy grew by
a robust 2.8% in the final quar ter of 2011, according to a first official estimate, the country's quickest pace of growth since mid-2010. American consum-
Starbucks rewards
Starbucks said it would open its first outlets in India later
this year in a joint venture with Tata, a giant conglomer ate. Starbucks has coffee shops in almost all big countries, but had found India a tough mar ket to break into. Underscoring that, it is entering into a so-so partnership with Tata despite the recent easing of India's convoluted investment rules that now allow for 100% for eign ownership of stores that sell just a single brand of goods. India's toxic telecoms scandal rumbled on, as the Supreme Court annulled 122 mobile licences issued in 2008 under a former telecoms minister, Andimuthu Raja, who is in prison and on trial for corrup tion. The move is likely to cause chaos for the host of smaller operators, some of
them foreign owned, which entered the market after 2008, and could hurt the banks that have loaned them money. It should benefit the big estab lished operators. Shares in Bharti Airtel rose after the announcement.
UniCredit successfully com pleted its capital-raising exer cise, selling 99.8% of the shares in a €7.s billion ($10 billion) rights issue. The Italian bank's offering was seen as a crucial test of the markets' willingness to invest in euro-zone banks.
American Airlines provided
Santander, the euro zone's biggest bank by market value, made only a tiny profit in the last three months of 2011, as it booked charges related to its property holdings in Spain. The bank also said that for the first time more than half its annual earnings came from its business in Latin America.
the first details of its restructur ing plans since it entered bank ruptcy protection in Novem ber. The airline wants to cut 13,000 jobs and will ground some aircraft. It also suggested ending its huge employee pension plans, which would cause the already stretched federal pensions-guarantee agency to cover the liabilities. Chrysler reported an annual
net profit for the first time since it emerged from a bankruptcy restructuring process in 2009 that handed control of the car company to Italy's Fiat. As expected the European Commission blocked a pro posed merger between NYSE Euronext and Deutsche Borse, mostly over competi tion concerns given that the combined exchanges would control more than 90% of the market for exchange-traded derivatives in Europe. The pair announced their intention to merge almost a year ago.
Contract killers
Business leaders in Britain voiced worries about political meddling in executive pay, after Stephen Hester, the chief executive of Royal Bank of Scotland, waived his bonus following a barrage of criti cism. Mr Hester had been awarded £963,000 ($1.sm) in shares by RBS, which was bailed out in 2008 and is still majority-owned by the tax payer. Days later the govern ment targeted another banker, when it stripped Fred "the Shred" Goodwin, RES's former boss, of his knighthood. Other economic data and news can be found on pages 88-8 9
7
9
A
fistful of dollars
Facebook may be a good bet for investors now; but regulator y problems lie ahead
.
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T ALL began as a lark. Mark
I Zuckerberg posted pictures of
his fellow Harvard students on line to let viewers comment on who was hot and who was not. Eight years later, Facebook is one of the hottest companies in the world. On February 1st the so cial network announced plans for an initial public offering (IPO) that could value it at between $75 billion and $100 billion (see pages 20-22). This is extraordinary. Investors believe that a start-up run by a cocky 27-year-old is more valuable than Boe ing, the world's largest aircraftmaker. Are they nuts? Not necessarily. Facebook could soon boast one billion us ers, or one in seven of the world's population. Last year it gen erated $3-7 billion in revenue and $1 billion in net profits. That is nowhere near enough to justify its price tag. But there are rea sons to bet Facebook will justify the hype, for it has found a new way to harness a prehistoric instinct. People love to so cialise, and Facebook makes it easier. The shy become more outgoing online. The young, the mobile and the busy find that Face book is an efficient way of staying in touch. You can do it via laptop or smartphone, while lying in bed, waiting for a bus or pretending to work. You can look up old friends, make new ones, share photos, arrange parties and tell each other what you thought of the latest George Clooney film. As more people join Facebook, its appeal grows. Those who sign up (and it's free) have access to a wider circle. Those who don't can feel excluded. This powerful feedback loop has already made Facebook the biggest social-networking site in many countries. It accounts for one in seven minutes spent on line worldwide. Its growth may be slowing in some rich coun tries-unsurprisingly, given how enormous it already is. And it is in effect blocked in China. But it is still growing fast in big emerging markets such as Brazil and India.
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With a little help from my friends
A $100 billion price tag would hardly be cheap, but other tech giants are worth more: Google's market capitalisation is $190 billion, Microsoft's $250 billion and Apple's $425 billion. And the commercial possibilities are immense, for three reasons. First, Facebook knows a staggering amount about its users. It is also constantly devising ways to find out more, such as Timeline, a new profile page that encourages people to create an online archive of their lives. The company mines users' data to work out what they like and then hits their eyeballs with spookily well-targeted ads. Last year it overtook Yahoo! to become the leading seller of online display ads in America. Second, Facebook is the most powerful platform for social marketing. Few sales pitches are as persuasive as a recommen dation from a friend, so the billions of interactions on Face book now influence everything from the music that people buy to the politicians they vote for. Companies, like teenagers, are discovering that if they are not on Facebook, they are left out. Social commerce (or "s-commerce") is still in its infancy, but a study by Booz & Company reckons that $5 billion-worth
of goods were sold in this way last year. Finally, Facebook is becoming the world's de facto online passport. Since so many people have a Facebook account un der their real name, other companies are starting to use a Face book login as a means of identifying people online. It has even created its own online currency, the Facebook Credit. That is the case for Facebullishness. But there are also two sets of reasons to worry. The first is the managerial challenge of jumping from start-up to giant. Facebook has only 3,200 em ployees, many of whom will now become paper millionaires. The prospect of having to motivate VIP employees-Silicon Valley shorthand for workers "vesting in peace"-may explain why Mr Zuckerberg delayed a flotation so long. With the bil lions of dollars that the IPO will bring in, the firm will add more people and services. It has already rolled out an e-mail service and persuaded millions of other websites to add but tons and links that enable Face book users to share material. It is bound to add an online-search function that will heat up its battle with Google, which is including information from its Google+ social network in its own search results. Go ogle has made the jump from popularity to profitability. For all its talk of new revenue streams, Facebook is still danger ously dependent on display ads. And there is a tension be tween attracting users and squeezing money out of them. Fa cebook's greatest asset is the information that its users willingly surrender to it. Turning such data into cash, however, will inevitably raise privacy concerns. Most users don't realise how much Facebook knows about them. If they start to feel that it is abusing their trust, they will clam up and log out. What Rockefeller was to oil...
This is where the other set of worries emerges-and these should concern more than just investors. America's Federal Trade Commission has already forced Facebook to submit to a biennial external audit of its privacy policy and procedures. As this newspaper has argued before, it would be better if Fa cebook, Google and other web giants switched their default settings from "opt-out" to "opt-in" (so that users had to give permission for the companies to use their data). Further down the line there is antitrust. Technology is fiendishly hard for competition tsars. On the one hand, it creates competitors quicker than any other industry (remem ber AltaVista, or Myspace?). On the other, network effects help to create monopolies. No other social network is nearly as big as Facebook, and it will soon be rich enough to buy up poten tial rivals. Many firms feel they have no choice but to deal with it, and some already resent its clout. For the moment, leaving Facebook alone makes sense. Its users can switch if something better comes along and its war with Google is only just beginning. If either firm behaves in a predatory way, it should be punished. But just as Microsoft once fell foul of trustbusters, so the new web giants surely will-for good and bad reasons. It seems likely that Go ogle will soon face a probe from the European authorities; Facebook will probably follow one day. The film has already been made, but the Facebook story is likely to get more intriguing. •
10
The Economist February 4th 2012
Leaders The future of Fleet Street
Fit to print How to clean up the unruly British press while keeping it free
N
ORMALLY it is the press that hounds celebrities, politicians and judges, not the other way round. But for the past three months a public in quiry led by Lord Justice Leve son, an appeal-court judge, has pulped the British newspaper industry. A parade of people-some famous, some not-have told of ill-treatment at the hands of reporters and photogra phers. A normally aggressive press has been cowed. The inquiry began following the revelation that the News of the World, part of Rupert Murdoch's News Corporation, had illegally accessed messages left on the mobile phone of a girl who turned out to have been murdered. But it has gone far be yond that narrow outrage. Lord Justice Leveson has heard of a young woman driven to suicide; of people accusing their fam ilies of spilling their secrets when in fact their phone messages were being listened to; of a mother (Joanne Rowling, author of the "Harry Potter" books) opening her five-year-old daughter's school bag to find a note from ajournalist inside. It is no surprise that the press often treats people callously. But the sheer volume of complaint has turned ordinary tales of cruelty into a persuasive indictment of the way the print media behaves. Worse stories are likely to come. In a few weeks' time Lord Justice Leveson will move on to the relation ship between the press and the police, which has often been corrupt. Waiting in the wings are civil and, perhaps, criminal trials. Some 30 people have been arrested so far. Politicians, who have feebly warned in the past that the press is "drinking in the last-chance saloon", have lost much of their fear. Newspapers will almost certainly be forced to aban don the long tradition of self-regulation (see page 23). But can the press be made less poisonous without making it toothless? The steamroller of reform
Britain excels at two sorts of journalism. In the mass market, tabloids like the Daily Mirror and the Sun are vital forces in British life. At their best, they expose corruption and hold poli ticians' feet to the fire. They can be world-beaters: the Daily Mail runs America's fifth most-popular newspaper website. But there is another more lofty Fleet Street: Britain is home to a cluster of serious broadsheet papers, the BBC, Thomson-Reu ters and, yes, The Economist. The danger is that in his focus on deterring tabloids from pestering actresses, Lord Justice Leve son muzzles serious British journalism of all sorts, which is al ready threatened by some of the world's barmiest libel laws. Three kinds of action have been proposed: market control, legal reform and tougher regulation. The first idea-to impose strict limits on market share, tighter than those implied by nor mal competition regulation-is the worst. It springs from the belief that the News of the World became so depraved in part because politicians feared its clout: no media empire, the argu ment goes, should be allowed to become as large as News In ternational, and no proprietor as powerful as Mr Murdoch. But setting a limit on a news outfit's market share would
mean constraining the growth of an expanding media group if its competitors were doing badly. Punishing success is never a good idea, and is especially undesirable when media compa nies are running up against powerful digital distributors like Apple, Facebook and Google. Two sorts of legal reform are suggested, on privacy and li bel. Those who want a privacy law believe that individuals need clearer protection from intrusion by the press. But writ ing legislation which protects ordinary people yet does not constrain the press's freedom is hard-witness the experience of France, which has a privacy law and a tradition of excessive ly tactful newspapers. Most of the tabloids' worst excesses in hounding people are clearly illegal, and Britain already has a sort of privacy law, via the 1998 Human Rights Act. Better leave that in place, for judges to interpret as they will, albeit in a messy way, than codify it further. Libel law, by contrast, badly needs reform. It is so plaintiff friendly in Britain that London is the venue of choice for for eign potentates seeking to sue critical compatriots. A new libel law should givejournalists greater recourse to the defence that they were acting in the public interest. A club with responsibilities and benefits The most strenuous effort should be directed at toughening up the system for regulating journalists' behaviour. The discredit ed Press Complaints Commission has been dominated by popular-newspaper editors who sit injudgment on their own industry. It is a voluntar y body, which proprietors have left when it offends them. Tightening is tricky, however. The gov ernment should not directly regulate the press-that would be an invasion of free speech. Nor should it set up a statutory body which alljournalists would be forced to join. Journalism cannot be regulated as medicine or law can: anybody must be free to report, comment and criticise. What is needed sounds impossible: a much tougher, inde pendent regulatory body to which no publisher is forced to be long, but to which most still wish to belong-including the on line publishers who are hardly regulated at present. The way to achieve this is to offer publishers something in return. The regulator should create a new tribunal (excluding serving edi tors) to hear all complaints, whether from celebrities, oligarchs or ordinary folk. It should not only rule on whether articles are accurate, as it does at present. It should also order corrections to be printed and specify where. It should be able to levy stiff fines and launch its own investigations. In exchange for participating in this embarrassing, unpleas ant process, publishers would gain increased legal protection. The press tribunal would give its verdict first-and a judge in a libel case or a privacy one would then have to consider that. The rich and powerful may well still try their luck in court, but their chances of success will be slimmer. This will help to solve one of the serious press's big complaints: the huge cost of de fending civil lawsuits, and the consequent chilling effect on what they publish. To get those protections, this tribunal will need to be set up in law. But the running of it, its appointments and its rules should be left entirely to its members. •
The Economist February 4th 2012
Leaders
11
France's presidential election
Hey, big spender The French state spends too much, and the presidential candidates should acknowledge it
I
HE 16m French people who
Government spending %of GOP
Ttuned in to Nicolas Sarkozy's
television interview on Januar y 29th could have been forgiven � for thinking they were watching 50 � � EU average a challenger for the presidency 45 -'V rather than the man who has oc 09 2007 08 10 11 cupied the Elysee since 2007. La menting France's lack of competitiveness, Mr Sarkozy repeat edly suggested that German-style reforms were needed to get France back to work and to restore its economy. He announced plans to trim the social charges paid by employers to the state, and to raise taxes on consumers to pay for that. He said that firms should have more freedom to negotiate changes in work ing time with employees. It was as if he wanted a "rupture" with the past-though voters are still waiting for the rupture he promised when running for president five years ago. France certainly needs dramatic reform. Its economy has probably slipped back into recession. The unemployment rate is 9.9%. In 2005 the current account swung into a deficit that has steadily deepened since. In Januar y Standard & Poor's, a ratings agency, hammered home how France has lost eco nomic clout by taking away its AAA credit rating. The economy is at the top of many French voters' minds as they prepare for a two-round presidential election in April and May (see page 31). The two front-runners, Mr Sarkozy and his Socialist rival, Fran�;ois Hollande, have already begun to battle for economic credibility. Although it is early days, neither man seems to have grasped quite how bad things are. First, the good news. Both candidates have pledged to re duce the budget deficit-though Mr Hollande has given him self a year more than Mr Sarkozy to eliminate it. This would be an achievement in a country that has not balanced its books for almost four decades. Fears over its sovereign bonds may Fran�
60
55
have eased, but France has a public-debt stock worth nearly 90% of GDP and is vulnerable to fallout from the euro crisis. It cannot rely on the good graces of the market for ever. The bad news is that both candidates look as if they mean to tame the deficit using mostly tax rises instead of spending cuts. This would be bad for France. On Mr Sarkozy's watch the public sector in France has ballooned to 57% of GDP, second only to Denmark among European Union countries. Just rais ing taxes further signals an unwillingness to grapple with the inefficiencies of the French state. Moreover, the French econ omy needs to grow. And experience shows that growth is more likely to follow spending cuts than tax rises. Time to go Dutch
In rhetorical terms, Mr Sarkozy is the less unrealistic: witness his keenness for German reforms in his TV appearance. But after five disappointing years, can anyone believe him? The austerity measures already taken by his government have re lied on tax rises more than spending cuts. The chances of any reform, German or not, before the election are slim. With Mr Hollande, the clear favourite in the polls, the dan ger is the opposite: he might do as he says. He plans not to take an axe to Leviathan but to feed it, with taxes on the wealthy in order to help pay for 6o,ooo new teaching jobs. He wants to raise spending by €2o billion ($26 billion) over the next five years. Maddest of all, he wants to reverse Mr Sarkozy's pen sion reform, reverting to the right to retire at 60 rather than 62 for those who have worked for long enough. France has a tradition of a strong, high-spending state. No one is suggesting it becomes Singapore. But tax rises cannot plug the gap for ever. The candidates vying for France's highest office owe it to the voters to tell them what lies ahead. Who ever occupies the Elysee after May will find it easier to confront some hard spending decisions with a mandate. •
China's economy
Time for a property tax A way to stabilise both China's wild propert y market and its weak local finances
I
C
HINA'S economy is so huge, and its significance to the world so great, that it is easy to 0 10 20 30 40 forget the country's property UnitedSt;,tes market is still in its adolescence. Japan South Korea Two decades ago most city folk China were consigned to dilapidated Tur�ey quarters provided by their state owned employer. In the years since then house building has boomed and the cult of home ownership has taken a hold on the Chinese psyche. But the market has seen epic swings, and prices are now falling in many big cities. This is having a big impact on China's local governments. Property-tax revenue As %of local tax revenue, 2009
iF
They carry out over four-fifths of the country's public spend ing, but pocket only half of the taxes (see page 54). To help make up the difference, they rely on expropriating land from farmers and flogging it to bullish property developers. But as developers struggle, land sales are dwindling. As a result, lo cal-government revenue is drying up. Popular resentment, meanwhile, is not. In Wukan, in the southern province of Guangdong, aggrieved villagers rose up in December against land-grab bing officials, chasing the local party chief away. In other parts of the world local governments raise rev enues by taxing homes based on something like their market value. In China taxing property is a touchy subject. The gov ernment had tried imposing a variety of levies on the sale, size ��
12
The Economist February 4th 2012
Leaders
�and historical cost of property, but none on the market value of homes. That changed a year ago, when Chongqing and Shanghai, two giant cities, introduced a pilot tax on some up market homes. The tax was largely symbolic, levied at low rates on a few thousand homes in each city. But it nonetheless set a precedent. China should now broaden that tax to as many properties as possible, in cities across the country. For local governments a fully fledged property tax would provide a stable source of revenue. Unlike workers or busi nesspeople, homes cannot up sticks and leave. A property tax raises revenue year after year, in contrast to a land lease, which can be sold only once. What's more, such taxes allow local au thorities to capture some of the value they create: as they in vest in local amenities, proper ty values rise, and so do the tax es they are able to collect. Home truths A property tax could also temper the wild swings in China's housing market. A recurring levy would make it costlier to buy and hold a second or third home as a speculative bet on rising prices. That would force some absentee homeowners to sell their vacant flats or rent them to the many citizens priced out
of the market. Some economists believe that the light taxation of land in Japan contributed to its ruinous asset-price bubble in the 1980s. A property tax would by no means be easy to implement in China. It would require homes to be registered, title to be clear and the appraisal of property values to be credible. But similar obstacles have been overcome in other developing econo mies, including many cities in India. Under Chairman Mao, taxes on private property all but vanished along with private proper ty itself. Today's Chinese set no store by the old socialist doctrine that "property is theft". But many urban Chinese now think of taxation that way. They feel, with somejustification, that they already pay too much to a state that provides too little. This antipathy is not lost on China's local governments. They are wary of angering the urban middle class, who own their own homes, and the city elites (including party officials and their families), who usually own several. So they continue to cause anger by throwing rural folk off their land. China must now act boldly to reform its taxation of property. Other wise it will have to face the consequences of continued weak local-government finances and even more social unrest. •
America's retreat from Afghanistan
The spectre of comparisons Attempts to accel erate the drawdown of Western troops in Afghanistan are tempting but misguide d ELISHING
their
country's
R reputation as the graveyard
of empires, Afghans are proud of having vanquished all the for eign armies that have ventured onto their soil. Yet the Soviet army, the most recent, was not exactly defeated: it withdrew in 1989 because it had wearied of an unpopular war that it strug gled to justify to the people at home. Nearly 25 years later, America and its allies risk a similar failure of nerve and will. This week Leon Panetta, America's defence secretary, has aired hopes that NATO soldiers in Afghanistan can finish their combat mission as much as 18 months early-by the second half of next year, rather than the end of 2014 (see page 49). He has also raised doubts that the outside world can afford to stick to its plans to pay for a permanent 350,ooo-strong Afghan se curity force. Such a shift has obvious attractions. Operations in Afghanistan cost a fortune and take precious lives. It does not help that some of the killers are NATo's supposed partners: rogue Afghan soldiers murdered four unarmed French train ers last month and an American marinejust this week. It is estimated to cost $1m to keep an American soldier in Af ghanistan for a year-and some 90,000 are there, along with a further 40,000 from nearly so other countries. At a time when money is short, this is a huge sum. Moreover, the Obama ad ministration has other strategic priorities. It wants to "pivot" eastward, to soothe maritime nerves jangled by China's rise (see Banyan, page 53). And then there are elections, in France, America and elsewhere. Incumbents want to campaign as the men who are bringing the boys home. For three reasons, however, succumbing to such electoral
temptations, by even voicing the possibility of an early draw down, is a mistake. First, limiting NATO's combat role and the strength of Afghan forces threatens the "transition" to a coun ter-insurgency war almost entirely waged by locals. This has been bearing fruit: violence is down in Helmand and Kanda har provinces; better-trained Afghan troops are proving their mettle against the Taliban; surveys of Afghan opinion suggest that the Taliban's popularity has fallen dramatically. Even so, the deadline of 2014 was always going to be difficult to meet. Nothing suggests that it can safely be brought forward, or that Afghanistan can get by with fewer troops. Second, 2014 is a crucial year in Afghan politics. Foreign forces will be needed to secure the vote for a successor to the president, Hamid Karzai. Their absence might even tempt him to renege on his promise not to seek an (unconstitutional) third term. And third,just as progress has been made in bringing the Taliban into peace talks, whispers of an early withdrawal will only encourage their intransigence. They have always said that the foreigners have the watches, but they have the time. Paid stan, whose continued clandestine support for the Taliban was catalogued in a leaked NATO report this week, will have little incentive to turn against its old partners-in-jihad. The price of failure An early transition may mean that the West will leave Afghan istan without completing its first, limited goal-to stop the country providing a base for al-Qaeda and its fellow jihadis. Moreover, Afghanistan is at greater risk of becoming a swamp that festers regional rivalries-especially that between India and Pakistan. These would soon become America's business. Lastly, the whole sorry story will send a chilling message ever ywhere about the worth of Western commitments. •
13
Disasters and climate change SIR - Your briefing on natural disasters discounted the possibility of a connection between global warming and weather-related events ("Counting the cost of calamities",January 14th). You referred to a recent study from the Intergovernmental Panel on Climate Change, correctly noting its conclusion that the number of tropical cyclones is not likely to increase. What you did not mention is that the same report also says that the average maximum wind speed of tropical cyclones, which determines how destructive they are, probably will increase. Furthermore, last year's devastation in Thailand was the result of extremely heavy monsoon rains, not a tropical cyclone. Among its other conclusions the IPCC's report states that the frequency of heavy precipitation is also likely to increase. The early signs of the relationship between climate change and weather are already being seen. As a recent article in Nature on the same subject puts it, "weatherrelated events are generally on the rise." Although there is no doubt that economic development is an important cause of losses from natural disasters, it is also becoming more clear that global warming is leading to an increase in the frequency of extreme weather events, and that this trend will continue in the future. RO B E RT DICKINSON
President Climate Strategy Advi sors Menlo Park, California
Parental custody in japan SIR - Regarding your article on parental access to children after divorce in Japan, I take issue with your conclusion that "a country that has long sought redress for the past abduction of a few dozen citizens by the North Korean state tacitly supports vast numbers of abductions each year at home" ("Child-snatchers",January 21St). This juxtaposes parental access to chil-
dren with the abduction of Japanese nationals perpetrated by the North Korean authorities, which infringes upon Japan's sovereignty as well as the lives and safety of Japanese people. Linking these two issues constitutes a blatant disregard for the facts and undermines efforts by the international community to rescue victims of abduction. Moreover, Japanese judges are not hesitant to recognise parental access, despite what you suggest. Japan believes that it is important for parents who do not live with their children to have access to them even after divorce. The courts have generally ensured that parents without custody are granted access, from the viewpoint of children's welfare. The government of Japan is deeply sympathetic to the suffering of children and families involved in parentalaccess disputes betweenJapanese and foreign nationals. The government puts the welfare of children first; it intends to conclude the Hague Convention as early as possible and is sparing no effort to ensure that this happens. H I RO S H I S U Z U KI
Embassy of Japan London
Table talk
was the only communist east European country in which its leader (and his spouse) were rather combustibly shot dead. E R I C M E RKEL-SOBOTIA
Berlin
Solar can shine in India SIR - Your report on energy in India focused on the country's reliance on coal, pointing out that this was problematic because Coal India would not be able to provide enough of it ("The future is black",January 21st). The article completely ignored the potential impact of solar photovoltaic cells, the cost of which is rapidly declining. By 2017 solar power is expected to be competitive with thermal coal plants that use more costly imported coal. The gestation period of large coal plants is six to seven years. The gestation period of solar plants is less than a year. Hence India can afford to stop investing in coal immediately and rapidly put up large solar PV plants beyond 2016. This will enable existing capacity to be used round the clock, and therefore increase power generation. Beyond 2017 solar energy costs will continue to decline, making it competitive at some point with low-cost coal as well. NADIR G O D REJ
Mumbai
S I R - You wrote that a "grand
bargain" with Iran "is still worth tabling" ("Not quite too late", January 21st). Are we talking about the British meaning of tabling (to put on the table to discuss, to submit for consideration) or the American definition (to put on the table for later, to postpone)? I assume the sentence carried the British connotation, but how would Iranians read it? J A M E S POTI E R
Charlottesville, Virginia
Remembering Ceausescu SIR - You began your article on rioting in Romania with the observation that "Romanians are not often thought of as combustible folk" ("Anger management",January nst). You have a very short memory. Some 20 years ago Romania
er to purchase or rent a jet ("Buy or rent", January 21st). The proposal is that the distinction between a "finance lease" and an "operating lease" be erased from the accounting lexicon. This will remove the beneficial effect of operating leases in respect of debt covenants, as they will no longer allow for a favourable debt-toequity ratio when compared with finance leases. This change should therefore eliminate a short-term incentive to lease rather than buy aircraft. TOM B O D E N
London
Inconvenience stores SIR - Oh dear. Your article on town-centre retailing has forced me to confront my shopping profile ("Nation of shop critics",January 21St). Within a ten-minute drive of my home there is a proper high street with butcher, greengrocer and other small shops, but inconvenient parking. There is also a supermarket with almost everything I need and plenty of parking. I extol the virtues of the former and shop at the latter. And if I need to buy books I'll click on Amazon, where parking availability is not an issue. Should I feel guilty or just accept that this is the reality for city-dwellers in 2012? TRU DY PAYN E
SIR - India's power-distribu-
tion process is the biggest hindrance to meeting energy demand. India recently had the capacity to produce 185 gigawatts of electricity, but the peak time supply was n8G w, which fell short of demand by some 10%. The latest "Electric Power Survey of India" states that the inefficient transmission and distribution process "loses" about 30% of electricity, compared with 6% in America and China. AMIT ANAN PARA
Ch icago
Plane accounting S I R - You noted the rise in
leasing aircraft by airlines, but did not mention new accounting changes that could affect an airline's decision on wheth-
London
Fifty, fit and miserable S I R - Reading about how near-starvation diets and vigorous exercise can boost longevity ("Worth all the sweat",January 21st) brought to mind a remark by Clement Freud: "If you resolve to give up smoking, drinking and loving you don't actually live longer-it just seems longer." T H E L L E N LEVY
San Francisco •
Letters are welcome a n d should be add ressed to the Editor at The Economist, 2 5 StJames's Street, London SWlA lHG E-mail:
[email protected] Fax: 020 7839 4092 More Letters are available at:
Economist.comfletters
An Australian view of China's rise
A necessary example of tolerance
As C h ina's n ei g h bo u rs eye its economic and military development with increasi n g
All aboard the Vivek Express Our corres p o ndent spends fo u r days on India's longest trai n jo u r n ey, from a
cauti o n , Kevi n Rudd, Australia's forei g n mi ni ster a n d former p rime minister, discusses the cha llenges posed by the
to Kanyakumari in the far south. He chats with so ldiers, cooks and a novelist,
Middle Kingdom's domi n a n ce and t h e importa nce o f multilateral n eg otiati o n s
recording t h ei r conversati o n s a n d s n a p pi n g p h otos a long the way
A Swedish dip lomat in B uda pest, Raoul Wallenberg saved thousands of Jews from Nazi death camps. B ut i n 1945 he vanished i nto the G u lag, n ever to be h ea rd from again. On t h e centena ry of his bi rth-a nd with anti-Semitism on t h e rise in Hunga ry- h e is the subject of new tri b utes
Economist.comfnode/21544812
Economist.comfnode/21545856
Economi st.comfnode/21545851
remote corner of Assam i n t h e n o rth-east,
Newt G i n g rich h a s been touti n g space
Technology: Forget it Thanks to digital tec h n o logy, people can n ow
colonisation for three decades. But is the idea workable?
remember nea rly everythi n g. It is hi g h time
Technology: Difference engine American carmakers may soon be ma ndated to bui ld vehicles that con sumers a re n ot
they relearned h ow to forget
mandated to buy
Economist.comfnode/21544790
Economist.comfnode/21543561
Economist.comfnode/21544810
Middle East: Makeshift medicine
China: Man-made and visible from space Satellite data reveal the true extent of air
Economics: Mick Jagger's top ten A soundtrack for the World Economic Forum
polluti o n a round the provi nces
Economist.comf node/ 21544 7 7 4
United States: Moon Base Gingrich
A rare glimpse i n side t h e secret h ospitals set up by o p position groups in Syria Economist.comfnode/21544818
Economist.comfnode/21545857
Europe: Nastase nailed Does the convi cti o n of a former p rime
Science: Walk this way
Language: Enough English for public office? A woman i n Arizona is told her En g li s h is too
minister mean that Roma nia is fina lly getti n g
Urba n plann ers i n creasi n g ly putthe n eeds of pedestrians before those of motorists
Economist.comfnode/21544789
t o gri ps with its corruption pro b lem?
Economist.comfnode/21544803
Economist.comfnode/21544821
Technology: Ten million billion and counting
poor to a llow her to run for the city counci l
Sport: The magic formula Why a re Korean women so good at go lf?
Management: It's a di rty job More and more busi n ess graduates are considering a career in ma n ufactu ri n g
America is poised for a comeback in the supercomp uti n g race-but is i t willing to go
Economist.comfnode/21544763
the dista nce?
Economist.comfnode/21544811
Economist.comfnode/21544806
Links to all these stories can be found at Economist.comfnode/2 1545858
Executive Focus
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42
The Economist
United States
Lexington
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February 4th
2012
The classes drift apart
Can the rich save the American dream by preaching what they practise?
wrong when he grumbles that America is run by an out-of J rich touch elite. If you want evidence, the data can now be found in UST because he belongs to it himself does not make Newt Ging
a book published this week by Charles Murray, the co-author in 1994 of "The Bell Curve", which became controversial for posit ing a link between race and intelligence. That controversy should not deter you. "Coming Apart: The State of White America 19602010" brims with ideas about what ails America. David Brooks, a conservative columnist for the New Yorh Times, thinks it will be the most important book this year on American society. And even if you do not buy all Mr Murray's ideas about what ails America, you will learn much about what conservatives think ails America, a subject no less fascinating. Though it does not set out to do so, this book brings together four themes heard endlessly on the Republican campaign trail. They are the cultural divide between elite values and mainstream val ues (a favourite of the tea-partiers); the case for religion and fam ily values (think Rick Santorum); American exceptionalism (all the candidates); and (a favourite of Mitt Romney's) the danger of America becoming a European welfare state. Mr Murray starts by lamenting the isolation of a new upper class, which he defines as the most successful 5% of adults (plus their spouses) working in managerial positions, the professions or the senior media. These people are not only rich but also ex ceptionally clever, because America has become expert at send ing its brightest to the same elite universities, where they inter marry and confer on their offspring not just wealth but also a cognitive advantage that gives this class terrific staying power. This new elite is not just a breed apart. It lives apart, in bubbles such as Manhattan south of 96th Street (where the proportion of adults with college degrees rose from 16% in 1960 to 6o% in 2000) and a small number of "SuperZips", neighbourhoods where wealth and educational attainment are highly concentrated. These neighbourhoods are whiter and more Asian than the rest of America. They have less crime and more stable families. They are not, pace Mr Gingrich, necessarily "liberal": plenty of Super Zips voted Republican in 2004. But they are indeed out of touch. In the 19th century Alexis de Tocqueville marvelled that in America the opulent did not stand aloof from the people. That,
says Mr Murray, is no longer true. He assumes (perhaps too blithely) that this class runs America, but makes decisions on the basis of atypical lives. A great cultural gap separates the elite from other Americans. They seldom watch "Oprah" or "Judge Judy" all the way through. In fact they do not watch much television at all. They eat in restaurants, but not often at Applebee's, Denny's or Waffle House, chains that cater to the common taste. They may take The Economist, with the New Yorh Times, Wall Streetjournal, and perhaps the New Yorker or Rolling Stone. They drink wine and boutique beers (and can discuss them expertly) but only in moderation, and they hardly ever smoke cigarettes. A lot of American commentary about the elite is suffused with a creepy resentment (Mr Gingrich), or exercised by inequali ty (Occupy Wall Street) or "fairness" (Barack Obama). In contrast, Mr Murray has nothing against this class of good parents and good neighbours. He just wants it to know and care more about the rest of America. And instead of handing over more of its money, he would like it to teach the rest of America its values. Most in need of instruction is a new lower class, perhaps a fifth of the white population (Mr Murray excludes blacks and Lat inos, simplifying his thesis by taking race out of the equation), whose plight forms the next part of his book. This class is in the throes of disintegration. Too many of its men will not work; too many of its women raise their children out of wedlock; religious worship is in decline. In lower-class neighbourhoods the togeth erness of communities has vanished. Family, pride in work, reli giosity, community: these, says Mr Murray, are "the stuff of life". Take them away and you block the road to happiness. Now comes the compulsory jeremiad on America's imper illed exceptionalism. To Mr Murray, what is at stake is not just the lot of the lower class but "the American project". Jefferson thought the state should stop people from harming one another but otherwise leave them free "to regulate their own pursuits of industry and improvement". But what if a growing proportion of Americans lose the virtues required to be functioning members of a free society? The danger Mr Murray foresees is that America will copy Europe's mistake and give the job of fixing broken fam ilies and communities to government bureaucracies that are bound to fail. The upper class might go along with this, because it is easier to pay higher taxes than to become involved in the lives of fellow citizens whom the rich no longer understand. America will become Europe and the Jeffersonian idea will die. It's noblesse oblige all over again
Mr Murray pleads instead for "a civic great awakening" that will see the upper class sally forth from its SuperZips to talk the less fortunate into marrying, working harder and becoming better neighbours. Mr Brooks thinks national service would bring the classes closer. The Republican candidates think that whatever the answer, it must not cost a penny more in taxes. Your own columnist, a jaundiced Brit residing temporarily in a SuperZip, wonders how the lower class will respond to hearing that the main help it needs is an infusion of its betters' morals. Mr Murray believes his numbers show that following his prescrip tion can help people lead fuller lives at almost any level of in come. He may be right. But those in the upper class who heed his call might want to leave their Mercedes Benzes at home when they set out for Denny's and their voyage of persuasion. • Economist.comfblogsflexington
43
Also in this section 44 Latin American baseball
For daily analysis and debate on the Americas, visit Economist.comfamericas
Canada 's housing m arket
Lool< out below TORONTO
After years of lecturing America about loose lending, Canada now must confront a bubble of its own
I park squeezed between two arms of an I N FEW corners of the world would a car
elevated highway be seen as prime real es tate. In Toronto, however, a 75-storey con dominium is planned for such an awk ward site, near the waterfront. The car park next door will become a pair of 70-storey towers too. In total, 173 sky-scrapers are be ing built in Toronto, the most in North America. New York is second with 96. When the United States saw a vast housing bubble inflate and burst during the 2000s, many Canadians felt smug about the purported prudence of their fi nancial and property markets. During the crash, Canadian house prices fell by just 8%, compared with more than 30% in America. They hit new record highs by 2010. "Canada was not a part of the pro blem," Stephen Harper, the prime minister, boasted in 2010. Today the consensus is growing on Bay Street, Toronto's answer to Wall Street, that Mr Harper may have to eat his words. In re sponse to America's slow economic recov ery and uncertainty in Europe, the Bank of Canada has kept interest rates at record lows. Five-year fixed-rate mortgages now charge interest of just 2.99%. In response, Canadians have sought ever-bigger loans for ever-costlier homes. The country's house prices have doubled since 2002. Speculators are pouring into the prop erty markets in Toronto and Vancouver. "We have foreign investors who are pur chasing two, three, four, five properties,"
A d u bious crown Ho usehold debt• as % of personal disposable income 170 160 150 140 130 120 110 100 '""" '1!"!1''11' "" ·" "'""'"'' .�.,
2000
02
04
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Sources : US Federal Reserve; 'Includes non-corporate Statistics Canada; Thomson Reuters business sector
Interactive: Explore and compare global housing data and rents over time at Economist.comfhouseprices
says Michael Thompson, who heads To ronto's economic-development commit tee. Last month a modest Toronto home put on the marketfor C$38o,ooo ($381,500) sold for C$570,000, following a bidding war among 31 prospective buyers. Accord ing to Demographia, a consultancy, Van couver's ratio of home prices to incomes is the highest in the English-speaking world. Bankers are becoming alarmed. Mark Carney, the governor of the central bank, has been warning for years that Canadians are consuming beyond their means. The bosses of banks with big mortgage busi nesses, including cmc, Royal Bank of Can ada and the Bank of Montreal, have all said the housing market is at or near its peak. Canada's ratio of household debt to dis-
posable income has risen by 40% in the past decade, recently surpassing America's (see chart). And its ratio of house prices to income is now 30% above its historical av erage-less than, say, Ireland's excesses (which reached 70%), but high enough to expect a drop. A recent report from Bank of America said Canada was "showing many of the signs of a classic bubble". The consequences of such a bubble bursting are hard to predict. On the one hand, high demand for Canada's com modity exports could cushion the blow from a housing bust. And since banks have recourse to all of a borrower's assets, and Canadian lending standards are stricter than America's were, a decline in house prices would probably not wreck the banks as it did in the United States. However, the Canadian economy is still dependent on the consumer. Fears about the global economy have slowed business investment, and all levels of gov ernment are bent on austerity. The Conser vative government's next budget is expect ed to put forward a plan to close the federal deficit, now 2% of GDP, by 2015-modest austerity compared to Europe's, but still a drag on the economy. Few new jobs are be ing created. Assuming there is no setback in Europe's debt crunch, slowdown in America or drop in commodity prices, GDP is forecast to grow by a meagre 2% this year. If consumers start feeling less well off, Canada could slip back into recession. The inevitable landing will probably be soft. Increases in house prices and sales volumes are slowing, and the 2015 Pan American Games in Toronto should prop up builders. "The national housing market is more like a balloon than a bubble," says a report by the Bank of Montreal. "While bubbles always burst, a balloon often de flates slowly in the absence of a 'pin'." Moreover, the government is trying to cool the market. The banking regulator is ��
The Economist
44 The Americas �
increasing its scrutiny of housing in re sponse to concerns about speculators. The Canada Mortgage and Housing Corpora tion, a government mortgage-insurance agency, says it will have to start reducing its new coverage because of legal limits. And the finance ministry has cut the maximum term of publicly insured mortgages from 35 years to 30. Some bank managers are call ing for it to be reduced to 25, the historical norm. Canada's reputation for financial sobriety is not entirely unwarranted. However, the state has refused to use its most powerful tool. To protect business in vestment, the central bank has made clear that it plans to keep interest rates low. As long as money stays cheap, the balloon could get bigger-perhaps big enough to become a fully fledged bubble after all. • Baseball in Latin America
Draft dodgers no more S A N TO D O M I N G O
Can the Dominican Republic avoid Puerto Rico's fate?
EEN from the air, much of Puerto Rico's
S northern coast is a mosaic of rooftops
and treetops dotted with countless base ball diamonds. The island of 4m has sent a total of 234 players to America's Major League Baseball (MLB)-twice as many as Mexico. Its Baseball Hall of Fame, just out side San Juan, features a salon full of life size statues of Puerto Rico's athletic pan theon. It even includes a famous broad caster seated at his microphone. Today, however, the fields are mostly used for football. Just 2.6% of MLB players are Puerto Rican, down from 4.3% in 2001. The island's renowned winter baseball league cancelled its season in 2007. A typ ical game now draws fewer spectators than nearby women's volleyball matches. Its four teams are on the block for around $750,000 each. No one is buying. Several factors account for this decline. They include better job opportunities out side sports and competition from basket ball, reggaet6n music, multiplexes and malls. But the biggest was MLB's inclusion of the island in its amateur draft in 1990. Every year, MLB teams select 1,500 play ers from schools and universities. The clubs get to pick in reverse order of their finish in the league the previous season. Draftees can negotiate only with the team that chooses them. Officially, the draft is meant to help the worst teams by giving them the best young talent. But all clubs love it because it reduces signing bonuses. When the draft began in 1965, only Americans were eligible. But 25 years later MLB extended it to Canada and Puerto
Rico. In theory, this should not have affect ed the number of Puerto Ricans signed, since undrafted players become free agents, who can sign with any team they wish. But in practice, MLB clubs rarely sign them; they tell them to go to university and try their luck in the draft later on. The draft thus forced Puerto Ricans to compete with Americans for a fixed number of places. Moreover, whereas Puerto Ricans could previously be signed at age 16, a high school degree (usually given at 18) is re quired for the draft. Since the island's schools do not have baseball teams, its 16and 17-year-olds had nowhere to train. As a result, the number of Puerto Rican MLB signings fell by 13% in 1991-92. Meanwhile, players from the Dominican Republic (DR) and Venezuela remained free agents. Their numbers soared (see chart). Now those countries may be facing Puerto Rico's fate. As more clubs started to recruit in Latin America, signing bonuses took off: the average payout in the DR rose from $29,000 in 2004 to $108,000 in 2008. In response, teams tried to cut costs. In No vember MLB's teams and its players' union reached a deal that levies a tax on clubs whose spending on foreign free agents ex ceeds a cap. It also sets up a committee to institute an international draft by 2014. In the DR, MLB's biggest source of for eign players, the reaction has been apo plectic. Baseball is big business there: MLB's direct value to the economy is $125m-150m a year (0.3% of GDP). Its 30 clubs all have training academies for their players, mainly in poor rural areas. They employ 1,200 people, many in new profes sions like groundskeeper and sports nutri tionist. And in response to criticism that they exploit youngsters, they are offering better education. The Pittsburgh Pirates re quire four hours of class a day, and last year granted 13 high-school degrees.
Try a cricket bat instead
I
February 4th 2012
Ten years later
Percentage of MLB players born in:
PUERTO RICO ENTERS DRAFT I I I I I I I I I I I
I
12 10 8 6 4 2
���LLLLUUUU��- o 10 1987 90 2000 05 95
Sources: baseball-reference.com; The Economist
The indirect benefits are bigger still. An estimated 2,ooo-3,000 scouts and trainers, called buscones, scour the country for play ers and house, feed and instruct them until they sign an MLB contract. They charge 30% of the bonus. Some buscones employ dozens of workers. The winter league plays nearly 200 games a year, each draw ing thousands of fans. Casa de Campo, a golf resort, now has a Latino Baseball Hall of Fame. Many players also have charities: Pedro Martinez, a star pitcher, has built a youth centre offering art, cooking and com puter classes to 300 students. A draft could put all this in peril, by reducing bonuses and possibly the number of contracts. Rafael Perez, MLB's director of Domini can operations, insists that MLB wants at least to maintain the current number of foreign signings. But many buscones ac cuse MLB of selling out Latinos to protect American players' jobs. They note there is just one Latino on MLB's international-tal ent committee-who, as the son of an MLB player, mostly grew up in America. "I feel like we're being invaded, like it's 1965 all over again," says Astin Jacobo, a busc6n, re ferring to America's occupation of the DR. "We're only number one in one thing, and that's baseball. We can't give that away." A group of Dominican buscones has al ready held anti-draft protests. They might convince MLB to set up a separate draft for foreigners with an eligibility age of 16, which would be less disruptive than ex tending America's draft abroad. But stop ping the draft entirely will be hard. Many buscones talk of a strike. But they have not formed a union. Even if they do, they could not stop their players from opt ing to sign with MLB teams. That leaves the government. Felipe Payano, the sports minister, has already written a letter to Bud Selig, MLB's commis sioner, expressing his opposition to a draft. He says his office is investigating whether it might violate the DR's free-trade agree ment with America. Another option would be to sue MLB for collusion under Dominican antitrust law. But it would take a lot of pluck for a small, poor, baseball-de pendent country to pick a fight like that. •
45
Also in this section
4 7 Senegal's e lection
47 Health care in Sierra Leone
48 Race in South Africa
48 African social media
For d a i ly a n a lysis and debate on the M i d d le East a n d Africa, visit Economist.comfworldfmiddle-east-africa
Arab spring economies
Unfinished business
C A I R O , T A B A R KA A N D T R I P O LI
Revolutions have hurt the wallets of bosses and workers alike
N a good day Abdenaceur Ham
O moudi takes home 15 dinar ($10) from
selling fruit in the Tunisian coastal town of Tabarka. Since the overthrow of president Zine el-Abidine Ben Ali last January, mu nicipal inspectors no longer demand a three-dinar-a-day bribe. But prices have risen sharply and Mr Hammoudi now pays wholesalers almost double for his supplies. Customers have become scarce and loans are as hard to come by as ever. "The government needs to build factories to bring us proper jobs," he says. A year ago the self-immolation of a Tu nisian fruit seller, Muhammad Bouazizi, in spired uprisings that toppled the leaders of Egypt, Libya and Tunisia, and caused viol ent chaos in Bahrain, Syria and Yemen. The protests were motivated not just by de mands for greater political freedom but also by popular frustration with unem ployment and economic stagnation. Mr Bouazizi, who could not afford a trading licence, set himself on fire after offi cials confiscated goods of his worth about $200. Whatever its political triumphs, the revolution he sparked has caused an eco nomic downturn. Tunisia saw its GDP growth in 2011 go from 3% to o%, according to the IMF-the Tunisian government says the economy actually contracted by 1.8%. Egypt saw a decline from 5% to 1%. Libya's economy is thought to have contracted by more than so% after its six-month civil war
paralysed the oil industry. A former Libyan bank governor reckons the country suf fered as much as $15 billion in damage dur ing the conflict to oust Colonel Muammar Qaddafi. Inflation is on the rise, though exact fig ures are hard to find. Worried Egyptians are depositing far less money in their banks, fearing a devaluation of the curren cy. Unemployment is also rising fast. One estimate sees an increase in the official rate from 1o% to 15% in Egypt. Youth unemploy ment is reckoned to be at least 25%. Tourism, on which some 15m Egyptians depend, has been harmed, too. Workers in once-busy resorts on the Nile have flocked to Cairo, the capital, hoping to pick up me nial work. In Tunisia many hotels remain closed. Having bought one in a fire sale, a new owner says, "I'm buying the walls, nothing else." He dismissed all the staff. Foreign investment has been hit hard est of all. A Tunisian analyst reckons 120 foreign firms shut up shop, cutting 40,000 jobs. Yazaki, a Japanese cable manufactur er, pulled out of a poor rural region. Over all foreign direct investment dropped by more than a quarter (see chart). In Egypt it plunged from $6-4 billion in 2010 to $soom last year; in Libya it dropped from $3.8 bil lion to almost nothing. A few foreign companies have sig nalled an interest in coming back. Italy's Eni, an energy giant, says it will invest
$6oom in Tunisia this year. Thanks to its existing investment in health care, the country also has hopes of attracting medi cal tourists from Europe and the rest of north Africa, where facilities are abysmal. In Libya construction and oil compa nies are falling over themselves in a race to rebuild what will probably be a wealthy country. Cities like Misrata that were de stroyed in the fighting need immediate at tention. Executives speak of a "gold rush". The United Arab Emirates, France and oth er countries that supported the rebels have sent official business delegations. Many entrepreneurs see unprecedent ed potential under new governments ac countable to their people. The toppling of dictators could open up the private sector, once reserved for those with ties to the rul ing circle. Tunisia has a well-educated workforce and decent infrastructure. Libya has the world's eighth-largest oil reserves; the flow is expected to reach 2010 levels lat er this year. Egypt has a large domestic con sumer market. "There is great excitement. Not every day do you get countries which have been under an autocratic regime for 42 years suddenly opening," says Kevin Virgil, an investment adviser who hopped on a plane to Tripoli the day Qaddafi was killed. Nonetheless few deals have been signed and most investors remain on the sidelines. Why they faltered
There are four main reasons for the eco nomic downturn in the post-revolution countries. The first is instability, both imag ined and real, that has driven away cus tomers and undermined business confi dence. Post-revolution Libya is largely lawless. Young, unemployed men with guns roam the streets. Security firms are decamping from Baghdad to Tripoli. Tat- ��
46 �
The Economist
Middle East and Africa
tooed former soldiers populate the break fast rooms of reopened business hotels. In Egypt the discredited police force has withdrawn from many districts, leaving control to local youths (at least 73 people died in a riot after a football match on Feb ruary tst). George Bahna, who runs an en gineering-services company, says he aban doned a large project near the city of Suez when locals raided his warehouse and fought gun battles over control of his prop erty. "They stole the metal doors at the en trance," he says. Even relatively stable Tunisia has seen continuing disturbances. In the country's north-west, roads were blocked by angry protesters in January. The government has recorded a total of 330 sit-ins and other protests in the first three weeks of this year over a lack of government services. The second cause of the downturn is strikes. Workers feel able at last to vent their frustration after years during which they feared repression. Owners report that in many places employees demand more pay and the replacement of managers who have supposed ties to the old regime. "When a strike takes place they have no united leadership, so you're dealing with 6o people tugging at your jacket asking for this and that. And when you've made con cessions and you think you've resolved it, it all begins again after a couple of months," says one owner. Civil servants have also been making demands for high er salaries and the replacement of their bosses. Fayza Aboul Naga, Egypt's minister for planning, has said the country is in "no shape to respond to the demands". The poor state of the government ma chinery is a further reason for the down turn. In many areas the state has either ground to a halt or been overwhelmed by rapid change. Egypt has had four finance ministers in the past year. Businessmen complain of red tape becoming "even red der" as corrupt bureaucrats down tools since they no longer dare to demand bribes. In Libya, where the state barely ex isted under the paranoid Qaddafi, many institutions have to be built from scratch. Diplomats say 2012 is "year zero". In all Investor flight Foreign-di rect investment inflows, Sbn
2005
06
Source: UNCTAD
07
08
09
10
11. * Estimate
three post-revolution countries, new lead ers-who for the first time face legal ac countability for their actions-are reluctant to sign off on projects, afraid that they may later have to answer questions in court. This is especially common in Libya, where the National Transitional Council says it will not ink any long-term deals until an elected government is in place. The final reason for the downturn is the chill that has descended over all business es connected to the previous rulers, espe cially privatised ones. Some sales of state assets are rightly seen as acts of plunder. Even where the regimes instituted painful but necessary reforms the benefits mainly went to insiders, leading the public to asso ciate privatisation with crony capitalism. Now that the old rulers have left, their suc cessors are going after some of their cro nies, piling on yet more uncertainty. Libya's new rulers have said they might revise certain oil contracts. Tunisia has con fiscated over 300 companies deemed to be owned or controlled by the discredited cronies, including a 51% stake in Orange Tu nisie, a telecoms firm, that was owned by Marwan Mabrouk, the son-in-law of the deposed president. In Egypt wrangling continues over deals made under former President Hosni Mubarak; Damac Proper ties and Al-Futtaim, two property compa nies, have agreed to make additional pay ments for land they bought cheaply from the government in 2006. A senior execu tive at a property-development firm in Cai ro says, "We had to take out ads after the revolution to tell people that we are a ma jor employer, and we received threats from people who wanted to blackmail us." The new rulers
Many local businessmen hope that new governments can dispel the gloom. Alas, ministers are preoccupied. Egypt, Libya and Tunisia all face fiscal crises. Tackling them is the first order of business for new ministers. Egypt is the worst off. Its foreign currency reserves have dwindled, from $36 billion to $10 billion in the past year, and an inflation-inducing devaluation is looming. The government is struggling to finance a budget deficit of lo% of GDP. In January the government managed to sell only a third of a planned $s8om bond of fering, even though it will be paying yields close to 16%. The IMF says it stands ready with tech nical assistance and loans to balance the books and rebuild foreign reserves. It is ne gotiating a $3.2 billion loan with Egypt that would send a good signal to investors. The IMF is also offering help to Tunisia. Libya is still waiting for the unfreezing of $170 bil lion in Qaddafi-era deposits abroad. Most of all the new governments want foreign investment. Abdullah Dardari, a UNESCO economics adviser and former Syrian government minister, says oil-pro-
I
February 4th 2012
Revolution blues Stockmarket i ndices, Dec 1st 2010•100
(TUNINDfX)
- Tunisia
(All Shore index)
(HFI)
- Ba hrai n
Egypt 110
��,���---------------- 100 90 80 70 60 ��
����-L��L-� 50
0 J 2010
F M A t•l J J 11
A S 0 N
0 JF 12
Source: Thomson Reuters
ducing Gulf states could easily and profit ably invest 10% of their sovereign-wealth funds in north Africa to promote growth and regional stability. "Countries should look at regional ties," he says. How soon investors return partly de pends on the policies of the new govern ments. They are mostly made up of moder ate Islamists who spent decades in opposition to authoritarian rulers-which makes them suspicious to both the West and the Gulf. In public so far the new gov ernments have emphasised their support for free markets and property rights. They say they look to economically liberal Tur key for inspiration. Nevertheless the priority for leaders in Tunisia and Egypt is popular concerns, such as cleaning up corruption, creating jobs and investing in new roads and schools. Tunisia's government has vowed to raise growth to 8% and reduce unem ployment from 19% to 8.5% by 2016. Egypt says it will restructure and boost private enterprises such as textile factories that employ some 70,000 workers. Successful Egyptian entrepreneurs with links to the Islamist Freedom and Jus tice Party, which won recent parliamenta ry elections, are promising to dispense ad vice and capital to small-business owners. Islamist leaders have brushed off calls by hardliners for bans on bikinis and alcohol in tourist resorts. Rachid Ghannouchi, the leader of Tunisia's ruling Nahda party, has encouraged executives to list more compa nies on the local stock exchange, which has risen recently (see chart). But for all the wooing of voters and in vestors, the new leaders so far lack credi bility and expertise. Their plans mostly re semble wishlists. In a worrying flight of economic nationalism, both Tunisia and Egypt have suggested they aim to achieve food self-sufficiency. There is little talk of cutting red tape, privatising state-owned enterprises or slimming the obese public sector, nor have officials contemplated phasing out wasteful and badly targeted subsidies. The hardest part of the north Af rican revolutions is yet to come. •
The Economist February 4th 2012
Middle East and Africa
Senegal's election
Two terms and maybe you're out West Africa's beacon of democracy loses its lustre
'l J OTERS are gathering in Senegal's pub V lie squares in preparation for presiden
tial elections on February 26th, but they are not listening to candidates' stump speeches. Instead angry young men are burning tyres in front of riot police. They come encouraged by Facebook messages explaining how to cope with tear gas and by photographs of those killed in previous protests, who number at least five. The rioting started on January 27th, when the constitutional court decreed that Abdoulaye Wade, the incumbent presi dent who has ruled for 12 years, could stand in the upcoming election. He is fin ishing his second term in office but the court ruled that the constitution's two term limit does not apply to him, since it only came into force after his first election win in 2000. The rule change was written into the constitution by Mr Wade himself.
Shakin' the tree
Abdou Diouf, his predecessor, was in pow er for almost 20 years. The court also said that Youssou N'Dour, Senegal's most famous musician, could not compete in the election because it could not identify enough of his suppor ters' signatures on his application form. He called the judges' decision a "constitution-
Heath care in Sierra Leone
It's up to you F R E ET O W N
Substitutes for traditional foreign aid are hard to find
I highest child-mortality rate in the
N 2010 Sierra Leone had the fourth
world-174 deaths pen,ooo live births. The Swedish figure was three. In re sponse the small west African country introduced free health care for pregnant and breastfeeding women and children under the age of five. Britain provided $24m in funding and officials proclaimed it a success. Yet problems keep cropping up. Drugs go missing, some women still cannot get treatment without paying and an online procurement system unsurprisingly foundered, because of the general lack of internet access. The British government modestly describes the free health-care system as a Sierra Leonean initiative that it is merely assisting. Increasingly donors like to stress the "local ownership" of foreign aid, a set-up that is deemed more effec tive than the old system under which donors built roads and hospitals only to find them neglected soon after being handed over because the locals regarded them as mere gifts. But where institutions are weak, local ownership at times fails. Sierra Leone
was devastated by a decade-long civil war that ended in 2002 and many of its most able citizens still live abroad. Min istries remain dysfunctional. British doctors who worked in the country say the Sierra Leonean government lacks the wherewithal to organise something as complex as the provision of free health care. Natasha Sauven, a paediatrician, described an official document outlining drug procurement as "quite frankly fantasy." UNICEF is scrambling behind the scenes to keep the initiative going. Meanwhile there is a new example of old-style aid in Sierra Leone. In the port of Freetown, the capital, sat until recently a converted Danish rail ferry once known as the Dronning Ingrid that has been turned into a floating hospital by Mercy Ships, an American charity. It has six operating theatres that can function independently of a beleaguered host country, literally offshore, insulated from corrupt officials and an unreliable power supply. Local ownership this is not, but the volunteer doctors on board the 499foot (152 metres) ship successfully re moved cataracts and fixed cleft palates for ten months.
al coup." Senegal is the only country in west Africa never to have had a military coup. All in all, it has a robust democracy but opposition leaders say that reputation is now under threat. They are supported mostly by youths in popular protest move ments such as June 23rd Movement ("M23") and Y'en a marre, meaning "we're fed up". Mr Wade, who claims to be 85 years of age but could be older, said when term limits were introduced that they ap plied to everyone including himself. But now he has changed his mind. His cam paign spokesman has said that those who oppose Mr Wade should stop complaining and vote in the elections. Mr Wade is by no means a shoo-in at the polls. Many Senegalese are fed up with rising prices and constant power cuts. Yet the political opposition is divided and has failed to agree on a single, inspiring candi date. Most are familiar figures, including three former prime ministers who scented blood as Mr Wade became increasingly unpopular in recent years. Like Hosni Mubarak, the deposed presi dent of Egypt, Mr Wade put his son in gov ernment and may be thinking of him as a possible successor. But that is where com parisons with the Arab world end. "Wade is not a dictator," says Carlos Oya, a profes sor at London's School of Oriental and Af rican Studies. Institutions have deep roots and are generally independent. Even if there are further violent protests in the run-up to the poll, Senegalese democracy should sur vive. The country's establishment also ap pears to be turning against the president. The leadership of the powerful Mouride Sufi Muslim brotherhood, of which Mr Wade and Mr N'Dour are both members, has refused to back the incumbent as in the past. In an apparent shot across his bows it cautioned that "those who reign by terror will perish by terror." •
47
48
The Economist
Middle East and Africa Race in South Africa
Still an issue
February 4th 2012
Social media
#AfricaTweets NAIROBI A N D KIGALI
A new report details the use of Twitter in Africa. Here is the short version C A P E TOWN
Mixed-race citizens remain uneasy about black rule
I he might be called a coloured. Under F BARACK OBAMA lived in South Africa,
apartheid, the government decided to which of four racial categories a South Af rican belonged-black, coloured, Indian/ Asian or white-depending mostly on looks. The same categorisation still exists, but it is now left up to individuals. Given that coloureds were formerly re garded as racial misfits, once dismissed by the wife of former president F. W. de Klerk, Marike, as "non-persons . . . the leftovers", one might have expected the number of South Africans wishing to describe them selves as such to plummet. But since the end of apartheid in 1994 the coloured pop ulation has in fact grown by almost a third, to 4.sm. Most live in Cape Town and the West ern Cape region, where they originated some 350 years ago after the arrival of the first Dutch settlers. Given the dearth of European women at the time, the Dutch soon to be followed by French, German and English settlers-often took the pale skinned indigenous Khoisan or, later, im ported Asian and African slaves as their wives and mistresses. Ranging in skin tone from very pale to darkest brown, many coloureds were (and still are) indistinguishable from their white or black compatriots. Some crossed the ra cial divide and became assimilated into white communities. But after a ban on in terracial sex in 1950, this became much more difficult. Borderline cases were sub jected to an infamous test. The curliness of someone's hair (a supposed indicator of blackness) was judged by sticking in a pen cil; if it slid out the person in question was counted as white. This experience, coupled with a long history of being treated as inferior to whites, could easily have led the coloureds to identify with their black fellow-suffer ers. But unlike in America, where a mixed race president describes himself as an Afri can-American, South Africa's coloureds have tended to reject their African heritage, preferring to adopt the language, culture, religion and even family names of their former white persecutors. Most coloureds speak Afrikaans (a creolised Dutch) and worship in the Dutch Reformed Church. In South Africa's first multiracial elec tions 18 years ago, two-thirds of colou reds-a higher proportion than whites voted for the party that once oppressed them, the now-defunct Nationalists, rather
@Africa: Twenty countries
sent over nm tweets in the last quarter of 2on, Africa is an officially paid-up member of the Twit tersphere #AfricaProgress @jacobzuma: South Africa is wired! sm tweets-number one in Africa! @Africa: Who needs computers? 57% of
@GovEritrea: we have no twits @UhuruKenyatta: Dad founded Kenya.
I'm going to The Hague and tweeting about it @MorganTsvangirai: •••• ••• •••• •••• * * * * * * ***** *** * * * * * * ** ***** **
•••
#ZimPolitics
@jacobzuma: tweeting in the shower
@UhuruKenyatta: As I leave for The Hague tonight, I would like to thank you all for the support, encouragement and prayers that you have accorded to me
@KenyaGov: Egypt shmeegit. Kenya
@RobertMugabe: I have a farm in Afri
rocks twitter. 2.sm tweets to your L2m
ca. Lots actually. #ReadingisakDinesen
@DisgruntledKenyan: @GovKenya no
@LibyanRebels: Does this thing run on oil? #HopeSpringsEternal
tweets were sent from mobile phones #CoolAfrotech
thanks to you! @SPRINGBOKS: Ek verstaan nie @SaifQaddafi: Catching up with reality television now I have some time on my hands. New season of I'm A Tyrant Get Me Out Of Here rocks. #KeepingltSaif @Africa: Chitchat with
1
(
friends and following the news form the bulk of )I tweets #Notthatdifferent
Number of tweets
Top 20 African cou ntries 04 2011
745,620
Morocco
34•916
Mali
6. 536
Burkina Faso
@PresidentofGhana:
103, 200
Algeria
--J
3,096
libya
50,000 tweets
7,052
Nige
1,646,212
Nigeria
25,284
Sudan
Ethiopia 6,450
"twitter machine" arrived this morning. @Africa: 94% of those on Twitter use Facebook too #NoSurprisesThere @AlQaeda: infidels get ready-Somali
al-Shabab has set up its own Twitter account @HSMpress @HillaryClinton: feeling glum-African
al-Qaeda @HSMpress has oveno,ooo followers @Bono: Africans tweeting each other,
not me, about news, not me #sadface @GovernmentEthiopia: 1 billion tweets
on their way by 2020! than the liberationist African National Congress (ANC). Today the same propor tion supports the white-led Democratic Al liance, the main opposition party. Better educated and traditionally better treated than blacks, the coloureds worry about be ing disadvantaged under ANC rule-per haps rightly. Economic-empowerment and affirma tive-action laws are supposed to benefit all
Source: Portland, Tweetminster
previously disadvantaged groups, but col oureds claim that blacks often get priority. They also fret over their loss of status. Sec ond from last in South Africa's old racial pecking order, they now find themselves right at the bottom. Trevor Manuel, the country's most senior coloured politician, recently complained that "worst-order rac ism" has "infiltrated the highest echelons of government". •
49
Also in this section 50 Papua New Guinea's bungled coup 50 Politics in Malaysia 5 1 Myanmar and Singapore 52 State elections in India 53 Banyan: The devil in the deep blue detail
Fo r daily a n a lysis a n d debate on Asia, visit Economist.comfasia Economist.comfblogsfbanyan
Am erica in Afghanistan
Outta here
After a decade in Afghanistan, the United States rushes for the exit
S a meeting of NATO ministers in Brus PEAKING on February 1st shortly before
sels, Leon Panetta, America's defence sec retary, dropped a bombshell. He said that he now hoped American troops in Afghan istan would be able to withdraw from a combat to an "enabling" role soon after the middle of next year-ie, about 18 months earlier than an existing plan agreed on in late 2010 at a N ATO summit in Lisbon. The timing of Mr Panetta's remarks about ac celerating the pace of the transition to Af ghan national security forces (ANSF) owes more to the Obama administration's elec toral calculations than to the situation in Afghanistan. There, everything argues against a rush for the exit. Although Mr Panetta paid lip service to Lisbon, stressing that his proposal did not mean early withdrawal and adding "we've got to stick to the Lisbon strategy", he was, in fact, carefully undermining what had previously been agreed on. Mid-to-late 2013 rather than end-2014 will almost cer tainly now become the date when most of the ISAF forces (that is, those in the N ATO led international coalition in Afghanistan) will start packing their bags. (Today, those forces stand at130,ooo.) Mr Panetta knows, too, that his suggestion will hardly be re sisted by America's NATO allies, most of whom will be only too happy to head for an early bath if they think they can do so with America's blessing. The war is unpopular with Western
voters for its expense (it cost American tax payers $n9 billion in 2on), the steady drip of casualties, the widespread impression that little has been accomplished, and what is seen, particularly since the killing of Osama bin Laden last year, as the tenu ous connection between what happens in Afghanistan and safety at home. Nor does it help sentiment when rogue Afghan army soldiers turn on their NATO trainers, as happened last month when four French soldiers were killed, and this week when an American marine met a similar fate. Mr Panetta cast further doubt on Amer ica's commitment to what Mr Obama once called the "good war", by hinting that the West might not be able to afford the planned expansion of the ANSF (the army and the police) to about 350,000 from their 305,000 today, unless non-fighting NATO allies, such as Japan, South Korea and the Gulf Arabs open their wallets. Revealingly, he said that "in many ways, the funding is going to determine what kind of force we can sustain for the future." Even the end-2014 deadline for with drawing Western combat troops was tight, but at least it was based on a phased transi tion and a staged ISAF drawdown that everyone understood and was working to wards. The second phase of the transition, which started last year, has already put the security of about half the country in Af ghan hands. Over the next two years, the plan was for Afghan forces increasingly to
fill in for Western troops as they either withdrew or were deployed elsewhere, holding what General John Allen, ISAF's American commander, calls the "human terrain". In a recent interview, General Al len described the ANSF as the "defeat mechanism" of the Taliban insurgency. Accelerating the pace of the transition and cutting the numbers of the Afghan forces inevitably risks eroding the real se curity gains that have been made in the south (particularly in Helmand and Kan dahar provinces) since America's "surge" in 2010. It also places in jeopardy the aim of a concentrated effort to peg back the insur gency in the still-violent east during the next two fighting seasons. Before Mr Panet ta's announcement, General Allen's job looked difficult but doable. Now it just looks difficult. What makes all this so unfortunate is that there has recently been some progress in coaxing the leadership of the Taliban to wards the negotiating table-a tribute of sorts to the potential success of the previ ous (as it must now be regarded) transition plan. However, a secret NATO report, leaked this week, called "The State of the Taliban", based on interrogations with more than 4,000 Taliban and al-Oaeda de tainees, painted a picture of an i �surgency that is resilient and likely to remain so for as long as Pakistan believes it is in its strate gic interests to give it material and moral support. The confidence undoubtedly owed something to the bravado of some of the interviewees. The Taliban's senior leadership, better informed, may well be less optimistic about their prospects-al though most Afghans yearn for peace, few want to see the return of the Taliban to Ka bul. But Mr Panetta's words, intended pri marily to pander to opinion at home, can only have given them encouragement and stiffened their resolve. •
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The Economist
Asia
February 4th 2012
Papua New Guinea
Desperate fling
CA N B E R RA
When is a mutiny not a coup?
A BUNGLED mutiny in Papua New Guin .1""\. ea was brought to an end on January 30th when 30 soldiers surrendered their weapons in exchange for an amnesty. Days earlier a larger group of rebels had seized control of barracks in the capital, Port Moresby, and briefly held the Com mander of the PNG Defence Force, Briga dier-General Francis Agwi, under house arrest. They then retreated after failing to obtain broader support from senior offi cers. The rebels' leader, Colonel Yaura Sasa, was arrested on January 28th, vehe mently denying that he was responsible for a failed coup. He claimed instead to have been following government orders. He has since been released on bail. The question is who the government is. A Supreme Court ruling in December de clared the government of the incumbent prime minister, Peter O'Neill, to be illegal and ordered the restoration of his prede cessor, a 75-year-old veteran, Sir Michael Somare. The judges opined that Sir Mi chael's removal in August while he was away undergoing heart surgery in Singa pore did not follow the proper constitu tional channels. It was a decision that left the judiciary at loggerheads with the legis lature. Mr O'Neill has a large majority in parliament, the support of senior public servants and considerable popular back ing. He has refused to honour the court's ruling, and instead reacted by passing ret roactive legislation aimed at rendering the August change of government legal. In December Sir Michael publicly called on the armed forces to honour the Supreme Court decision and restore his government. General Agwi, though origi nally a Somare appointee, declined, insist ing that no state of general disorder existed to justify a military call-out. And so Sir Mi chael plucked Colonel Sasa, a disgruntled former military attache to Indonesia, from obscurity to assume the commander's post. Gripes over pay and conditions helped him to secure limited rank-and-file support. The failed mutiny was a desperate fling by Sir Michael and his supporters to recap ture the government ahead of elections scheduled for mid-2012. Both Sir Michael and Mr O'Neill are keen to go to the polls as the incumbent with easy access to state coffers, buoyed by a mineral-resources boom, to bankroll their campaigns. Mean while, the population bears the cost of ever more dilapidated infrastructure. On
They went quietly in the end
February 2nd a coastal ferry sank with 300-350 on board. Mr O'Neill could resolve the legal im passe by getting parliament to accept an early election, but since up to four-fifths of MPS generally lose their seats at each poll, parliamentarians are notoriously reluctant to cut short their own terms of office. Sir Michael will probably seek redress through the courts again, but Mr O'Neill has already shown his willingness to defy them. Sir Michael's support is slipping. The man he appointed as police chief has placed his unit back under the command of Mr O'Neill's police commissioner. The latest mutiny in a notoriously di verse country (there are 850 different ethno-linguistic groups) conforms to the pattern of previous cases of military in subordination. The armed forces have in tervened in cases of severe political insta bility, most notably in opposition to a
government that imported mercenaries to suppress a secessionist rebellion on the is land of Bougainville in 1997. Yet the army has never mounted a coup. Rumours of imminent takeovers have often swirled, but the conventional wisdom is that Papua New Guinea's ethnic diversity, rugged ter rain and the relatively small size of the army for a country of 6.5m people would make military rule difficult. Still, that ex plains more about the challenges of sus taining military control than it does about why the armed forces have refrained from intervening in civilian politics. More likely, differences among the army high com mand have made concerted military med dling hard, as Colonel Sasa's abortive mu tiny indicates. The country's quarrelsome politicians would do well to take advan tage of that good fortune while it lasts and settle their protracted disputes, if neces sary by going to an early election. •
Politics in Malaysia
Najib at bay
K U A LA L U M P U R
Good intentions are not enough for a leader at odds with his party
Wposition, Anwar
HEN the leader of the Malaysian op Ibrahim, was ac quitted by a high court judge last month on controversial charges of sodomy, suppor ters in the government of the reforming prime minister, Najib Razak, were able to claim it as something of a victory. It was proof, they said, that ministers no longer meddled in judicial decisions, as in the bad old days. They even claimed it as evidence of Mr Najib's wider programme to bring the country into a modern, liberal age.
And so the attorney-general's decision barely two weeks later to appeal against Mr Anwar's acquittal hardly looks good. Mr Anwar has always maintained that the sodomy charge was a smear that had been orchestrated by people from within Mr Na jib's ruling party, the United Malays Na tional Organisation (UMNO). The case had run for two years, which for many Malay sians was quite long enough. Mr Anwar's lawyer quickly derided the appeal as "a desperate act". ��
Asia
The Economist February 4th 2012 �
The attorney-general's decision renews suspicions that nothing much has changed within UMNO, which refuses to stop hounding Mr Anwar and, despite Mr Na jib's worthy intentions, wants few reforms to speak of. Resistance to Mr Najib's changes has become something of a leit motif of his time in office, and it could cost him dear at the next general election, which is expected later this year. Over the past two years this English educated son of an earlier prime minister has positioned himself as a bold moder niser. Mr Najib has promised to repeal a myriad of repressive laws, some carried over from colonial times, and to usher Ma laysia into a new era of "transparency, de mocracy and the rule of law". He seems sincerely to believe that Malaysia's politi cal settlement after independence in1957 is anachronistic, because it uses wide-rang ing affirmative actions to privilege the rights of the majority ethnic Malays over those of ethnic Chinese and Indians. It should, he says, be dismantled, slowly but surely. As well as being right and proper, such reform makes political sense too. A youn ger generation of Malaysians resents the ethnic divisiveness practised by the ruling establishment and yearns for more politi cal and social freedoms. It means that the centre ground of politics, on which the next general election will be fought, has shifted away from the politics of Malay su premacy. The trouble is that though Mr Najib be lieves in change, much of his party clearly does not. UMNO was founded specifically to protect Malay privileges and has ruled Malaysia without interruption since inde pendence. Mr Najib came to power in 2009 not through an electoral mandate for change, but in an internal coup. As a conse quence, he lacks the clout and possibly the will to impose his agenda on UMNO. And the longer he postpones an election, the more his personal authority will ebb. Reformists within the party are now frustrated, whereas others have defected to other parties. One, Mohamed Ariff Sa bri Aziz, used to be chief of information in Mr Najib's own division, or constituency. He argues that Mr Najib "does not have the foot soldiers to bring his reformist slogans down to the ground. He has the right in stincts, but he's running into a brick wall." Most of the internal opposition to Mr Na jib comes at the divisional level, where a belief in Malay privilege remains en trenched. Here are the people who have benefited most from the tenders and con tracts traditionally doled out by UMNO ministers to friends and family. "These are the favoured lot, who grease the wheels of power", a senior UMNO man says. "You have to dismantle all this, and so far Mr Na jib has done nothing. He is not strong enough. He has tried very hard, but he has
Myanmar and Singapore
Among friends Didn't he do well? Singapore celebrates a reformist ex-general
M frequent visitors to Singapore for all EMBERS of Myanmar's elite are
sorts of reasons. They come to shop, to pay anxious visits to their bank deposits and their doctors, to put their children into school, to gamble at the world's biggest casino and to ogle a vision of globalised prosperity. Thein Sein, the president, came this week with a big delegation, for the signing of and agree ment on co-operation in areas from tourism to the law and to thank Singa pore for its loyal support over the years. But he came mainly to take a bow. Like a prize-winning schoolboy who vindicates his maligned teachers, he makes everybody feel good. A former general, he is Myanmar's first civilian president for half a century. He has led a startling liberalisation. Most notably, the political system is now open to Aung San
Thein Sein off the reservation
been pushed back by the conservatives in his party." The civil service is a problem too. Tradi tionally an important source of Malay pa tronage, it is dominated by those with a vested interest in hanging on to their perks and their standard of living. So even if the prime minister's office tries to push a re form through, the outcome is by no means assured. Obstructionism from within the go verning system to Mr Najib's reforms has become brazen. Take the Peaceful Assem bly Bill, awaiting signing into law. This leg islation, from the attorney-general's office, seems to go directly against much of Mr
Suu Kyi, the leader of the opposition, and her party. She is to contest a by-election in early April and, soon afterwards, Thein Sein implied last month, may find herself in his cabinet. After long years of repressive military rule, this is huge progress, and has been welcomed by world leaders. Singapore and by extension Myanmar's other part ners in the Association of South-East Asian Nations-is keen to take the credit for an effective policy of engagement. Speaking this week at the World Eco nomic Forum in Davos, Kishore Mah bubani, a former Singaporean diplomat and now a writer on international affairs, boasted that "the gradual 'drip-drip-drip' diplomacy eventually yielded results." This week it naturally suited the Bur mese delegation to accept this argument and to thank Singapore for continuing to trade with and invest in Myanmar even when its generals were shunned by the West. Yet an equally convincing case can be made that the real impetus behind reform was the desire to see Western sanctions lifted. The debate is academic. It is a dip lomatic win-win, where all parties can claim they were right. The same is true of the whole liberalisation process. Freed political prisoners and the democratic opposition have won, but so have the leaders of the former junta, whose wealth and freedom are not, as yet, under threat. On the campaign trail, Miss Suu Kyi has already started to raise some difficult issues-such as Myanmar's constitution, which enshrines a decisive role for the army and may only be changed with its consent. It would be nice if democracy were a win-win propo sition. Sadly, even Myanmar cannot escape its need for losers. Najib's earlier declarations about the need for greater civic freedoms. To many, the bill, regulating the right to protest, seems to be even more restrictive than what went be fore. Najibistas in the cabinet claim that they fought back bravely, watering down some of the more draconian provisions. Nonetheless, the new law has come in for condemnation, including by UN human rights people. So much for the great reform pro gramme. The pity of Mr Najib is that a well-intentioned man has reformed just enough to alienate his own party and too little to convince the centre ground. He may be courting electoral disaster. •
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The Economist
Asia Politics in India
UP, down, sideways
D E L H I A N D G O RA K H P U R
A series o f state elections have national bearing
Tcrowd, but little enthusiasm. Farmers
HE famous speaker draws a hefty
and residents of Gorakhpur, a scruffy, fast growing market town in eastern Uttar Pra desh (uP), have waited for hours in a win try wind to hear him, weather-beaten old men huddling for warmth at the front. "I have no expectation," says one of these. "I've only come to see." Rahul Gandhi's stump speech (brief and earnest) earns few cheers. The heir both to the Gandhi-Nehru dynasty and the ruling Congress Party pledges a state gov ernment for UP of all castes and tribes. Rolling up his sleeves and jabbing a finger in the air, he talks of fighting corruption. He gets a single chuckle by telling of an ele phant that chomps government money meant for the poor-a blunt reference to Mayawati, the charismatic teacher-turned chief minister, whose wealth has attracted as-yet unproven accusations of massive graft. It is hard-going for any politician in this fly-blown corner notorious for organised crime, smugglers and tense Hindu-Muslim relations. Gorakhpur made headlines late last year for an outbreak of encephalitis that killed over 640 people, mostly chil dren. Alongside signs of new prosperity the temptations along its clogged streets in clude the "He Man Hair Parlour"-abject poverty persists. Mr Gandhi hurtles through three other rallies, then four the next day farther south, and so on. He has campaigned in UP for much of the past year, promising more welfare and land rights for the rural poor and talking up "Mission 2012": reversing Congress's meagre fortunes in India's most populous state, with 2oom residents. An election for the state assembly rolls out over the coming four weeks. Congress had largely floundered in UP since the rise in recent decades of Ms Mayawati's Bahujan Samaj Party, which appeals to low-caste dalits and (for a time) upper-caste brahmins feeling squeezed. To day Congress wants to repeat its perfor mance in the 2009 general election, when it nabbed18% of votes in UP, a decent share given fragmented voting in the state, partly by talk of dishing out rural welfare. This time round, such a result would probably return Congress to state government, after 22 years away, as a needed junior partner to the Samajwadi Party (sP). Led by Mulayam Singh Yadav, a politi cal gadfly and former defence minister, the
(backed by lower castes, but not the lowest) might then return the favour by al lying with Congress at a national level. A tempting cabinet post in Delhi would sweeten the deal. It would give the govern ment of the prime minister, Manmohan Singh, desperately needed legislative clout, and fresh sway over some trouble some allies. Just possibly, it might cause some long-stalled policy reforms to flow. If that sounds optimistic, consider that at least one political figure, not in Con gress, expects the party to spring an even greater surprise in UP. On this analysis, Mr Gandhi's dogged campaigning, especially among young, first-time voters, will win the party a notably higher share of votes than before. In that event, calls will only grow for Mr Gandhi to take on a bigger job, such as Mr Singh's. Much is uncertain. The main national opposition, the Bharatiya Janata Party (BJP), seems to be making little impact. Its member of parliament in Gorakhpur, Yogi Adityanath, a surly man in woolly hat and saffron robes, prefers to talk about the des peration of his own party (for accepting a corrupt defector from Ms Mayawati's camp) rather than bash his opponents. Nor is it clear how far Ms Mayawati's star has fallen since her clear victory in 2007. Educated, high-caste types relish her setbacks. The Electoral Commission told her to shroud many of the statues of eleSP
Ra h u l in fly- blown corner
February 4th 2012
phants (her party symbol) and of herself that dot the state. On the eve of the polls, she sacked several ministers as officials ex posed a shameful $1.2 billion scandal in a rural health scheme. Tens of millions of people remain stuck in a sink of feudalism, repression and hunger. She can point to some gains, nonethe less. Her biographer, Ajoy Bose, says that dalits, whom he suggests are "prone to to temism", feel their dignity lifted by the many statues of dalit symbols. Violent crime and communal tension are down sharply since the early 2000s, when hood lums of the then-ruling Samajwadi Party took over police stations. A man from western UP, now working in Delhi, says Ms Mayawati has brought electricity to his village and has done more than anyone for the "depressed and suppressed". The state economy has also done pretty well, growing by some 7% a year recently, roughly India's average (though gains per person lag behind). Public finances are im proving, and Ms Mayawati has overseen the building of 2oo,ooo homes for the poor, free bicycles for schoolgirls, extra power stations and the construction of In dia's Formula 1 racetrack. Shifting sands
Though the chief minister may have lost sway among brahmins, she can still proba bly expect loyalty from her core dalit back ers, a fifth of the state. That is despite efforts by Mr Gandhi, who likes to be seen eating with the low-caste and who tries to break off sub-castes among them with targeted promises-for example, by offering to set up special institutes for boatmen, fisher men and carpenters. Uttar Pradesh is only one of five states though by far the biggest-holding assem bly elections. Turnout of over 8o% was re ported as Manipur (in the north-east) and Punjab and Uttarakhand (both in the north) voted early this week. It suggests In dians are far from tired of electoral democ racy, despite some excited commentary in the aftermath of street protests last year against corruption. Tiny Goa will also vote on March 3rd, with all results due on March 6th. These results in turn will feed other big elections. In April a new clutch of 58 mem bers of the upper house of the national parliament, the Rajya Sabha, will be elect ed (by the state assemblies). Then in July, both houses of parliament, plus all the state assemblies, must elect someone as In dia's president, with a five-year term. Some speculate that Mr Singh might also step down as prime minister before long, leaving the way clear for a younger leader to battle for Congress as campaign ing looms for the next general election, in 2014. Just maybe, somewhere between all the campaigning, there will be time for some governing too. •
Asia
The Economist February 4th 2012
B anyan
I
The devil in the deep blue detail
Fiendishly complex disputes in the South China Sea dangerously simplified
Tacademic analysis on an industrial scale. But as an attention HE South China Sea and its myriad disputes have spawned
grabbing international issue, the wrangling has an image pro blem: so many contested, arcane technicalities; so many confer ences and research papers-in sum, so much talk; but so few shots fired in anger. That may be why commentators tend to paint the disputes in an almost apocalyptic light: "The South China Sea is the Future of Conflict" shrieked an article last September in For eign Policy, an American journal. The author, Robert Kaplan, fore cast that "just as German soil constituted the military front line of the cold war, the waters of the South China Sea may constitute the military front line of the coming decades." He may well be right. The disputes over the sea are no nearer a resolution than ever. But they have persisted for decades without threatening global peace and need not inevitably become the main focus of tension between China and America. There is a danger that putting the sea in the same sentence as the cold war too often is self-fulfilling. A recent publication ("Co-operation from Strength") from the Centre from a New American Security (cNAS), an American think-tank, uses the sea to argue for an American naval build-up. And some Chinese observers seem all too keen to become maritime cold warriors. Take, for example, some of the reaction in the Chinese press to the news at the end of January that the Philippines wants to "maximise" its mutual defence treaty with the United States, with more joint exercises, and more American soldiers rotating through. Explaining the decision, officials referred to threats aris ing from "territorial disputes". America is not going to bully Ma laysia over the Philippines' historic claim to Sa bah in Borneo, so this must have meant the South China Sea. Of all the claimants to islands, reefs, rocks and waters there, the one with which the Phil ippines is in active dispute is China. That was certainly how the news was taken by China's Global Times newspaper, which called for sanctions against the Philippines. Philippine governments also pay a political price at home for security ties with America. The current one may have felt pro voked by China's seeming to ignore its protest about the incur sion in December of three Chinese vessels in what it calls the "West Philippine Sea". Such spats are commonplace. China and
Taiwan (as the "Republic of China", and largely irrelevantly) ap pear to claim almost all the South China Sea, citing an old map showing nine disconnected lines around its rim. Vietnam claims the Paracel chain in the north, from which China evicted it in 1974, and the Spratlys in the south, where Brunei and Malaysia as well as the Philippines have partial claims. In the past there have been flare-ups-between Vietnam and China in 1988, and between China and the Philippines in 1995. In normal times, conflict is waged partly through the competitive building of structures on occupied islets and the harassment of fishing and oil-exploration vessels. But it is mainly waged through diplomacy. The stakes are high, because of the enormous economic sig nificance of the sea. It accounts for as much as one-tenth of the fishing catch landed globally; around half the tonnage of inter continental trade in commercial goods passes through; and, in a phrase that haunts the academic literature like the ghost of Christmas future, it is the "new Persian Gulf"-a claimed treasure chest of hydrocarbons that China, anxious about the vulnerabili ty of its own supplies, sees as its own. With plenty to argue about there are three reasons why the ar guments are becoming more strident. The first is that the Ameri ca-Philippines "reinforcement" of their defence arrangement has to be seen in the context of the much touted "pivot" of American strategy towards Asia. Following the announcement in Novem ber of a permanent presence of American marines in Darwin in northern Australia, the shift fuels Chinese fears that America is seeking to contain its rise, both through its own military deploy ments, and through alliances with "small" countries such as the Philippines (populatiomoom-odd). Second, both the Philippines and Vietnam may soon start extracting oil. China will not want such facts under the water to set precedents. Third and most important, China's position continues to un nerve the other claimants. It is unclear, for example, what the dot ted-line claim is based on. And, refusing to countenance serious negotiations with the Association of South-East Asian Nations (ASEAN), to which four of the claimants belong, China appears to want to pick off its members one by one. Until recently, its fiercest rows were with Vietnam. That relationship seems to be going through a relatively mellow phase as it bullies the Philippines. And last July it did agree with A SEAN on "guidelines" for imple menting a "declaration" on a code of conduct agreed on by the two parties back in 2002 to reduce tensions in the South China Sea. Last year A SEAN was under Indonesian chairmanship. Nei ther the new annual chair, Cambodia, nor the next two, Brunei and Myanmar, are likely to risk antagonising China by making the sea a multilateral issue. How cold wars start
Already, last July's "breakthrough" looks more like a stalling tac tic. Not only is a settlement of the disputes not in sight; no mecha nism that might eventually lead to one is even under discussion. China seems to calculate that, although all the countries involved are building up their armed forces, it has so much more capacity for military spending that it will soon be lording it over them all. So the chances are that America, with its mighty navy and abid ing interest in the freedom of navigation and commerce, will be come still more involved in what the CN AS report calls "the stra tegic bellwether for determining the future of us leadership in the Asia-Pacific region". China, after all, seems determined to put that assertion to the test. •
53
Taxin g China
Also in this section
55 Ti betans and the Chinese state
Pay and play
55 Hong Kong and the mai nland
For d a i ly a n a lysis and debate o n Chi n a , visit Economist.comfchina HONG KONG
One year on, China's most-hyped tax is still mostly hype
Twest China is famous for its hills, which HE vast city of Chongqing in south
punish the knees, and its skyline, which strains the neck. The metropolis, straddling the Yangzi river, is sprawling outward as well as upwards (see picture), and its mu nicipal government is keen to capture more of the value created by its rapid de velopment. A year ago it pioneered a tax on large single-family homes and new lux ury flats. Some 1,4ookm (870 miles) down stream, Shanghai also imposed a tax on luxury second apartments. Such property taxes are common else where in the world, championed by econ omists, resented by homeowners. But in China, they are a novelty. Advocates argue that such taxes could ease two of China's biggest economic problems. The first is the speculative fever that so often grips the housing market. The second is the debt that troubles local governments. This debt reflects China's peculiar divi sion of fiscal revenues and responsibilities. The constitution, in an intriguing phrase, promises to give "full play to the initiative and enthusiasm" of the country's local au thorities, but its fiscal arrangements give them little to play with. In 2010 local gov ernments accounted for over four-fifths of public spending but collected just 45% of the country's tax revenues, a gap amount ing to 4.1 trillion yuan ($6oo billion) or just
oveno% of GDP. Handouts from the central government fill much of that gap. Meanwhile, local gov ernments' favourite source of cash lies un derfoot. In 2006-10 across China they sold land-use rights to over 22,oookm2 of land, an area the size of New Jersey. Such sales are lucrative, but also divi sive. Urban land in China belongs to the state, whereas rural land is owned "collec tively". This hazy definition lets officials use their power as representatives of the state to displace villagers on the urban fringe. Officials pay the farmers compensa tion on the basis of the land's agricultural value, whereas developers buy the land at a price nearer to its commercial value. So city governments profit at the expense of villagers. The shenanigans provoked a re markable uprising in the small southern town of Wukan in December, and protests happen elsewhere almost daily. To calm rural discontent, larger cities now offer more generous compensation, Joyce Yanyun Man of Peking University says. But the property market is slowing and sales are faltering. That will make it harder for local governments to repay the huge debts they incurred during the stimu lus programme of 2009-10, when the cen tral government urged state banks to lend to local governments in order to stave off the effects of the global financial crisis. Lo-
calities now have a pressing need to find other sources of revenue. China already imposes taxes on prop erty-as many as a dozen, according to Ba sin Tang of Hong Kong Polytechnic Univer sity. But most cover the buying or selling of it. None reflects its market value or falls on the most common form of property: homes. The taxes therefore make a paltry contribution to local coffers. China's government has talked about introducing a fully fledged tax on home ownership since 2003. What has stopped it? The logistical barriers should not be un derestimated, says Mr Tang. The govern ment must clarify who owns what, and de cide what a property is worth. Fair valuations need expertise and indepen dent judgment-both in short supply in China. Unfair valuations, on the other hand, will breed resistance and evasion, which China already has in abundance. But the biggest obstacle is political. Most urban residents own their home. Some, including many party officials, own several. For them, a property tax would be a levy not on their home, but on the wealth they have locked up in property that often lies vacant. The Communist Party does not want an angry middle class. These political sensitivities are appar ent even in the pioneering cities. Chong qing, for example, charges a puny rate (o.s-
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The Economist February 4th 2012
China
� 1.2%) on a tiny number of properties-bare ly 8,500, according to Xinhua, the state news agency. The much-ballyhooed ex periment netted just 90m yuan in its first ten months, less than 0.2% of Chongqing's tax revenue. To put a lid on property speculation and plug the hole in municipal finances, China's property taxes will have to cover more homes in more cities. None has yet volunteered, though faltering land sales may give them a prod. And some cities might take the plunge if the central govern ment offered to lift the curbs it has placed on property speculation. In the realm of property taxation, alas, China's local au thorities have shown neither initiative nor enthusiasm. •
Hong Kong and the mainland
Dogs and locusts HONG KONG
Old divisions find a new expression
D year dragons and a few days of
ESPITE a plethora of festive new
holiday, it has been a season of ill will in Hong Kong. On January 15th a young Mandarin-speaking girl dropped some dried noodles she had been nibbling on a Hong Kong underground train. Perhaps her family, from mainland China, did not know that eating and drinking is banned on the spotless metro. When a local Cantonese speaker objected to the noo dle-eating in bad Mandarin, a quarrel erupted. The whole incident, recorded on a mobile phone, was soon viewed online by millions in Hong Kong and in China. "That's what mainlanders are like," was perhaps the nastiest thing said by any Hong Konger in the metro carriage. But soon a well-known loudmouth professor at Peking University was sug gesting that some in the former colony were "British running dogs". This caused some Hong Kongers to take to the streets to protest. On February 1St another group took out a full-page advertisement in a Hong Kong newspaper complaining about mainland "locusts" swarming into the territory; it called for the government to stop the "infiltration".
Ti betans and the Chinese state
No power to pacify B EIJING
More discontent on the plateau, despite strong economic growth
I ing, Tibetan medicine had the power to
F ONLY, Chinese leaders might be think
pacify. In recent years rural incomes in eastern areas of the vast Tibetan plateau have been soaring, thanks to a surge in Chi nese demand for Tibetan herbal remedies. But in late January the same region experi enced the biggest outbreak of violent un rest since a surge of Tibetan discontent across the plateau in 2008. Police have shot dead several demonstrators. There is every sign the unrest could spread. The shootings follow on from the self immolation of 16 Tibetans, including monks and nuns, over the past year, some of them fatal. Now security across Tibet and Tibetan-inhabited areas of neighbour ing provinces has been tightened in an ef fort to stop protests-including self-immo lations-from spreading. The violence has so far been limited to Tibetan-dominated areas of Sichuan province, to the east of Ti bet proper (see map). But the recent shoot ings of unarmed demonstrators are bound to arouse powerful emotions elsewhere on the Tibetan plateau. Police have sealed off affected areas to prevent access by foreign journalists, mak ing reports of recent events difficult to con firm. But Western human-rights organisa tions say protests broke out in several villages and rural towns in Sichuan from mid-January onwards, and that police opened fire on three or four occasions, kill ing several people. In the most recent inci dent, on January 26th, a crowd of Tibetans attempted to block the way of police who had arrested a protester in a township in Rangtang county. Police shot into the
crowd, reportedly killing one Tibetan. To Chinese officials, the violence should reaffirm that rising prosperity is far from being the guarantor of stability that many of them suppose. The areas where the immolations and protests occurred are still relatively backward. But in Ganzi, a prefecture that has seen some of the worst unrest, rural incomes rose by an average of 30% in 2011. They are projected to rise just as much again this year. A big contributor to this has been a vo racious appetite in other parts of China for the region's "caterpillar fungus", a mush room that grows in the bodies of dead cat erpillars on high-altitude grasslands.
Beijing0 ,
N
;: }��b
_ , - .. .. ...
e
T I 8
p
Rangtang
fat
----·,j \
f
T
l
9:0-11
A
� _.., .,_� .. )hen�d�' l '•
,jJ
\ GANZI "i 0 -
.A�?:� ?��� ,_.
600km
In the past two months Hong Kong has seen a spate of related protests: one against the thousands of expectant moth ers who pour in from the mainland to give birth in local hospitals; another involving a march against Dolce & Gab bana, a prominent Italian retailer, when it was thought to be favouring shoppers from the mainland. Though Hong Kong reverted to Chinese sovereignty in 1997, a border still runs between the territory and mainland China, and access from the mainland is restricted. The Hong Kon gers' broad complaint is longstanding: they see hordes of mainlanders putting a strain on public resources. Mainlanders in turn feel that Hong Kongers are arro gant and disloyal to the motherland. What has changed drastically in the past few years is that the old fear of poor mainland Chinese swamping Hong Kong has been washed away by floods of rich mainland shoppers. Where once Hong Kongers disdained their countrymen from the mainland as Ah Chan, the deri sory term for a bumpkin, they are now more likely to hear themselves dispar aged as Kong Chan, Hong Kong bump kins, by mainlanders flush with cash. Claimed to be an aphrodisiac, it can be worth more than its weight in gold. The Si chuan government reported in 2010 that in Aba county, another centre of unrest, most peasants were getting up to nine-tenths of their income from it, at the expense of tra ditional herding and farming. In Lhasa, the Tibetan capital-usually off-limits to journalists as well-the au thorities have responded to the recent un rest with increased patrols by armed riot police. Tensions will remain high for at least the next few weeks. The Tibetan new year falls in late February, and the month of March gives the jitters to authorities in Lhasa because of various anniversaries: the uprising that led to the Dalai Lama's flight into India in 1959 (March 1oth) and the anti-Chinese riots in 2008 (March 14th). Few ethnic Chinese express sympathy with Tibetan dissidents, whom most be lieve to be separatists trying to split the motherland. But some online commenta tors have derided the Communist Party's recent attempts to make Tibetans feel patri otic pride in China. These have involved handing out posters showing President Hu Jintao and three earlier Chinese leaders, in cluding Mao Zedong, against a backdrop of the Chinese flag. Monasteries have been ordered to display them. •
55
Islam and homosexuality Also i n this section
Straight but narrow
57 Political violence and trauma 58 N eglected tropical diseases
A debate about homosexuality in Islam is beginning. But in Muslim lands persecution-and hypocrisy-are still rife
0 NE
leaflet showed a wooden doll hanging from a noose and suggested burning or stoning homosexuals. "God Abhors You" read another. A third warned gays: "Turn or Burn". Three Muslim men who handed out the leaflets in the English city of Derby were convicted of hate crimes on January 2oth. One of them, Ka bir Ahmed, said his Muslim duty was "to give the message". That message-at least in the eyes of re ligious purists- is uncompromising con demnation. Of the seven countries that impose the death penalty for homosexual ity, all are Muslim. Even when gays do not face execution, persecution is endemic. In 2010 a Saudi man was sentenced to soo lashes and five years in jail for having sex with another man. In February last year, police in Bahrain arrested scores of men, mostly other Gulf nationals, at a "gay party". Iranian gay men are typically tried on other trumped-up charges. But in Sep tember last year three were executed spe cifically for homosexuality. (Lesbians in Muslim countries tend to have an easier time: in Iran they are sentenced to death only on the fourth conviction.) Gay life in the open in Muslim-majority countries is rare, but the closet is spacious. Countries with fierce laws, such as Saudi Arabia, also have flourishing gay scenes at
all levels of society. Syria's otherwise fear some police rarely arrest gays. Sibkeh park in Damascus is a tree·filled children's play ground during the day. By night it is known for the young men who linger on its bench es or walls. Wealthy Afghans buy bacha bazi, (dancing boys) as catamites. Where laws are gentler, authorities find other ways to crack down. In the Jordanian capital, Amman, several gay hangouts have been raided or closed on bogus char ges, such as serving alcohol illegally. Even where homosexuality is legal (as in Tur key), official censure can be fierce. A former minister for women's affairs, Aliye Kavaf, called it "a disease"; the interior minister, Idris Nairn Sahin, cited it (along with Zoro astrianism and eating pork) as an example of "dishonour, immorality and inhuman situations". A new film, "Zenne Dancer", portrays a young man's murder in 2008 as Turkey's first gay "honour killing" (the sus pect, the victim's father, is on the run). Charges of homosexuality can also be used in political repression. The Malaysian opposition leader, Anwar Ibrahim, was twice tried for sodomy; the attorney-gen eral is appealing against the latest acquit tal. Intolerance can unite otherwise war ring factions. In Nigeria Muslims and conservative Christians alike back a pro posed law banning gay marriage (and indi-
reedy criminalising all same-sex unions). The democratic upheavals of the Arab spring have brought little comfort. Hossein Alizadeh of the International Gay and Les bian Human Rights Commission, a New York-based lobby group, says that religious awakening is strengthening hardline inter pretations of Islam and a repressive back lash on all kinds of sex-related issues. But the laws left behind by the former regimes in countries such as Tunisia and Egypt seem draconian enough to satisfy the new governments. An ominous counter-example is Iraq. The previous Iraqi regime was politically repressive but unbothered by sexual mo res. Now men even suspected of being gay face kidnap pings, rape, torture and extraju dicial killing. Ali Hili, head of a group called Iraqi LGBT, (Lesbian, Gay, Bisexual and Transgender) says that since the 2003 invasion more than 700 people have been killed because of their sexuality. It is the most dangerous place in the world for sex ual minorities, he says. Theology or technology
One small source of hope is the internet: life online offers gays safety, secrecy and the chance to make their case. In a cam paign called "We are everywhere" Iranian gays and lesbians are posting protest vid- ��
The Economist February 4th 2012 �
International
eos on Face book. In one, entitled "Ali the Queer", a man speaks of his longing for a world in which those who deviate from the heterosexual standard are no longer considered unnatural or abnormal. How ever, a video newly posted from the United Arab Emirates shows an effeminate gay man being "cured" by two straight men. The internet also offers a chance to de bate the fundamental issue: the Islamic prohibition of homosexuality. This is based on a tale (common to all three Abra hamic religions, though details differ) of a man called Lot and the cities of Sodom and Gomorrah. These were engulfed in fire and brimstone as divine punishment for the lo cal penchant for gay sex. Earlier Islamic societies were less hard line. An nth-century Persian ruler advised his son to alternate his partners seasonally: young men in the summer and women in the winter. Many of the love poems of the eighth-century Abu Nuwas in Baghdad, and of other Persian and Urdu poets, were addressed to boys. In medieval mystic writings, particularly Sufi texts, it is unclear whether the beloved being addressed is a teenage boy or God, providing a quasi-reli gious sanction for relationships between men and boys. Austere European chroni clers fumed at the indulgent attitudes to gay sex in the Caliphs' courts (now the cen sure is the other way). Like liberal]ewish and Christian schol ars in recent decades, some Muslim think ers are now finding theological latitude. "The Koran does not condemn homosex uality," says Scott Siraj al-Haqq Kugle, an American Muslim convert who teaches Is lamic studies at Emory University in At lanta. The story of Lot, he argues, deals with male rape and violence, not homo sexuality in general. Classical Islamic theo logians and jurists were mostly concerned with stifling lustful immorality, he says. Ko-
I
Politica l violence and trauma
Beaten but unbowed DAMASCUS
Violence seems to scar some more than others
Phead so badly that his eyelids were
way to end the Israeli occupation. This political framework left them less upset by what they saw. In contrast, many Bosnian youths were mystified by the onset of the war that engulfed previously peaceful Yugoslavia in 1992. It haunted them into adulthood. Mr Barber is now testing his theory further. He has interviewed scores of young people in Egypt and will monitor their state of health every three months. Initial findings offer some hope for Mo hammed and his bruised and battered peers. They fit the pattern observed in Gaza. "It would be hard to describe even those injured as traumatised," says Mr Barber. "They saw the violence-both by and against them-as an unfortunate means to a worthwhile end." More research may shed light on what exactly causes, and prevents, trauma. Mr Barber does not discount the effects of torture. But he suspects that disrupted schooling and family life may be doing more lasting mental harm than the vio lence itself.
ranic verses describe without condemna tion men who have no sexual desire for women. Arash Naraghi, an Iranian academic at Moravian College in Pennsylvania, sug gests that the verses decrying homosex uality, like those referring to slavery and Ptolemaic cosmology, stem from common beliefs at the time of writing, and should be re-examined. Even Sheikh Muhammad
Hussein Fadlallah, the late spiritual leader of Lebanon's Hizbullah party-cum-militia, conceded that more research is needed in order to understand homosexuality. Unsurprisingly, the debate, such as it is, is led by gay Muslims outside the Islamic world. Though their rights are better pro tected, they too can suffer from intoler ance-as the trial in Derby last month high lighted. In European cities with lots of poor, pious Muslim immigrants, munici pal politics brings some rum alliances. Ken Livingstone, a left-wing London politician with a strong record on gay rights, has in the past welcomed Yusuf al-Qaradawi, an America-bashing Muslim cleric from Egypt who supports the death penalty for homosexuality. In Muslim countries activists have mostly shied away from the pitfalls of theological debate. Instead, groups such as Helem, a Lebanese NGO, use the secular language of human rights, citing United Nations declarations. Mr Alizadeh sees progress, though it is slow. Even some Mus lim clerics, the group most resistant to re form, are shifting slightly. After attacks on gay men in Iraq in 2009, Muqtada al-Sadr, a fiery Shia cleric, condemned the killings. He said that the "depravity" of homosex uality should indeed be eradicated, but through "preaching and guidance" rather than violence. Optimists would see that as progress, of a sort. •
RISON guards beat Mohammed's
puffy and purple, and his feet so hard that he could not walk. They hurled abuse and taunts at the 21-year-old Syrian protester. But his sunny resolve was unbroken. "As soon as I can walk, I'm back on the street," he vowed from his bed in a suburb of Damascus. Violent unrest wreaks havoc on men tal health, provoking nightmares, altering behaviour and causing lasting illness. But the link between suffering and trauma is less straightforward than many assume. In research published in 2008 Brian Barber, a psychologist at the University of Tennessee, found that violence had left young Palestinians in Gaza less trau matised than their Bosnian peers, even when stripping out factors such as the levels of bloodshed they had witnessed and whether their homes had been destroyed. The key, he found, lay in how injured people understood the violence. The young Palestinians saw the intifada as a
Gloom for gays Male homosexuality and the law
Country
Legal status*
Penalty
Indonesia
Illegal in sharia-ruled areas
Prison
Iraq
Not specifica lly outlawed
None
Iran
Illegal
Lashes, death
Hardliners broke up international gay-rights . . . .f1l e_e�n�_in_ 2_0_10 . . . . Self-proclaimed shariajudges issue death . . . . .�7.��e-� c�s ; _f1lili� a.s _ki �_na.� a � d. � ll ��xs . . New draft law may li mitthe prosecution of consensual sex . ...
. . L�$.a � . . . . . . . . . . . ....... . . . . . , . .. . . . . � o-�_e _ _ _ __ Illegal Prison
Jordan Malaysia Morocco
.. . . _Il �e�� t . . . . . . . . .. . . . . . .. . . . . Fine Death . . _Ille�at_i � s_ha_��: r� led_ ��e_as .
..
..
.
.
.
.
Turkey
.
Legal
.
.
None
.
Sodomy law under discussion following . -�-�:Va_r I� :a hi �: s_ ac9_ui tt� l -- . . . . . . . . . . . . . . . . . . . . . . . . . . . . . _A_ g_�Y, t?�.ri �t .�?� P.o� �e�pite �-he_ p r?_hi b,i_tio � . . . . . . . . . . .� ?lll e_� h_ris�a �s .a ls? _b��k �el'!. �ay_:f1l a_rri_a �e b_an . . . . �a_n : b,ox st;�. t_ole_rat�d _i �-S?f1l� t�_bat �-re�_s . . . . .. . . . . . . . .
_Ni ��-ri�_Pa_�sta_n_ . . . . . _Ille�at_ _ _ . . . . . . . . . . . . . . . . . . . . . . . . . . P. rison Saudi Arabia Illegal Fine, lashes, death ...
.
.
. .
.
.
. ..
-
Death penalty applied if man is married
.
Gay groups a llowed to operate openly but some police harassment under morality laws
Sources: International Lesbian, Gay, Bisexual, Trans and Intersex Association; The Economist
*2012
57
58
The Economist
International Neglected tropical diseases
Hot tropic
February 4th 2012
Woe-bu sters Global aid for health, $bn (2009 prices) 30
25 N E W Y O R K A N D S I E R RA L E O N E
The world's nastiest illnesses get some belated attention
LOBAL health campaigns like grand goals. On January 30th Bill Gates joined the head of the World Health Orga nisation (WH O), 13 drug-company execu tives and others in pledging to eradicate or control by 2020 ten of the world's nastiest diseases, which afflict more than a billion people. Guinea worm, sleeping sickness, bilharzia (which doctors call schistosomia sis) and the others rot tissue and cripple the organs. Even if they do not kill, they stunt children and sap adults' energies. The new push comes as a bolder set of ambitions hits trouble. As part of the Mil lennium Development Goals, world lead ers promised in 2000 to curb the toll of HIV, malaria and tuberculosis by 2015. That brought a spending splurge-dona tions for health projects in poor countries more than doubled between 2001 and 2008 (see chart). The death rate for malaria dropped by more than a quarter. But the economic crisis has tightened fists. Christo pher Murray of the University of Washing ton reckons annual spending-growth from 2009 to 2011 was only 4%. Excluding the World Bank's money, mostly loans to mid dle-income countries, giving is nearly flat. The whiff of mismanagement has low ered spirits too. The Global Fund to Fight Aids, Tuberculosis and Malaria (an outfit specially created to help meet the last lot of goals) is making no new grants until 2014. It had projected (too optimistically) a 20% rise in donations in 2011-13. On January 24th its director said he would step down. The new effort includes American and British aid agencies but the impetus comes largely from Mr Gates, a tireless champion of global health. On January 26th he said he would give $750m to the Global Fund.
20
15
G
Lovely swimming for children and parasites
10
0 1990
95
2000
05
Source: Institute for Health Metrics a n d Evaluation, University o f Washington
Having announced in 2007 an "audacious goal" to eradicate malaria, his foundation (named after him and his wife Melinda) is now targeting the neglected tropical dis eases. It will provide $363m of the $785m planned for fighting these ailments in the years to 2020. Mr Gates praises big returns for low costs. At so cents per child per year, treating intestinal worms is the most cost-effective way to raise school attendance, the Massa chusetts Institute of Technology found. "Probably we should have gone after them earlier," says Mr Gates. He hatched the new plan with pharma chiefs such as An drew Witty of GlaxoSmithKline. Drug firms will donate 1.4 billion treatments each year. The parasites and bacteria work in dif ferent ways. With river blindness, black flies spread larvae that when grown de stroy eye tissue; mosquitoes do the same for the worms that block the lymphatic system in elephantiasis; hookworm, roundworm and whipworm are soil-born. But as such diseases often plague the same places, it is possible to dispense sev eral drugs together, saving money. Peter Hotez of the Sabin Vaccine Institute says administering azithromycin (for blinding trachoma), albendazole (for elephantiasis
10 1 1
•Incorporated in US
and soil-transmitted worms), ivermectin (for elephantiasis and river blindness) and praziquantel (for schistosomiasis) all at once could cost half as much per patient per year as stand-alone programmes. As well as donating these drugs, pharma firms will also sponsor early-phase re search into newer medicines. Some are sceptical; providing free drugs does not mean that people take them. Bru no Gryseels of the Institute of Tropical Medicine in Antwerp fears that blanketing regions with medicines will make bugs drug-resistant. Mr Gates's lot stress the need for good monitoring to prevent that. The new goals build on some existing successes. Since 2008, for example, volun teers in Sierra Leone have distributed drugs to fight elephantiasis, locally dubbed "big fut". They measure children against a pole, using height to gauge dosage. But the earliest victory may be against an ailment with no vaccine or treatment. Guinea worm wreaks its havoc after larvae are swallowed in water. The female worm grows up to a metre long and breaks pain fully through the skin, releasing eggs into water once more. Vigilant education and sanitation efforts from the Carter Centre, founded by a former American president, have nearly eradicated it. Nine to go. •
59
Also in this section 6 1 India favours French jets 61 Hard times, bigger yachts 62 Health care in America 63 M urky accounts i n China 63 Cakes and chaebol i n Korea 64 Sch u m peter: European retail under attack
Fo r dai ly a n a lysis a n d debate on busi n ess a n d o u r weekly "Money talks" p o dcast, visit Economist.comfbusiness-finance
Carlos Slim
Let Mexico's moguls battle
M EX I C O CITY
Mexico suffers from two near-monopolies. It should let them fight each other
I Slim opened last year in Mexico City, vis N A futuristic art gallery which Carlos
itors can enjoy, among other things, a hall of rare coins and share certificates. Some times art speaks louder than words. Mr Slim is the richest man in the world. According to Forbes, he and his family have amassed a comfortable nest egg of $63 bil lion. (Bill Gates would be richer had he giv en away less of his stash, or Mr Slim more of his.) In Mexico Mr Slim is a giant: his companies account for more than a third of the stockmarket. The Slim fortune was made in telepho ny. After growing moderately rich from property, mining and other businesses, Mr Slim, the son of a Lebanese immigrant named Salim, bought Telmex, Mexico's state-run telephone monopoly, in 1990. Tel mex still has 8o% of Mexico's landlines, and about 75% of its broadband connec tions. Telcel, its sister company, has 70% of the mobile market. Both now belong to America M6vil, a Slim venture which has spread across 18 countries in the Americas and is the biggest or second-biggest player in all but three. With nearly 250m subscrib ers, it is the world's third-biggest mobile phone company, and accounts for about 6o% of Mr Slim's wealth, according to Forbes. Much the biggest market for Amer ica M6vil is Mexico, where profit margins in the stifled mobile sector are among the highest in the world. Mexicans complain that it is impossible
to pass a day without putting pesos into Mr Slim's pockets. His interests span retail, banking, construction and much else (in cluding an 8% stake in the New York Times). But one huge market eludes him. Under the terms of his Telmex concession, he for feited the right to enter Mexico's pay-tele vision business. So whereas America M6vil offers "triple play" packages of phone, internet and television nearly everywhere else in Latin America, in his biggest market Mr Slim is tuned out from TV. For many years he has tried to chip away at this ban, just as his rivals have tried to loosen his grip on telephones. Nei ther has succeeded. Mexico's regulators have found it hard to enforce competition
I
Sli m band Average monthly subscription price for broadband connections between 2.5 and 1 5 Mbps September 2010, $•
el ess bro,.,,W ,.,ir-, -:ad,.,,.,ub sc-:rip --: tion --, ba nd s-: s per 100 people, June 2011, %
Mexico Chile South Korea Turkey Slovenia Czech Rep. Israel Estonia
Source: OECD
0
20
40
60
80
100
[Q;I] liD IDJ
CTIJ
i1ITI [E2]
3QJJ
ill]] *At purchasing-power parity
in either market thanks to a blizzard of writs. Between 2005 and 2010, the tele coms sector generated more than 260 ap plications for injunctions, judgments of annulment and judicial reviews, says a re port published on January 30th by the OECD, a group of mainly rich countries which includes Mexico. The "relentless use of injunctions, in particular by [Amer ica M6vil] . . . has replaced, to a large extent, the right and responsibility of government to implement economic policy and regula tion," it says. This has cost Mexico dearly. Though it is one of Latin America's richest countries, mobile-phone penetration stands at 88%, among the lowest rates in the continent. In Brazil, a poorer country, it is 119% (ie, it has more mobile phones than people). Prices for customers who make few calls and pay in advance are reasonable. But chattier cus tomers pay more than in many rich coun tries. Fast broadband is scarce and pricey (see chart). The OECD calculates that exces sive pricing in Mexico's "dysfunctional" telephone and broadband markets has cost the country some $26 billion a year (in purchasing-power parity terms). The cost to business of slow and patchy internet connections was not included, but is clearly huge. Complaints of downtime and blackouts abound on Apestan.com (roughly, "TheyStink.com"), a consumer rage website on which Telcel and Telmex attract more complaints than any other company in Mexico. There are signs that Mr Slim's grip on Mexican telephones is being prised open. In April Mexico's Federal Comp etition Commission (cFc) hit Telcel with a fine of $1 billion, the biggest it had ever handed out, for abusing its dominant position by charging high fees to rivals for connecting calls. Telcel is appealing and has yet to pay up. A new competition law has beefed up ��
60
The Economist
Business
� penalties for antitrust offenders, with pri son terms of up to ten years for collusion. (Mr Slim has not been accused of this.) A few weeks later the Supreme Court ruled that telecoms rules should continue to apply while they were being challenged in court. This is normal elsewhere, but in Mexico regulatory decisions have been suspended for years while judges puzzle over challenges by Mr Slim and others. Armed with these new powers, the telephone regulator, Cofetel, has at last suc ceeded in drastically reducing telephone interconnection fees. As long as these fees are high, "off-net" calls will be more costly than the "on-net" calls made to phones on the same network. This provides consum ers with a powerful incentive to join the operator to which most of their friends be long-which in Mexico nearly always means Telcel. In March Cofetel ordered that interconnection fees be reduced from 0.95 pesos ($o.o8) to 0.39 pesos, taking Mexico from a relatively high rate to one of the lowest in the OECD. Retail prices have already fallen: Telcel cut the price of its off net calls by two-thirds, and Telefonica by half. Telmex lowered the price of calls to mobiles (thereby probably reducing the national inflation rate). The cuts may not end there: Cofetel is considering applying "asymmetric regulation" to America Mo vil, which could force it to charge less to its rivals than they charge it. America Movil is furious. Carlos Garcia Moreno, its chief financial officer, warns that the cut will deter operators from cov ering poor rural areas, where customers tend to receive more calls than they make. He points out that in most of Europe fees started to drop only when penetration had reached 100%. But no OECD country has an incumbent with a market share like that of Telcel, notes Agustin Diaz-Pines, an economist at the OECD. Mr Slim has annoyed foreigners, too. Every year Americans make more than 20,000 years of calls to Mexico, more than to all of western Europe. In 2004 America won a case against Mexico at the World Trade Organisation over Mexico's failure to stop Telmex from overcharging American companies to dial into the country. Comp tel, an American business association, has accused Telmex of not consolidating local area codes (so local calls are charged as long-distance) and of inserting recorded messages into calls from rival carriers, warning that future calls might fail. Technological change could squeeze Mr Slim. Telephone calls and TV are in creasingly delivered through the same ca ble. Since 2007 cable companies in Mexico have offered bundled services of phone, internet and television, which America Movil may not do. A quarter of fixed broadband customers now get online via cable. And as Mexico's middle class ex pands, the broadband market is growing
by a quarter each year. Wireless broadband is another threat to Mr Slim. In 2010 an auction of new spec trum allowed his mobile competitors to of fer 3G mobile-data services. Televisa, the biggest pay-Tv company, which is con trolled by the Azcarraga family, is trying to add mobile telephony to its products. Its proposal to buy half of Iusacell, a small mobile operator, was blocked by the C F C on the ground that the other half of the company is owned by TV Azteca, Tete visa's main rival in television. New technology offers Mr Slim oppor tunities, too: it could allow him to invade Televisa's turf. Free-to-air television in Mexico is a stale duopoly in which 70% of viewers tune in to channels broadcast by Televisa, the biggest media company in the Spanish-speaking world. Televisa domi-
I sold my chair to pay the phone bill
nates pay-Tv as well, with about 45% of Mexico's cable market and 6o% of the sat ellite market. According to the CFC, more competition in the pay-Tv sector could slash prices and increase the size of the market by more than a third. Telmex is hammering on the door. In October it cheekily transmitted live foot age of the Pan American games via its web site. Rivals cried foul, but so far there has been no sanction. In 2008 Mr Slim engi neered a deal with Dish, a satellite-Tv firm, whereby Telmex would provide billing services for the broadcaster and sell its packages in its shops. Again, rivals have complained, to no avail. The partnership has been successful. In its first two years Dish won 2m customers, equal to nearly 40% of the satellite market and about 17% of the entire pay-Tv market. Its cheapest deal is 109 pesos a month, less than half the cost of the cheapest package
February 4th 2012
with Sky Mexico, the market leader, which is majority-owned by Televisa. Pay-Tv could be even bigger: more Mexican homes have TVS than fridges. Next, Mr Slim craves a broadcast licence of his own, perhaps when Mexico switch es to digital television, freeing up enough spectrum for at least two new national free-to-air channels. In 2010 Felipe Calde ron, the president, issued a decree bringing forward the digital switchover from 2021 to 2015. The decree was suspended after com plaints by incumbent-friendly senators. Cofetel said that it would move ahead with an auction of two new channels. But on january 25th it announced, without ex planation, that it had decided to suspend the project indefinitely. The big prize for Mr Slim would be a change in the rules to allow him to use his vast network of phone lines to deliver tele vision. The copper lines would need to be upgraded to fibre, a project which Telmex has already begun (to provide faster broad band). Cable-Tv companies fret that Mr Slim will crush them: he already has 14-4m fixed-line phone customers, whereas their cables are only in s.sm homes. Two things hold Mr Slim back. One is that, with a general election due on July 1st, few politicians dare irk the incumbent broadcasters. In 2008 Santiago Creel, a senator who had argued for more competi tion in television, was blurred out in Tete visa's coverage of a Senate debate. Televisa blamed an "editing error". A source says the presidency leant on the C F C (unsuccessfully, in the end) to ap prove Televisa's proposed acquisition of half of Iusacell. Cofetel's announcement that it would shelve plans to auction new free-to-air TV channels was seen by some as a sop to the giant broadcaster. A com mon saying in the industry is that Mexico's phone sector may be about four times more valuable than the television market, but the latter is four times as powerful. Mr Slim's second weakness is content. Unsurprisingly, Televisa and TV Azteca are unwilling to sell their programmes to pay-Tv rivals such as Dish, and there is no rule forcing them to. Televisa's "Channel of the Stars" pumps out wildly popular telenovelas such as "Abyss of Passion" and "Hope of the Heart", to which families tune in religiously. Though they are also broadcast on free-to-air television, many prefer to watch them via cable or satellite, as the signal is much better. About 40% of time spent watching pay-Tv is reckoned to be spent watching free channels. So Mr Slim would have to woo audi ences not just with low prices, but with good Mexican programming (imported Ar gentine telenovelas, with their funny ac cents, won't do). It would, in short, mean fierce competition, something that for Mexico's strangled TV and telecoms mar kets cannot come soon enough. •
The Economist February 4th 2012 Fig hter jets
Bomb bays to Delhi
Business Big boats
Offshore finance Superyachting in the age of austerity
PARIS
India favours France's Dassault
"
W
E'VE been waiting for this day for 30 years," said Nicolas Sarkozy, France's president, on the news this week that India had gone into exclusive negotia tions with Dassault Aviation, a French firm, to buy 126 of its Rafale warplanes for $15 billion-20 billion. France has not sold a single Rafale overseas, and until this week the plane's future looked iffy. Shares in Dassault Aviation soared by18.5%. The loser, ironically, was the Rafale's cousin, the Eurofighter Typhoon, built by a consortium led by EADS, Europe's defence and aerospace champion, which is jointly controlled by Germany and France. EADS itself owns a 46% stake in Dassault, a lega cy of earlier French government meddling, so its own shares inched up on the news. Dassault won its exclusive-bidder sta tus by offering the lower price. Both Euro pean jets had satisfied the technical re quirements of the Indian Air Force, which wants zippier planes to guard against Chi na's Chengdu J-10 combat aircraft and Pakistan's ageing American F-16s. In tests over the Himalayas and the Rajasthan des ert, India had eliminated the F-16 and F I A-18, the Russian MiG-35 and Swedish JAS 39 Gripen from the process during 2009-10. The capabilities of both the Rafale and the Eurofighter were on display during the Libyan war. The Typhoon is the superior air-to-air interceptor. The Rafale switches more easily into a ground-attack mode. After seeing the Rafale rejected repeat edly over the past decade, by the Nether lands, South Korea, Singapore, Morocco, the United Arab Emirates and Switzerland, the French were desperate to win a con tract. The plane was becoming a costly em barrassment, especially for Mr Sarkozy, who has long promised a sale to Brazil but has nothing to show for his efforts. Some even wondered if the Rafale could survive with France as its only customer. Now Dassault must seal the contract with India in a series of detailed negotia tions over technology transfer and other conditions. India is known for switching to other bidders before finally signing a con tract. "The Indians will now squeeze the French hard," says an executive on the Ty phoon side. That said, India has used Das sault's Mirage jets for many years, and last year signed a $2-4 billion deal with Das sault, Thales and MBDA, two other French defence firms, to upgrade its French planes. For the Eurofighter consortium the Indi an deal is crucial too. David Cameron, Brit-
E the pinch. Last year only 173 super
VEN superyacht-owners are feeling
yachts (vessels over 30 metres long) slipped into the briny, according to Super yacht Intelligence, a consultancy. That's 27 fewer than in 2010 and far below the peak in 2008, when 260 floating pleasure palaces hit the waves. The number of vessels on order, too, slipped from 453 in 2011 to 423 this year. But cheer up: their combined length rose from 2okm (12 miles) to 23km. The super-duper rich are surprisingly unimaginative when it comes to dreaming up new ways to outdo each other. The biggest yacht ever was launched in 2010. Roman Abramovich, a Russian billionaire, reputedly forked out €5oom ($66om) for the 164-metre Eclipse (pic tured). It includes such essentials as a mini-submarine, a hair salon and two helipads. (Owning a yacht with only one helipad would be embarrassing-a bit like owning a football club that is only fourth in England's Premier League.) Quite sensibly, Mr Abramovich has hung on to his other superyachts. On the brokerage market (second-hand, to land lubbers) prices are disappointing. That second yacht is the first thing a troubled tycoon sells. Global gloom means there is a vast fleet of used superyachts for sale.
Falling demand for new boats means that shipyards are desperate for business. Maintaining a superyacht is not cheap. Most need a hefty crew (the Eclipse needs 75 pairs of hands). Add in fuel, berthing and the like and the tab can hit millions a year for a craft you use for only two weeks. In the boom years, emotion often trumped good sense. Captains and yacht managers spent the owner's money on supplies, upgrades and repairs so freely that the practice spawned an acronym, SP AM: "spending Paul Allen's money" (the Microsoft co founder owns some fairly lavish boats). These days, the have-yachts are more hard-headed. More craft are being offered for charter to offset running costs. Last year the Eclipse was put up for hire at $2m a week. Many Mediterranean yacht owners are seeking cheaper berths in places such as Malta, where marinas are only a quarter as costly as those in France or Spain. Some despatch their captains to Tunisia to load up on duty-free diesel. Some maintain a skeleton crew over the off-season and hire extra help only in the summer. A few owners are even hiring auditors to check that they are getting value for money, says Martin Redmayne of Superyacht Intelligence. The days of splashing out are over, it seems.
Nice boat, but where can I park it?
ain's prime minister, said this week that the Typhoon is "far better" than the Rafale. Sales of the Typhoon, which went into ser vice in 2004, have disappointed. The Euro fighter member governments (Germany, Britain, Italy and Spain) have all ordered planes, but only Austria and Saudi Arabia have bought them from outside the group. Eurofighter may now lower its price to rejoin the bidding for India's contract. It may also offer India the carrot of equal sta tus as a partner in the programme, along side the four European nations. Eurofighter says it will be helped by what is turning out to be a transparent procurement pro-
cess. Whereas previous Indian arms deals have been dogged by accusations of cor ruption, this one has so far been exempla ry, says an executive involved. Having opted out of the Eurofighter project in 1985, France's determination to go it alone in defence matters has led to the spectacle of two expensive European com bat planes competing for the same big con tract. "Europe should not have two jets fighting each other," says Zafar Khan, a de fence-industry analyst at Societe Generate, a French bank. The next generation of European fighter jets, he says, should be a more co-ordinated effort. •
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The Economist
Business
Health care in America
Shopping around for surgery
N E W YORK
Companies try to make health-care costs transparent
A MERICANS spent $2.6 trillion on health fi care in 2010, a staggering 18% of GDP.
Yet few of them have the faintest idea what any treatment costs or how it compares with any other treatment. Prices vary wild ly and seemingly without reason (see chart). Insurance terms require a dictio nary. For most Americans, buying a proce dure is akin to choosing a house blindfold ed, signing a mortgage in Aramaic, then discovering the price later. Slowly, how ever, this is changing. The past decade has seen a shift in how people pay for medicine. Americans' health spending is growing at a slower pace. This is partly because of the down turn, but not entirely. The rate of growth fell every year between 2002 and 2009, note David Knott and Rodney Zemmel of McKinsey & Company, a consultancy. There are many reasons for this-for exam ple, many costly drugs have lost their pat ents. But spending habits also seem to be changing. Most American workers receive health insurance through their employers. They typically shoulder the costs without realis ing it. The more a company spends on health insurance, the less is left over to pay wages. Now employers are trying to give staff an incentive to think hard about costs. Under "consumer-driven health plans", workers must cough up part of the price of any treatment before their insur ance coverage kicks in. Most have an un taxed account to spend on health; they
think twice before depleting it. In 2006 only 10% of workers had to pay at least $1,000 before their insurer picked up the rest of the bill. By 2010 that share had more than tripled. General Electric (GE) shifted its salaried employees into consumer-driven plans in 2010. It urged them to shop around for bar gains, but they found this nearly impossi ble due to a lack of information. "People started saying: 'If you want me to be an ac tive consumer, I need to know prices,"' ex plains Virginia Proestakes, the head of GE's benefits programme. When employees asked doctors for prices, the doctors were baffled. They had no clue how much differ ent insurers paid for the same procedure, or what share a patient would pay. A recent study by the Government Accountability Shop before you're chopped
Median price of health-care servi ces, 2009, S'OOO
Setected hospitals in the Bosto n area
• Brigham & Women's
Hospital
• Massachusetts
General Hospital
- MountAubum Hospital Hip j oint replacement Knee joint replacement
Caesarean delivery
0
5
10
15
20
25
twiiiiijiiiiii ri/i II twiiiiiP• II iiii�•
Source: Massachusetts Division of Health Care Finance and Policy
30
February 4th
2012
Office (GAO), a public watchdog, reported similar problems. Barack Obama's health reform requires hospitals to list standard prices each year, and more than 30 states have either pro posed or passed laws to promote price transparency, according to the GAO. None of these measures has come close to solv ing the problem. Few provide enough data to allow people to shop around. So private firms are having a go. G E, for example, hired Thomson Reuters, an infor mation firm, to show employees the cost of different services. Thomson Reuters an alyses prices from prior purchases-by workers at GE and other firms-to show the cost of a given procedure at different hospitals and clinics. Another company, Castlight Health of California, has made transparency its sole mission. Working with big firms, Castlight assembles data from past transactions so that employees can shop for doctors on line and read reviews posted by patients. Castlight wants to do for health what Tra velocity did for air travel, explains Gio vanni Colella, the founder. Mr Colella's co founder is now the chief technology offi cer for Mr Obama's health department. These plans face several obstacles. Health care is more complicated than fly ing. A traveller knows she wants to get from A to B, and that more or less any air line will get her there in one piece. So it is easy to rank air tickets by price. By contrast, someone with a heart problem may be un sure whether to pop pills, operate, change his diet or do nothing. Informed medical decisions require a tonne of information. To make matters worse, health insurers are reluctant to share data about costs, says Bobbi Coluni, who leads Thomson Reu ters's consumer-health unit. If an insurer has a contract to pay one hospital $7,000 for a caesarean and a contract to pay an other hospital $1o,ooo for the same ser vice, and this information leaks, the first hospital will lobby for a higher price. GE's contracts with insurers stipulate that GE owns the data from workers' past health purchases. But such agreements are rare. Despite this, greater transparency seems inevitable. Smart insurers are hawk ing their own tools. Cigna uses Thomson Reuters's technology to support its "cost of care estimator". Aetna, another insurer, of fers a sophisticated web tool that patients use more than 67,000 times a month. Meg McCabe of Aetna hopes that consumers will soon be able to use their smartphones to enter symptoms, find doctors, compare prices and schedule an appointment. Such experiments will serve insurers well. If Mr Obama's health law stands, mil lions will soon shop for insurance on new exchanges. The easier the plan is to under stand, the more people may pick it. A fully transparent market is years away. But a bit of sunlight is creeping in. •
The Economist February 4th 2012 Accounting in China
Seeing the forest for the trees HONG KONG
Corporate govemance in China is lousy
AN you trust Chinese accounts? Many
C investors fear (and several short-sell
ers are betting) that the answer is "no". Sino-Forest, a big forestry firm listed in To ronto, is a case in point. Last year Muddy Waters, a short-seller, accused it of running a Ponzi scheme, which it denies. On Janu ary 31st Sino-Forest released the final re port of independent investigators into the charge. Insiders crow that the gumshoes found no smoking gun. The gumshoes grumbled that, lacking access to all the evi dence, they were "not able to reach defini tive conclusions". America's SEC is trying to force the
Business
Shanghai office of Deloitte Touche Toh matsu, a big Western accountancy firm, to hand over papers related to Longtop, a Chi nese software firm that was delisted by the New York Stock Exchange last year. De loitte refuses, saying this would violate Chinese laws on "state secrets". Deloitte may have a point. If it co-operates, its local staff could be jailed under Chinese law. Many accountancy problems spring from reverse takeovers, when a Chinese firm buys a foreign one to acquire its listing. T. J. Wong of the Chinese University of Hong Kong has analysed 200 Chinese re verse takeovers in the West, and found that many have run into trouble. The troubled outfits are typically smallish private ones that opted for a backdoor Western listing because they could not list in Hong Kong (where reverse takeovers are barred). Western accountancy firms have taken flak for lending their good names to dodgy Chinese firms. But the international boss of a Big Four accountancy firm says this is
Ba kers and chaebol in South Korea
Let them eat cal<e SEOUL
A half-baked effort to curb the conglomerates
SA few give them cake shops. The hot
OME parents give their children cakes.
topic in South Korea is the trend for daughters and grand-daughters of chae bol families to open bakeries and other small food outlets. The chaebol are the conglomerates that dominate the Korean economy, so these plutocratic piitissieres have deeper pockets than any of the little bakers they compete against. Their baking has provoked outrage. Lee Myung-bak, South Korea's president, calls it a "hobby" business for rich girls that threatens the livelihood of poor shopkeepers. Lee Ju-young, a member of the national assembly, likens it to Park Ji-sung (Manchester United's Korean midfielder) lording it over amateurs in a backstreet game of football. A restaura teur in Seoul puts it more plaintively: "These families already control every thing else in Korea. Why can't they leave something for the rest of us?" The chaebol families have decided that this is not a battle worth picking. Scions of the Samsung, LG and Hyundai dynasties are all hanging up their aprons. Artisee, a chain of swanky pastry shops run by Lee Boo-jin, whose dad is the chairman of Samsung, is to close. So is the Hyundai-affiliated Ozen. Whether this will help small bakers much is open to question. Artisee has only 27 shops; Ozen a mere two. Both are cupcakes in comparison to SPC Group,
which operates more than 3,000 Paris Baguette shops in Korea. Buns have always been SPC's bread and butter-and its boss is not an heiress. Some say all this pie-throwing dis tracts attention from the real problems that overmighty chaebol cause. Entrepre neurs complain that if they have a good idea, the chaebol show up with their chequebooks and poach their staff. Small firms that supply chaebol complain that they are ruthlessly squeezed, though few dare say so publicly. Consumers also suffer. Korea's Fair Trade Commission (FTC) detected over 3,500 cases of price-fixing in 2010, but only 66 led to fines. The average penalty amounted to just 2.3% of unfairly earned revenue. Samsung and LG were fined in January for fixing the prices of notebook PCS and flat-screen televisions between June 2008 and September 2009. Sam sung was ordered to pay a fine of 25.8 billion won ($23m); LG, 18.8 billion won. LG's fine is to be waived, in return for co-operation with the FTC. This is the third time the two firms have been caught price-fixing in the past two years. Politicians follow the same old recipes when dealing with the chaebol. They lean on banks to lend cash to small firms. And they lean on the chaebol to stay out of a few minor businesses, such as baking or tofu-making. However you sugarcoat it, this is not serious reform.
unfair. The first 156 Chinese reverse take overs were not audited by Western ac countants, he says, but by their Chinese ri vals. He insists the Big Four have greatly increased their vigilance in China. Michael Thompson of the China Eu rope International Business School argues that Chinese corporate-governance laws are better than people think. They call for independent directors, separate the chair man's role from that of the chief executive, and grant shareholders many rights. The problem with many of the firms whose accounts are currently under scruti ny is that they were registered in such places as the Cayman Islands, outside the reach of Chinese law. And the loophole that allowed them to list in America via re verse takeovers is an American loophole, not a Chinese one. China's biggest corporate-governance problem is not its laws, but its govern ment's willingness to enforce them even handedly. William McGovern of Kobre & Kim, a lawyer and former SEC enforce ment official, argues that aggressive action by American regulators after the Enron de bacle restored confidence to American markets. China risks a similar crisis of con fidence now, but Mr McGovern observes that its regulators have yet to act decisively at home or to co-operate with foreign agen cies such as the SEC. Not all Chinese firms are crooked-but until China gets serious about regulating its companies, investors should remain wary. •
Carefu l where you tread
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The Economist
Business
February 4th
2012
I
Schumpeter The coming retail boom
Europe's dozy retailers are about to be rudely awoken
.
,
I I CliCK ! 1
A COUPLE of years ago the Obamas visited Paris. One Sunday .t"\. morning Michelle and her daughters decided to sample the city's famous shops. There was only one problem: the shops were all firmly fennes (French secularism is mysteriously sus pended when it comes to observing the Sabbath). Nicolas Sar kozy, France's ever-helpful president, had to call a few places per sonally and ask them to open. Europe's greatest achievement is supposed to be its single market. But actually taking advantage of that market can be frus trating. Retailing is a mess of restrictive practices and cultural oddities. Continental Europe boasts plenty of charming boulan geries and conjiterias. But charm costs time and money. You may have to visit six or seven shops to fill your shopping bag-and one or two will inevitably be closed. Parisian butchers close on Tues day afternoons and Thursdays-and whenever else the propri etor decides to put a "fermeture exceptionelle" sign in the window. Europe has some mighty supermarkets, to be sure. But they are often built in the middle of nowhere, due to restrictive plan ning laws. Many appear to have been built from Soviet-era blue prints, and to have staff who go out of their way to demonstrate that they hate you. "When stores start to smell like that in Ameri ca," one shopper commented after a visit to a hypermarket near Bordeaux, "we just pull them down." Restrictive practices are everywhere you look. Food and soft drinks cost 28% more in Belgium than in the Netherlands. Over the-counter drugs can cost five times as much in one European country as in another (if you can buy them at all: Germany and Italy bar the sale of pharmaceuticals by non-pharmacies). Shoes cost 30% more in Montenegro, a relatively poor country, than in Britain, a relatively rich one. European shoppers are starting to revolt. On January 30th Carrefour, Europe's biggest retailer, announced that it is replacing its boss, Lars Olofsson, with Georges Plassat, an outsider. This comes after years of stagnant sales. Mr Olofsson had tried to re vive Carrefour with beauty zones and organic food, but nothing worked: the company's share price fell by 37% last year. And Carrefour's problems are a mere rumble compared with the earthquake that is about to hit European retail. £-commerce will do to shops what it did to music and media (minus the pira-
cy). It will make a reality of the single market by giving consum ers the power to browse across a club of 500m people. This will be hugely disruptive: those boulangeries and hypennarches are collectively one of the biggest employers in Europe. So far Europeans have been slow to grasp the potential of e commerce. A mere 3-4% of Europe's products and services are sold via the web, compared with 4.6% in the United States, and only 8.8% of European e-commerce flows across borders. Ger many, where service in shops is often dire, has been particularly obdurate. But things are changing. £-commerce has been growing much faster than the rest of the industry. The European Commis sion calculates that the proportion of Europeans who bought something online in the past year increased from 20% to 40% be tween 2004 and 2010. Britain's Centre for Retail Research predicts that Europe's online market will grow by16% this year. Popular at titudes are evolving: hard times are making Europeans more price-conscious. And familiarity with the internet is soothing old fears about how trustworthy e-commerce is. Europeans are well-equipped to take advantage of new forms of e-commerce, such as shopping by mobile phone. Europe is a smartphone superpower: 48% of Spaniards have the gadgets, as do nearly as many Britons and Italians. A handful of European companies are becoming market leaders in e-commerce. France's Vente-Privee, an online hawker of designer goods, has pioneered exclusive "private sales" to make members feel special. It sells more than €1 billion-worth of fancy baubles a year. Italy's Yoox Group delivers selections of clothes to customers by FedEx, waits while they try them on and takes back what they don't want. Bricks-and-mortar stores are furiously adapting. Marks & Spencer, a traditional British store, now sells knickers and supe rior cakes by smartphone. John Lewis, another British chain, shifts tonnes of furniture online and is known for good service. EC stands for e-commerce
On January nth the European Commission announced that cre ating a "digital single market" and toppling barriers to cross-bor der e-commerce is one of its priorities. The commission says it wants e-commerce to double its share of retail sales to 6.8% by 2015. More importantly, the biggest e-tailers are investing huge sums to grab market share. Amazon's poor results this week re flect its willingness to sacrifice short-term profits for growth. There will be losers. Retailers employ 17-4m Europeans, many of them young, unskilled and unlikely to find other work. A fifth of small businesses in Europe are shops, and many Europeans treasure the culture of the little corner store. It cannot be long be fore the anti-Walmart crowd turn their fire on eBay and Amazon. But the winners will outnumber the losers. When you shop online, it costs less and someone else delivers it all to your door. This is more agreeable than pushing a trolley round Tesco while your children knock over the soup display. The commission cal culates that if obstacles to e-commerce are removed and it grows to 15% of the retail sector, the gains in "consumer welfare" could amount to €204 billion ($267 billion), or 1.7% of GDP. Some of Eu rope's small shops will give up the battle with giant supermar kets and reinvent themselves as stylish showcases for e-com merce. Oddly enough, the old continent's best chance of preserving its cultural traditions lies with harnessing new tech nology, not ignoring it. • Economist.comfblogsfschumpeter
65
Also in this section 66 Ma laysia's serene central bank 67 Rare earths in China 6 7 Japan's quiet US incursion 68 B uttonwood: The war on finance 6 9 The outlook for weather derivatives 69 Carnage in investment banking 71 Free exch ange: The ECB's bazooka
Fo r d a i ly a n a lysis a n d debate on eco n o mi cs, visit Economist.comfeconomics
The Reserve Bank of India
Pulling every lever
M U M BAI
India's central bank is one of its best institutions. It is also complicit in a government-borrowing binge
NE of the perks of being governor of O the Reserve Bank of India (RBI) is the use of a colonial bungalow on Carmichael Road, a posh street that weaves along a ridge in south Mumbai. On one side live some of India's richest industrialists, mod ern-day pharaohs with flashy architectural tastes. On the other, a stone's throw down a cliff, is a small slum-a monument to des peration and government failure. Both sets of neighbours are part of the 1.2 billion population that India's central bank must look out for. In normal times this is a task that would furrow the brow; now that the country's boom is faltering, it risks causing a blinding headache. Judging by the numbers, the RBI is among the world's best central banks. Its record on balancing growth and inflation is decent enough (see chart 1). Since 1995 wholesale prices have risen by an average of 6% a year, not too far from the RBI's com fort zone of about 5%. Growth has aver aged 7% a year. The RBI is also in charge of the safety of the financial system, to which end it yanks more levers than Willy Wonka in a chocolate factory. Its record here is ex cellent. Despite a current-account deficit that leaves India vulnerable to global jit ters, the country sidestepped the 1997 Asian crisis ("nobody gave us a chance," re calls a former governor) and the West's
became a politicians' plaything after India nationalised its banks in 1969. For two de cades the state controlled lending and also fixed as many as 200 separate interest rates. It used the RBI as a piggy bank, forc ing it to print money to finance its short term needs. After 1991, when a balance-of payments crisis led India to deregulate, the central bank rediscovered its spine. Agree ments fully enacted in 1997 and 2006 stopped the state using it as an ATM, and as interest rates were liberalised and the bond market developed, the RBI began to look more like a normal central bank, set ting short-term policy rates to try to bal ance inflation and growth. Thisjourney never reached the destina tion that was until recently in vogue in the West-that of a statutorily independent central bank narrowly focused on setting interest rates and targeting inflation. The RBI's independence is not enshrined in law, although none of the four central bank governors since 1992, interviewed by The Economist for this article, raised this as ��
banking crisis in 2008. The RBI also coped with big and potentially destabilising capi tal inflows in the euphoric years before Wall Street began to totter, and has avoided a domestic financial crisis despite fast growth in banks' assets for many years. Some fancy the RBI is a model for the kind of full-service central bank that is back in fashion worldwide-both the Fed eral Reserve and the Bank of England, among others, are now in charge of finan cial stability as well as interest rates. In truth, it would be hard to run a rich econ omy the way the RBI does India, with its fi nancial system only partly liberalised. But the central bank has new clout abroad and at home its stock is high. Under the present governor, Duvvuri I Subbarao, a softly spoken figure, it has made a tough series of rate rises in the past two years to try to curb a stubborn spell of inflation (a battle that may not be over). And although the bank finds it hard to tempt star graduates to work in its tower overlooking Mumbai harbour-"if you look at its people and those of the Fed, there's no comparison," laments one big wig-relative to most Indian state bodies the RBI has more brains, muscle and integ rity. It is about the only institution in the country you never hear accused of graft. That's a big turnaround for a body that
II
Crack record India's: % change on a year earlier
16 12 8 4 0
1990
95
2000
05
Sources: Central Statistical Organisation; CEIC
11
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The Economist
Fi nance and economics
India's combined fiscal deficit* as % of GOP
10
Serene but surprising KUALA L U M P U R
8
Malaysia's central-bank governor knows her own mind
4
M Negara Malaysia (BNM), is the least ALAYSIA'S central bank, Bank
90
95
Source: Morgan Stan ley
2000
05
2012
Malaysia's central ban k
Deficit attention disorder
1981 85
February 4th
12
0
*Including off-budget items I Estimate !Forecast
� a big concern. The RBI consults the govern ment but it has enough breathing-space to set rates as it pleases, they say. And like a triumphant wearer of flares that have at last come back in fashion, the RBI'S wide remit-minting coins, managing the exchange rate, acting as banker for the government, and supervising banks and the bond market-is now seen as a tem plate. These responsibilities helped it deal with the 2008 crisis: in short order it de fended the currency, loaned money to cash-strapped banks, gave forbearance on troubled loans, soothed the bond market and eased banks' capital requirements. To day a process of constant tweaking contin ues. In December, after a panicky fall in the rupee, the RBI introduced several obscure measures to bolster it, such as making it more attractive for Indians resident abroad to deposit money in the homeland. Such fiddling has a cost. In 2007 an offi cial report on making Mumbai a global fi nancial centre-a work of great imagina tion-identified nit-picking and suspicion of foreign financiers (who are welcome to buy shares in India but not to play in debt markets) as a big problem. In 2009 an offi cial review of finance chaired by Raghu ram Raj an, a former chief economist of the IMF, worried that conservative regulation was inhibiting India's potential. One local bank boss says the RBI "runs a repressed fi nancial system which is intolerant towards innovation. If the us was at 90 out of 100 in terms of complexity and sophistication, we are at 10 .. .1 sometimes get the impres sion it [the RBI] is resting on its laurels, not realising that more financial innovation could help India's development." Still, after years of financial convul sions abroad it is hard to say that the RBI has got the balance between safety and thrills wildly wrong. Indeed, the thing that endangers India today is not its financial markets but its government. Heady talk of 9-10% as India's new nat ural rate of growth is long gone. Many blame the government, which has not passed a significant reform for years while running a fiscal deficit of almost a tenth of GDP, including the states and off-balance-
predictable in the region, according to Robert Prior-Wandesforde of Credit Suisse. Its rate-setting decisions surprise analysts 26% of the time. That is not because it is erratic or antsy. Far from it. In the past seven years it has changed its policy rate only ten times, never cutting it below 2% or raising it above 3.5%. On January 31st it sat on its hands again. This serenity is overseen by Zeti Akhtar Aziz, the bank's governor since 2000. She is not bothered by Mr Prior-Wandesforde's finding. Predictability is prized by the advocates of inflation-targeting, who believe central banks can mould people's expectations of prices. But the BNM never embraced inflation-targeting, even when it was fashionable. The bank surprised analysts by not raising rates in mid-2008, when the removal of fuel subsidies contributed to inflation of over 8%. "We were con demned by everyone, everyone," Ms Zeti says. The bank then caught analysts out again by raising rates in March 2010, when the global financial crisis was still fresh. Both decisions proved prescient. That crisis was not Ms Zeti's first. She served as acting head of BN M for a brief but crucial period in 1998, after her boss resigned over the capital controls Malay sia imposed in response to the Asian financial crisis. She has defended the controls as a pragmatic response to Ma laysia's unique predicament, including the haemorrhage of ringgit (Malaysia's currency) to a vibrant offshore market in Singapore. This week the bank liber alised its foreign-exchange rules, allowing Malaysians to buy and sell one for-
sheet items (see chart 2). The deficit-which began as an electoral giveaway in 2007, morphed into a stimulus package and is now just a product of indiscipline and populist politics-is widely seen as bad for India. Government borrowing crowds out the private sector, which has to live with higher interest rates than might otherwise be the case. Because the state is less likely than private business to spend the cash on investment, it does less to boost the econ omy's potential. At the RBI the boom of 2003-07, when growth was near double-digits and infla tion comfortable, is now seen as a distinct era during which the deficit was falling, bullish firms were investing freely, a criti cal mass of reforms were in the bag and the
eign currency for another. But the ringgit still cannot be exchanged for another currency for investment purposes. Ms Zeti says she believes in the free market, but not self-regulation. Like the Reserve Bank of India, B NM prides itself on keeping its banks in line. Its supervisian reports rank each bank's safety and efficiency against its peers. It discusses any lapses with the offending bank's entire board, so that its directors know the right questions to ask its managers. These meetings are usually hosted by the deputy governor. But "if it's a very bad report, I might chair it," she says with a smile. The better the central bank does its job, the fewer meetings she has to attend. At BNM, less is often more.
Steady Zeti
state was productively solving day-to-day problems. Those conditions do not exist to day. The central bank's rule of thumb for the non-inflationary rate of growth has fallen to 8%, but that seems to bake in an as sumption that the political class will recov er its wits. If, hypothetically, that does not happen, insiders at the RBI accept that trend growth could be significantly lower. Bears outside the central bank talk of 6%. The uncomfortable question for the RBI is whether it is partly responsible for the slowdown, albeit indirectly. If you have a central bank that always gets you home safely at the end of the night the tempta tion for politicians may be to go crazy. The RBI 'S position is especially delicate on the fiscal deficit. The central bank oversees a fi- ��
The Economist February 4th 2012 �
nancial system that is a conduit for funnel ling savings into government bonds, 70% of which are owned either by the central bank or by the banking system, which re mains dominated by state-owned lenders. Although the ratio has come down, the RBI still forces banks to invest 24% of their core deposits in government bonds, far above what is needed to give banks a safe ty buffer of liquid assets. This creates cap tive demand for public borrowing (al though during an economic soft patch such as today's, cautious banks may vo luntarily hold more than the minimum). The RBI also buys government bonds in the market. It argues this makes markets work smoothly, but most outsiders think the aim is to put a lid on government-bond yields. A spike in yields in November has been followed by a big, $14 billion RBI bond-purchase programme. The RBI is thus in the weird position of publicly rebuking the government about its deficits while being the guarantor that they are financed. An extreme remedy would be for it to stop buying nearly so many bonds and to ease the rules on banks' bond holdings. Without captive buyers interest rates would rise, perhaps by a percentage point or two. Some doubt whether the politicians would pay any at tention-their appetites are insensitive to the government's borrowing costs, it is ar gued. But the RBI would still probably like to try; in December 2010 it cut the liquidity requirement from 25% to 24%. The trouble is, anything more dramatic might be seen as meddling in politics and could prompt a bond-market rout that endangers stability. Prop trading
In this respect, as with its strong superviso ry record, the RBI may have lessons for the world. Other central banks, including the euro zone's, are propping up sovereign bond markets. Mr Rajan talks of "the con ceit that central banks are independent. When they find that the governments are not going to budge [on cutting their defi cits) few feel able to just walk away." In a speech on February 1st, Mr Subbarao, the RBI ' S governor, worried that "in the pres ence of large sovereign borrowing... cen tral banks typically have little choice." One possibility is that slower growth, high borrowing and lack of reform might eventually prompt a fiscal or balance-of payments scare that even the RBI, with its impressive array of tools, struggles to keep a lid on. That might frighten the political class enough to act. The more benign sce nario is that politicians will anticipate this risk and act spontaneously to get India's public finances back on track. But politics is one thing India's central bank cannot control. As he settles down at his villa to watch the sun set over the metropolis of Mumbai, all the governor of the RBI can do is cross his fingers. •
Fi nance and economics
67
China and rare earths
Of metals and marl<et forces H O N G KONG
Is China's grip on essential minerals loosening?
ALL that glisters is not gadolinium. Even 1""\. so, that mineral and its 16 "rare earth" cousins-found in everything from batter ies to catalytic converters-do help make the modern world go round. And, as the world's manufacturers of such products have been reminded recently, China has a chokehold on their production. China's grip on rare earths first made headlines in 2010, when it suddenly cut ex ports to Japan. But it had been squeezing the market for years. In 2000 it exported some 47,000 tonnes of the stuff; by 2010 it exported only about 30,000 tonnes. This decline appeared to be the result of unfair export taxes and quotas. Western powers have threatened to take the case to the World Trade Organisa tion (wTo). This week they seemed to get a boost when that body ruled against Chi na on a related case. On January 30th an appellate body of the wTo ruled that Chi na's policies to restrict exports of several metals, like bauxite and magnesium, vio lated its WTO obligations. American and European officials cheered, arguing that China's rare-earth policy must now also be scrapped. Some pundits say China might even pre-empt further legal action with a deal to drop its quotas. Such celebrating may be premature. For one thing, China's leaders have taken a hard line on trade of late, imposing fresh tariffs on imported poultry and sport-utili ty vehicles. On the heels of this week's rul ing a Chinese official declared defiantly that "we are fully prepared" to fight any challenge on rare earths. Gary Hufbauer of the Peterson Institute for International Eco nomics is convinced that China's policies add up to "a disguised restriction on inter national trade" but cautions that any case on rare earths will be harder to win on its merits than this week's one. That is be cause there is a stronger environmental ar gument for restricting the supply of rare earths, the extraction of which produces toxic chemicals. China also has other means of retain ing control of the market besides export quotas. It has lots of capacity to refine rare earths, whereas most rich countries do not, so it can exercise control downstream. Rare-earth prices are also not likely to drop soon, even if the WTO rules against China again, because the Chinese have forced the industry to consolidate. There were once many miners but the country has recently shut down dozens of operators in Inner
Mine, all mine
Mongolia and elsewhere. Take the long view, though, and China's policies seem destined to fail. Although the country produces over 90% of rare earth minerals today, it controls less than half of the global resource base. Restricted supply and higher prices have already spurred the development of big mines in Australia and in America, where a large Californian mine called Mountain Pass re opened late last year. In time, this fresh supply will take market power away from China. For the Chinese, rare earths are sim ply not rare enough. • Japan ese banks
Quietly does it
N EW Y O R K A N D TOKYO
The next wave ofJapanese investment into America will differ from the last
HE first round of Japanese investment Tinto America, during the 1980s and 1990s, was notable for being so emotive. Extraordinary prices were paid to buy up supposedly gilt-edged assets including golf courses, investment firms and a large part of New York's Rockefeller Centre. Sell ers were delighted; the public horrified. The real victims were the Japanese buyers themselves, who suffered huge losses. Not every deal flopped. In particular, a minority investment in Goldman Sachs by Sumitomo Bank that was initially seen as an embarrassment in Japan (Sumitomo thought the stake was to be a partnership rather than a spigot for cash) turned out to deliver good returns. The lessons of that approach-a discreet profile, a minority stake, a focus on finance-may characterise
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68
The Economist
Fi nance and economics
� the next wave of Japanese investment. Western banks need to raise equity cap ital to meet new regulatory hurdles. Other financial assets are being sold off as part of post-crisis restructurings. Japanese banks are relatively healthy, have high capital ra tios and are deeply sceptical about their own ability to grow in Japan. That has led them once again to look outward, and not just to the Asian backyard. On January 18th Sumitomo Mitsui Fi nancial Group, Japan's second-largest fi nancial institution and the current incar nation of the old Sumitomo Bank, paid $93m for a 5% stake in Moelis & Company, a
Buttonwood
niche investment bank. That deal came just a day after Sumitomo Mitsui an nounced an agreement with the Royal Bank of Scotland (RBS) to pay $7.3 billion the seventh-largest amount ever paid by a Japanese company-for RES's aircraft-leas ing division. The leasing business ticks a number of boxes: it has a low public pro file and is dependent on access to cheap money rather than adroit management of personalities (a problem that has dogged Nomura since its splashy acquisition of Lehman Brothers' European and Asian in vestment-banking businesses). Japan's largest financial institution, Mit-
February 4th
2012
subishi UFJ Financial Group, has adopted the subtle approach. During the crisis it took a 22% minority stake in Morgan Stan ley. It also acquired full control of its San Francisco-based subsidiary, UnionBanCal, better known as the Union Bank, and has since made small purchases to expand that lender's franchise. Union Bank has operations in Califor nia, Oregon, Washington and Texas, and is among the 25 biggest banks in America. Mitsubishi wants to transform it into a top ten institution, and Morgan Stanley is ru moured to have a mandate to find a target. There should be no shortage of those, giv- ��
I
Attacking your creditors is an intriguing strategy
Tthe next French president, Fran�ois HE man who the polls suggest will be
Hollande, claims that finance is his "real adversary" in the coming election. Britain has just stripped the former chief execu tive of the Royal Bank of Scotland of his knighthood. Even Newt Gingrich is attacking the "vulture capitalists" in the private-equity industry. Perhaps the West is set for a "war on finance" along the lines of the "war on terror", with similar uncertainty about how to define victory. Politicians seem to have three main beefs with the financial sector. The first is that bankers earn too much. The second is that banks take reckless risks and then need rescuing by governments. And the third complaint is that investors in finan cial markets have undue influence over an economy through their ability to affect bond yields and equity prices. The first two problems are really relat ed. People do not worry too much about footballers' high pay. The problem with bankers is the extent to which they are subsidised by explicit and implicit tax payer support. (Of course, you might worry about income inequality in gen eral but that is not specific to banks and can be tackled by redistributive taxation.) It is hard to disagree with Paul Tucker of the Bank of England, who has written that: "Those who most espouse the disci plines of capitalism-bankers and finan ciers-should live by them." The problem of banks being "too big to fail" is being addressed, albeit slowly, by the higher capital ratios being imposed by regulators. Higher capital ratios should mean lower returns on equity; over time, this should lead to less rapid pay growth for bankers. Andrew Haldane, a col league of Mr Tucker's, has found that the pay of bank bosses correlated well with returns on equity, but not with returns on
assets-in other words, managers pros pered by gearing up bank balance-sheets. That is now harder to pull off. The finance sector has also, in some people's eyes, had a pernicious effect on politics. Like any other interest group, the industry lobbied on its own behalf and achieved some notable regulatory gains in the 1980s and 1990s, such as the abolition in America of the old Glass-Steagall divide between investment and commercial banking. Its doyens have gained powerful positions in government, although this may be down to the modern assumption that if people are rich they must be smart. But this influence did not stop Congress passing the Dodd-Frank act, has yet to stop Britain's planned divide between com mercial and investment banking, and has not held up a host of new EU regulations. This suggests that democracy can over come vested financial interest. Indeed, there are plenty of votes in bashing bank ers, as Mr Hollande is only too aware. The third political beef is a very long standing complaint: recall, for example, Harold Wilson, a former British prime minister, and his rants about the "gnomes
of Zurich" who were speculating against the pound. The German chancellor, An gela Merkel, called for "the primacy of politics over the markets" in 2010. This seems an odd battle to fight. All euro-zone governments need to borrow money from the markets. The political message seems to be: "We hate private sector creditors. We will penalise you by defaulting on your debts but not on debts to official creditors. We will endeavour to stop you protecting yourselves against our actions by making it difficult to collect on insurance in the credit-default-swaps market. Now, can we please borrow some money at a very cheap rate?" The underlying complaint is that spec ulators drive up bond yields, making it harder for governments to finance them selves. As a result governments are forced into austerity programmes, against the wishes of their electors. Yet the same markets are more than willing to lend money to governments in America, Britain and Germany at nega tive real (ie, after inflation) rates. This may be down to the influence of other buy ers-central banks, commercial banks, pension funds-who are not that interest ed in maximising their return. That suggests the problem might not be with the markets after all. What hap pens to countries like Greece which lose access to private-sector finance? They be come dependent on the largesse of offi cial creditors-the International Mone tary Fund, the European Central Bank, other EU nations-which can be even more stringent in demanding austerity programmes. After a few bouts with the ECB, the 57-year-old Mr Hollande may end up wishing that his planned retire ment age of 6o also applied to presidents. Economist.comfblogsjbuttonwood
The Economist February 4th 2012
� en the need of European institutions to shed foreign assets to concentrate on home markets. Other large financial assets may be available soon. In September AIG's air craft-leasing subsidiary, ILFC, announced it would spin out of the insurer and go pub lic. ILFC is a rare franchise, vying with Gen eral Electric to be first or second in the in dustry. An offering is said to be in process, although the markets are volatile and there may be an opening for a trade buyer. No one expects the Japanese to repeat the bid ding frenzy of the 1980s and 1990s, how ever. This time, says Brian Waterhouse of eLSA, a broker, the Japanese are biding their time, patiently playing their hand in a market with few other bidders. "The lon ger the wait," he adds, "the more desperate sellers will become." • Weather derivatives
Come rain or shine
The outlook for the business of hedging against the elements
Wwaterproof coat is one way to guard
EARING lots of layers and a decent
against changeable weather. Firms facing losses because of a big freeze or baking sun do not have that option. Insurance compa nies have long offered cover against flood ing, hurricanes and other catastrophes. For less calamitous changes in the weather, de rivatives are a better option. This is still a "niche market", says Tim Andriesen of CME Group, the exchange where most weather contracts are traded. According to the Weather Risk Manage ment Association, an industry body, the
Fi nance and economics
value of trades in the year to March 2011 to talled $11.8 billion, nearly 20% up on the previous year, though far below the peak reached before the financial crisis took the steam out of the business. In 2005-06 the value of contracts had hit $45 billion. Weather derivatives had an inauspi cious start: the first trade was done by En ron in 1997. The instruments were initially used by American energy companies to hedge against the effect that unseasonal temperatures could have on gas sales. But abundant shale gas in the United States has rendered hedges against mild weather less important. Energy companies are still the biggest users of these trades and contracts based on temperatures continue to be the most popular form of weather derivative. But Europe is now the largest market, accord ing to Jiirg Triib of Swiss Re, a reinsurer. And demand for sophisticated and flexible over-the-counter products, which involve other variables such as rainfall, snow and sunshine and are tailored to meet custom ers' specific needs, are growing far more quickly than standardised, exchange traded contracts. The weather-derivatives industry hopes that farmers will pile in to purchase hedges against sun and rain that can affect the size of their harvest. Subsidised gov ernment-insurance schemes offer them some reassurance already, but derivatives can fill gaps or boost coverage. Big con struction companies, with tight deadlines and costly penalty clauses, are also turning to derivatives. So too are retailers and com panies that run big outdoor events behold en to the weather. Online providers such as CelsiusPro and eWeatherRisk offer small businesses simple and relatively cheap weather-risk coverage. But widening the industry's appeal fur ther may be tricky. In many instances the direct correlation between weather and
revenues is not obvious. And collecting current and historical weather data to cal culate risks is harder in Africa or India, both regarded as potentially big markets. As they look to renewables, it may be that energy companies are the best bet for future growth as well as current revenues. There have been some big transactions with companies that generate hydro power, which requires consistent snow and rain. Products based on sunshine for the solar industry are now available. And some firms are offering contracts to limit the exposure of wind farms to either a lack of puff or gusts that are too strong for tur bines. This is helping energy firms to raise cash to invest in pricey wind projects by guaranteeing long-term returns from un predictable blasts of air. If so, an ill wind might now blow some good. • Investment banking
Bonfire of the bankers Profits down,jobs cut, strategy needed
I
" T SUCKED," says the head of investment banking at one of Europe's big gest banks, reviewing the fourth quarter of 2011. That succinct assessment will take few by surprise. The sale and trading of bonds and shares slowed to a trickle last year. Analysts at Credit Suisse reckon that investment-banking revenues among the big American banks slumped by a quarter in 2011. Trading bonds, currencies and com modities (activities known as F r e e) is the industry's bread and butter: F r e e rev enues fell by about 15% in America. Things are even worse in Europe. Credit Suisse reckons that European investment banks will post a 43% drop in revenue for 2011. On February 2nd Deutsche Bank announced a fourth-quarter loss for its investment bank. The first few weeks of this year also look dire. Markets have recovered relative to December, but there has not been the usual January leap. Analysts at Citigroup gloomily predict a further 10% fall in Free revenues in Europe this year. The question dogging the industry is whether these falls are temporary or per manent. "Trading goes up, trading goes down," Jamie Dimon, the boss of JPMor gan Chase, told journalists in January. "When things come back these numbers will boom again and we'll be geniuses, and it won't be because we did anything, it will be because we stayed in the game." �� Correction. In "By hoo k or by crook" (January 14th
Perfect weather for wind-up merchants
69
2012) we mistakenly said that write-downs had boosted B BVA's capital by €400 billion . We were a little out: the ban k's capital rose by €400m. Sorry.
70
�
The Economist
Fi nance and economics
If surviving the downturn is the goal, the logical response is to cut variable costs (see chart 1). The banks have been slashing headcounts with vigour. CEBR, an eco nomics consultancy, forecast in October that 27.000 jobs would be lost in London's financial district in 2011, taking the number of financial employees in the City down to a level last seen in 1998. Not only the City is suffering. Financial News, a specialist newspaper, reckons that 16 of the biggest investment banks have cut 26,600 jobs globally over the past six months. That rep resents 8% of their total headcount. From diets to gastric bands
Times are also grim for those bankers who have kept their jobs. In the past investment banks fired some people but still paid big bonuses to those that remained. Now costs are being cut more deeply and banks are less concerned about being outbid in pay. "Compensation is going to get crushed," says the head of one large investment bank. "Investors are concerned about re turns . . . [Their] bigger concern is about the split between shareholders and employ ees." CEBR reckons that the bonus pool in London's financial district will slump by some 38% this year, leaving it at about a third of the level it was before the financial crisis. On Wall Street banks including Citi group, Morgan Stanley and Goldman Sachs are said to be cutting pay by any thing from 30% to 70%. Slimming cures are not enough for many banks, however. Some are changing their business models. Under pressure from regulators, banks everywhere are crowding into client-focused businesses which do not eat up as much capital. Brit ain and Switzerland in particular are press ing their banks to hold lots more capital; past disasters have also persuaded man agement to cut their losses. UBS, Switzer land's biggest bank, is cutting risk-weight ed assets at its investment bank by almost half over the next five years and is pulling out of several business lines. Royal Bank of Scotland (RBS), which once had ambitions to be a leading global investment bank, is
I
now shedding assets: on February 1st RBS announced that it was selling its Hoare Go vett corporate-braking unit to Jefferies, an American investment bank. All this will lead to consolidation in two ways. The first is that as some banks pull back, they create an opportunity for ri vals to gain market share. The second is that as banks crowd into capital-light "flow businesses"-trading bonds, currencies or shares-they are likely to drive down mar gins. That will please banks' customers but will also lead to a concentration of market share among the biggest firms. This process is not new. Two decades ago an investment bank could buy a tele phone and earn decent margins by quot ing bond or currency prices to ignorant customers. These days corporate custom ers trade electronically and have terminals providing a stream of prices. Although "flow businesses" do not require much regulatory capital, they do need massive investments in computer systems. Firms with the best systems tend to at tract the most liquidity and in turn are able to offer the most competitive rates. That suggests that only a few "flow monsters" can achieve sufficient volumes of trade to cover the costs of their infrastructure. In ar eas such as currencies, which are almost entirely traded electronically, this consoli dation has already largely taken place: JPMorgan, Goldman Sachs and Deutsche Bank already have big market shares. The next frontier will be the move of bonds onto similar platforms: the same handful of banks is likely to benefit again. Niche work if you can get it
With money tight and capital a scarce re source, investment banks must also choose whether to specialise in areas where they are strongest. The very top tier of global investment banks will still hope to generate synergies across diverse busi nesses-lending a firm money, say, and then helping it to sell shares and to hedge currency movements on the capital it is raising. This elite bunch will probably in clude Barclays Capital, Deutsche Bank, Ci-
a
Seeing the s h ri n k Investment-banking employment. '000
Investment-banking fees. Sbn
• Eqvity
Bonds
600
1998 2000
02
04
06
08
10 1 1
Loans
M&At 120
500
100
400
80
300
60
200
40
100
20
0
Sources: CEBR; New York State Comptroller; Thomson Reuters
2003 04
05
06
07
08
09
10
11
0
'State-wide employment I Plus directly related activities t Mergers and acquisitions
I
February 4th
2012
II
League champions Investment-banking market share•, 201 1, %
0
4
8
10
JPMorgan Goldman Sachs BoA Merrill Lynch ...... Morgan Stanley Citigroup Deutsche Bank Credit Suisse Barclays Capital UBS BNP Pari bas HSBC Wells Fargo
-
=-
Sources: Bloomberg; Thomson Reuters; The Economist
'Weighted average of debt, equity and M&A fee income
tigroup, JPMorgan and Goldman Sachs (see chart 2). Most banks, however, will slim down. "We're seeing an additional specialisation in investment banking," says the head of a bank. "Firms are funda mentally either debt or equity [specialists] . . . They have debt or equity in their DNA." A second area of specialisation will be geographic. All but a handful of the very biggest banks will probably be forced to give up their ambitions of being global and concentrate instead on the regions where they are strongest. The retreat is partly dri ven by capital and cost pressures at home, partly by the realisation that there is less room than expected for outsiders in many of the fastest-growing emerging markets. A home bias in investment banking is not new, nor is it confined to emerging markets. Of the top five corporate fee payers in the industry last year, four gave most of their investment-banking work to firms from their country or region, accord ing to Thomson Reuters. But the trend is likely to be reinforced as foreign banks be come less willing to make cheap loans to prise open new markets and win invest ment-banking mandates. As dire as the outlook is, it would be foolish to underestimate the resourceful ness of the industry. The investment banks are staffed by clever, entrepreneurial peo ple with a knack for inventing new finan cial products and selling them to the world. Instead of going through a grinding decade of job cuts and restructuring, in vestment bankers could come up with an other big, money-spinning innovation. But even if markets simply bounce back as Mr Dimon expects, the investment banking industry will look quite different in a few years' time. There will be fewer big firms straddling the globe; the rest will try to dominate their own niches. And if rev enues do stay flat, shareholders may still benefit as employees make do with less of the pot. For bankers that really will suck. •
Fi nance and economics
The Economist February 4th 2012
Free exchange
I
The silent bazooka
The three-year loans offered by the ECB to banks have helped stabilise the euro zone
Taround. When in 2009 the Federal Reserve and the Bank of
HE European Central Bank (ECB) tends to take the long way
England slashed interest rates towards zero and started quantita tive easing (buying government bonds with central-bank mon ey), the ECB was more circumspect. It was reluctant to cut its main rate below1% and loth to buy government bonds directly. Instead it adopted its own non-standard measures. It offered unlimited loans to commercial banks for up to a year against a broad range of collateral. The ECB's oblique approach had much the same effect as the route taken by the Fed and others. A flood of liquidity from a €442 billion ($611 billion) auction of one-year ECB loans in June 2009 pushed short-term interest rates close to levels in America and Britain. Banks used much of the cash to buy government bonds, driving down long-term interest rates. More than two years on, and in far more trying circumstances, the ECB seems to have repeated the trick. Faced with renewed re cession, a bank-funding crisis and investor revulsion against all but the safest euro-zone government bonds, the ECB said on De cember 8th that it would provide unlimited funds for 36 months at its main interest rate (which it cut to 1%), at two auctions. The first of these, on December 21st, attracted bids of €489 billion. That more than matched the amount lent for one year in June 2009, and has had similar effects. Overnight interest rates have fallen to around 0-4%, well below the ECB's benchmark rate. Lon ger-term bond yields for investment-grade euro-zone coun tries-ie, everyone but Cyprus, Greece and Portugal-have dropped, too (see left-hand chart). The decline in short-term rates is not surprising, given the ex cess liquidity washing around the euro-zone banking system: banks have almost €500 billion on overnight deposit with the ECB earning interest of 0.25%. A fall in longer-term bond yields looked less of a sure thing when the two auctions were an nounced. Borrowing money from the ECB for three years at 1% to buy bonds with much higher yields might look an obvious carry trade. But it seemed that only the bravest or most desperate banks would want to risk loading up on government debt issued by Ita ly or Spain so soon after being told by the European Banking Au thority (EBA) to raise capital against declines in the value of that very debt. Even so, ten-year Italian bond yields have dropped by around one percentage point so far this year, to below 6%; Span ish yields have fallen sharply, too. The rally in bond prices may be as much to do with a change
I
The ECB effect
Euro-area sovereign-bond yields*, %
4
Loans 1 1 .4
Deposits
Euro-area banks, €trn
8.4
11.2
8.2
1 1.0
8.0
1 0.8
7.8
3
--'-'--'·-'----'-'
,_._...._ ._ _0
3 6 1 2 3 4 5 6 7 8 mm Year! to
maturity
9 10 15
Sources: Bloomberg; Eurostat; European Central Bank; The Economist
10.6 ..p ��-��-�W--W I
2010
i....£.J ._J
201 1
7 .6 4-
* Excluding Cyprus, Greece and Portugal, weighted by 2011 GDP
in expectations as with the direct use of the three-year money in bond purchases. The ECB says that the net increase in liquidity owing to the December auction was a more modest €193 billion, because banks retired some shorter-term loans at the same time. They have done more of the same since then, which means the incremental increase in liquidity is closer to €150 billion, says Laurent Fransolet at Barclays Capital. Perhaps two-thirds of that total was raised to replace bank bonds that are set to mature soon, he reckons, and only a third to finance carry trades. That is a frac tion of the total the ECB has spent since the summer, trying in vain to cap bond yields of peripheral countries. Yet the headline number of €489 billion and the promise of a second (potentially larger) three-year auction later this month have been enough to turn sentiment around-especially as non bank investors had started 2012 short of euro-zone government paper. Before the end of the year "everyone was underweight Ita ly because they were worried about being fired for being long," says the head of capital markets at one large investment bank. "Now the j ob risk has shifted to being underinvested in Italy." Banks may also be more inclined to use the February auction to finance sovereign-debt carry trades following assurances from the EBA that it will not mark down the value of government bonds in its next round of stress tests. "The test was a one-off," says one senior EBA official. Several banks say that they have had similar encouragement from regulators. "We're going to use it," says the boss of one large bank in a peripheral country, of the ECB facility. "It doesn't matter if we buy government debt with public money, or the ECB buys it directly. It has exactly the same result." Fringe benefits
So the ECB seems to have stopped the rot. Banks have secure fi nancing for three years, which has militated against the risk of a liquidity shortage that could lead to bank failures. A run on illi quid but solvent governments has been halted. But this being Europe, a host of worries remains. Banks are still required to meet the minimum capital ratios set by the EBA byJune 30th. Since equity is hard to raise, banks have to marshal their existing capital carefully, which will make loans for con sumers and firms hard to come by. A worrying sign that recession may linger is that euro-area bank loans to the private sector, as well as bank deposits, fell sharply in December (see right-hand chart). The ECB's quarterly bank-lending survey on February 1st reported a substantial tightening of credit conditions. Banks also expect to tighten credit standards over the next three months. Bond purchases will leave banks at greater risk if anxieties about public solvency return. The more banks pledge collateral to draw on long-term ECB financing, the less attractive it is for in vestors to buy banks' unsecured bonds, as they will be further be hind in the queue in the case of bankruptcy. The issue of "addic tion" to ECB funds is particularly acute in the peripheral countries that need to finance large current-account deficits (and to refinance accumulated deficits) through their banks. That helps explain why Portugal has not shared in the rally. In vestors fear that it, like Greece, may not be able to repay its public debts. If negotiations over private-sector losses on Greek govern ment debts end in a coercive deal or a messy default, the appetite for other risky euro-zone debt could also fade. The ECB may yet be forced to take the direct route to bond-market stability. • Economist.comfblogs/freeexchange
71
Prepare for opportunity™ Economist Intelligence Unit
73
Also in this section 74 Smelling sound 74 A rebellion in scientific pu blishing 75 Scorpions and aircraft
For daily a n a lysis a n d debate on science a n d tech n o lo gy, visit
Economist.comfscience
The nature of humanity
What's a man?
Studies of brain genetics are starting to reveal what makes humans human
Tman uniqueness is precisely that it is
HE problem with understanding hu
unique. Though the proper study of man kind may be man, that study will yield lit tle if there is no reference point to compare man with. That, at least, is the philosophy of Svante Paabo of the Max Planck Institute for Evolutionary Anthropology, in Leipzig. Dr Paabo, whose work on fossil DNA was the inspiration for "Jurassic Park", has since become interested in human evolution. To this end, he and his colleagues have se quenced the DNA of both Neanderthal man and an Asian species of prehistoric human, the Denisovians, which Dr Paabo's own work identified. Now he has turned his attentions to modern Homo sapiens. In collaboration with a team from the Chinese Academy of Sciences, Dr Paabo and his colleague Phil ipp Khaitovich have compared genetic ac tivity over the course of a lifetime in the brains of humans, chimpanzees and rhe sus monkeys. They have then matched what they found with what is known of Neanderthals, and think they have thus discovered at least part of the genetic dif ference between Homo sapiens and the others that creates human uniqueness. Dr Paabo and his colleagues focused their examination, just published in Ge nome Research, on two parts of the brain. One was the dorsolateral prefrontal cortex, which is the seat of abstract reasoning and
social behaviour-things that humans are particularly good at. The other was the lat eral cerebellar cortex, which is more to do with manual abilities. They extracted cells, post mortem, from people, chimps and monkeys of many ages, and looked at which genes had been active in these cells when the owners were alive. The vortex of the cortex
They did this by examining the RNA in the cells. RNA molecules are single-stranded copies of the double-helical DNA genes in the cell nucleus. Their job is to carry in structions from the genes to a cell's protein making machinery. Most primate genes have now been identified, so it is possible to make chips covered with complemen tary strands to the RNA messengers, to which these messengers will uniquely stick, and which thus act as probes for par ticular messenger molecules. Using such chips, Dr Khaitovich and Dr Paabo were able to find out when, during the course of life, particular genes were ac tive, by working out how much RNA from each gene cells from particular parts of the brains of individuals of different ages con tained. Their results fell into six categories. First, they found some genes whose ex pression patterns over a lifetime were uniquely human (ie, were the same in chimpanzees and monkeys, but different in people) and others that were uniquely chimpanzee (ie, the same in people and
monkeys, but different in chimpanzees). Second, they discovered that there were more uniquely human expression pat terns than uniquely chimp ones. Third, un ique human expression patterns were more common in the prefrontal cortex than in the cerebellum. Fourth, though these uniquely expressed genes were most active in the young of all species, their per iod of activity was several years longer in humans than in the others. Fifth, the activ ities of a lot of the uniquely active genes seemed to be correlated: the researchers identified seven groups of genes (five in the prefrontal cortex and two in the cere bellum) which each seemed to be working as a module. And sixth, these modular genes seem to be involved in the crucial job of linking nerve cells together through junctions called synapses. To summarise, human beings have suites of genes that probably cause their brains to be "plastic" and thus receptive to change far longer (to the age of about five) than is true for chimps or monkeys (whose brains are plastic for less than a year after birth). Moreover, Dr Khaitovich was able to work out how the expression of these modules of genes was co-ordinated, by looking at the switches, known as tran scription factors, that turn them on and off. Indeed, by comparing modern ge nomes with their discoveries about Nean derthals Dr Paabo's group has found that the regulatory process for one of the mod ules came into existence after the modern human and Neanderthal lines separated from one another, about 300,000 years ago. Unfortunately, it is not possible to look at the expression pattern of genes in Nean derthals, and it probably never will be. But it might be possible, as knowledge ad vances, to reconstruct part of it from a bet ter understanding of that extinct species's DNA. "Pleistocene Park", anybody? •
74
Science and technology Synaesthesia
Smells like Beethoven Using the word "note" to describe an odour may be more than just metaphor
Ttions between the senses has been ac
HAT some people make weird associa
knowledged for over a century. The condi tion has even been given a name: synaesthesia. Odd as it may seem to those not so gifted, synaesthetes insist that spo ken sounds and the symbols which repre sent them give rise to specific colours or that individual musical notes have their own hues. Yet there may be a little of this cross modal association in everyone. Most peo ple agree that loud sounds are "brighter" than soft ones. Likewise, low-pitched sounds are reminiscent of large objects and high-pitched ones evoke smallness. Anne-Sylvie Crisinel and Charles Spence of Oxford University think something sim ilar is true between sound and smell. Ms Crisinel and Dr Spence wanted to know whether an odour sniffed from a bottle could be linked to a specific pitch, and even a specific instrument. To find out, they asked 30 people to inhale 20 smells ranging from apple to violet and wood smoke-which came from a teaching kit for wine-tasting. After giving each sample a good sniff, volunteers had to click their way through 52 sounds of varying pitches, played by piano, woodwind, string or brass, and identify which best matched the smell. The results of this study, to be pub lished later this month in Chemical Senses, are intriguing. The researchers' first finding was that
What do you hear?
The Economist
the volunteers did not think their request utterly ridiculous. It rather made sense, they told them afterwards. The second was that there was significant agreement be tween volunteers. Sweet and sour smells were rated as higher-pitched, smoky and woody ones as lower-pitched. Blackberry and raspberry were very piano. Vanilla had elements of both piano and wood wind. Musk was strongly brass. It is not immediately clear why people employ their musical senses in this way to help their assessment of a smell. But gone are the days when science assumed each sense worked in isolation. People live, say Dr Spence and Ms Crisinel, in a multisen sory world and their brains tirelessly com bine information from all sources to make sense, as it were, of what is going on around them. Nor is this response restrict ed to humans. Studies of the brains of mice show that regions involved in olfaction also react to sound. Taste, too, seems linked to hearing. Ms Crisinel and Dr Spence have previously es tablished that sweet and sour tastes, like smells, are linked to high pitch, while bitter tastes bring lower pitches to mind. Now they have gone further. In a study that will be published later this year they and their colleagues show how altering the pitch and instruments used in background mu sic can alter the way food tastes. In this experiment, each volunteer was given four pieces of toffee. While they were eating two of them, a sombre, low pitched piece of music played on brass in struments filled the air. They consumed the other two, however, to the accompani ment of a higher-pitched piano piece. Vol unteers rated the toffee eaten during low pitched music as more bitter than that con sumed during the high-pitched rendition. The toffee was, of course, identical. It was the sound that tasted different. •
February 4th
2012
Scientific pu blis hing
The price of information Academics are starting to boycott a big publisher ofjournals
OMETIMES it takes but a single pebble
Sto start an avalanche. On January 21st
Timothy Gowers, a mathematician at Cambridge University, wrote a blog post outlining the reasons for his longstanding boycott of research journals published by Elsevier. This firm, which is based in the Netherlands, owns more than 2,000 jour nals, including such top-ranking titles as Cell and the Lancet. However Dr Gowers, who won the Fields medal, mathematics's equivalent of a Nobel prize, in 1998, is not happy with it, and he hoped his post might embolden others to do something similar. It did. More than 2,700 researchers from around the world have so far signed an on line pledge set up by Tyler Neylon, a fel low-mathematician who was inspired by Dr Gowers's post, promising not to submit their work to Elsevier's journals, or to refer ee or edit papers appearing in them. That number seems, to borrow a mathematical term, to be growing exponentially. If it real ly takes off, established academic publish ers might find they have a revolution on their hands. A bundle of trouble
Dr Gowers's immediate gripes are three fold. First, that Elsevier charges too much for its products. Second, that its practice of "bundling" journals forces libraries which wish to subscribe to a particular publica tion to buy it as part of a set that includes several others they may not want. And third, that it supports legislation such as the Research Works Act, a bill now before America's Congress that would forbid the government requiring that free access be given to taxpayer-funded research. Elsevier insists it is being misrepresent ed. The firm is certainly in rude financial health. In 2010 it made a £724m ($1.16 bil lion) profit on revenues of £2 billion, a mar gin of 36%. But it charges average industry prices for its products, according to Nick Fowler, its director of global academic rela tions, and its price rises have been lower than those imposed by other publishers over the past few years. Elsevier's enviable margins, Dr Fowler says, are simply a con sequence of the firm's efficient operation. Dr Neylon's petition, though, is symp tomatic of a wider conflict between aca demics and their publishers-a conflict that is being thrown into sharp relief by the rise of online publishing. Academics, who live in a culture which values the free and easy movement of information (and ��
The Economist February 4th 2012
� who edit and referee papers for nothing) have long been uncomfortable bedfellows with commercial publishing companies, which want to maximise profits by charg ing for access to that information, and who control many (although not all) of the most prestigious scientific journals. This situation has been simmering for years. In 2006, for example, the entire edi torial board of Topology, a mathematics journal published by Elsevier, resigned, cit ing similar worries about high prices chok ing off access. And the board of K-theory, a maths journal owned by Springer, a Ger man publishing firm, quit in 2007. To many, it is surprising things have tak en so long to boil over. Academics were the internet's earliest adopters, with all the possibilities for cutting publishers out of the loop which that offers. And there have indeed been attempts to create alterna tives to commercial publishing. Cornell University's arXiv website (pronounced "archive", the X standing in for the Greek letter "chi") was set up in 1991. Researchers can upload maths and physics papers that have not (yet) been published in journals. Thousands are added every day. The Pub lic Library of Science (PLos) was founded in 2000. It publishes seven free journals which cover biology and medicine. But despite the enthusiasm for such op erations, there are reasons for the contin ued dominance of traditional publishers. ArXiv's papers, though subject to merci less post-publication commentary, are not formally peer-reviewed before they are posted. Their quality is thus rather uneven. PLOS relies partly on donations, but also charges publication fees of up to $2,900 per paper. These must be paid by the au thors, a significant expense for cash strapped university departments. And there is also a lingering prejudice against electronic-only publishing. Web-based al ternatives often seem less respectable than their dead-tree counterparts. That matters, because university de partments (and individual researchers within them) are rated both by the number of papers they publish and the reputation of the journals those papers appear in. Youngsters, who might be expected to em brace new ways of doing things, must therefore publish in existing, reputable journals if they want recognition and pro motion. And the definition of "reputable" changes slowly, since journals with the best reputation get the pick of new papers. Commercial publishers have begun to experiment with open-access ideas, such as charging authors for publication rather than readers for reading. But if the boycott continues to grow, things could become more urgent. After all, publishers need aca demics more than academics need pub lishers. And incumbents often look invul nerable until the suddenly fall. Beware, then, the Academic spring. •
Science and technology Biomim etics
Not a scratch Scorpions may have lessons to teach aircraft designers
TAndroctonus australis, is a hardy
HE north African desert scorpion,
creature. Most animals that live in deserts dig burrows to protect themselves from the sand-laden wind. Not Androctonus. It usually toughs things out at the surface. Yet when the sand whips by at speeds that would strip paint away from steel, the scorpion is able to scurry off without apparent damage. Han Zhiwu of Jilin University, in China, and his colleagues wondered why. Their curiosity is not just academic. Aircraft engines and helicopter rotor blades are constantly abraded by atmo spheric dust, and a way of slowing down this abrasion would be welcome. Dr Han suspects that scorpions may provide an answer. As he writes in Langmuir, he has discovered that the surface of Androcto nus's exoskeleton is odd. And when that oddness is translated into other materials it seems to protect them, as well. Dr Han's investigations began by scouring the pet shops of Changchun, where the university is located, for scor pions. Having obtained his specimens, he photographed them under a micro scope, using ultraviolet light. This made the animals' exoskeletons, which are composed of a sugar-based polymer called chitin, fluoresce-thus revealing details of their surface features. The team found that Androctonus armour is cov ered with dome-shaped granules that are 10 microns high and between 25 and 8o microns across. These, they suspected, were the key to its insouciance in the face of sandstorms. To check, they took further photo-
Sand? I spit on it
graphs. In particular, they used a laser scanning system to make a three-dimen sional map of the armour and then plugged the result into a computer pro gram that blasted the virtual armour with virtual sand grains at various angles of attack. This process revealed that the granules were disturbing the air flow near the skeleton's surface in ways that appeared to be reducing the erosion rate. Their model suggested that if scorpion exoskeletons were smooth, they would experience almost twice the erosion rate that they actually do. Having tried things out in a computer, the team then tried them for real. They placed samples of steel in a wind tunnel and fired grains of sand at them using compressed air. One piece of steel was smooth, but the others had grooves of different heights, widths and separations, inspired by scorpion exoskeleton, etched onto their surfaces. Each sample was exposed to the lab-generated sandstorm for five minutes and then weighed to find out how badly it had been eroded. The upshot was that the pattern most resembling scorpion armour-with grooves that were 2mm apart, smm wide and 4mm high-proved best able to withstand the assault. Though not as good as the computer model suggested real scorpion geometry is, such grooving nevertheless cut erosion by a fifth, com pared with a smooth steel surface. The lesson for aircraft makers, Dr Han sug gests, is that a little surface irregularity might help to prolong the active lives of planes and helicopters, as well as those of scorpions.
75
Also in this section 77 The future of u niversities 77 Rin Ti n Ti n, life and legend 78 Tax reform in Am erica 79 Am erica's gay writers 79 New fiction from India
Prospero, our o n li n e blog o n books, a rts a n d culture, a p pears every day. F o r a n a lysis a n d debate, visit Economist.comfculture
Contem porary art
Cosmic que en
Yayoi Kusama is painting more intensely than ever, as can be seen in a major travelling retrospective of six decades of her work
I paints an arc in exactly the same vibrant N HER Tokyo studio, Yayoi Kusama
red colour as the wig she is wearing. Since childhood, Ms Kusama has made art to help her deal with her serious psycholog ical problems. These include terrifying hal lucinations of what she calls "self-oblitera tion" in which she feels the boundary between herself and the universe sudden ly melting away. Brush in hand, the 82year-old artist works without the slightest hesitation; this is one domain over which she has absolute control. Ms Kusama was famous in N ew York in the 1960s, but she was almost completely forgotten as an artist after she moved back to Japan in the 1970s and checked into the psychiatric hospital where she still lives. Now her star is once again in the ascen dant. In 2008 one of her works sold for $s.8m at auction, then the second-highest price for a work by a living female artist. Now a solo retrospective show is touring some of the world's best museums. Ac claimed in Madrid at the Reina Sofia and in Paris at the Centre Pompidou, the exhibi tion opens this month at London's Tate Modern and will travel to the Whitney Mu seum in New York in July. Ms Kusama has made at least two sig nificant contributions to the history of post-war art. In the late 1950s, shortly after moving to New York, she made large ab stract works in which white loops of hand painted mesh keep a black background at bay. At first glance these canvasses look like
flat monochromes, but a longer gaze sug gests that they are undulating oceans of dots. These works were a riposte to ab stract-expressionist pictures, such as Jack son Pollock's "drip" paintings; the compo sitions were more radical and the process of producing them more intense. Most important was the fact that Ms Kusama's abstractions announced the arrival of the next notable art movement, minimalism. These paintings, which Ms Kusama called "Infinity Nets", helped her protect herself from the "void" she most feared. In 1961 she created an "Infinity Net" that mea sured 33 feet (1o metres) across, an obses sive work that betrayed the scale of both her need and her ambition. Ms Kusama has never stopped making "Net" paintings, although these now come in a range of col ours. Her endless series is a forerunner of Damien Hirst's never-ending production of spot paintings. Ms Kusama was also ahead of her time in creating installation art. In 1963 "Aggre gation: One Thousand Boats Show" at the Gertrude Stein gallery featured a rowing boat filled with phallic sculptures installed in a room papered with 999 black-and white photographic reproductions of the work. This surreal Pop piece was influen tial in the way it took art outside the frame and invaded a whole room. Three years later, in 1966, Andy Warhol imitated her treatment of walls with his "Cow Wallpa per". About Warhol, Ms Kusama has said: "We were like rival gang leaders, enemies
in the same boat." ("Obsession", pictured left, is a later installation work that was shown in Paris in 2008). Ms Kusama went on to make "Infinity Mirror Rooms". The most recent of these have hundreds of little lights that are re flected by the mirrored walls and ceiling and the water on the floor. Ms Kusama seems to be translating her inner terrors into works that inspire feelings of awe, ela tion and plenitude. Viewers who step into these boxes have the sense of being physi cally at the centre of a beautiful universe. In the late 1960s Ms Kusama started creating performances that brought her fame and disrepute in equal measure. Called "Body Paint Festivals" or "Self Obliteration Happenings", these events consisted of naked dancing hippies (who were often covered in polka dots) burning flags or simulating sex, or both. Somehow Ms Kusama, a celibate, became a propo nent of the sexual-liberation movement. It was not a high point in her career-at least not aesthetically. If there is one thing that Ms Kusama has never feared, it is the limelight. She looks extraordinary, often wearing clothes that blend in with her artworks to the extent that she becomes a part of them. The artist begins each working day by reviewing her press clippings. Some people view the me dia as a curse. For Ms Kusama media cover age is an instant, if short-term, panacea against her fears of self-annihilation. It's as if her media image helps her reaffirm her sense of self. Many women artists wait a long time for accolades. The advantage of late recog nition is that it can spur them to new heights. Louise Bourgeois did some of her �� "Yayoi Kusama" is at Tate Modern from February 9th until June 5th and at the Whitney Museum of American Art from July 12th until Septem ber 30th. Victoria Mira London will exhi bit some of her new paintings from February 10th until April 5th.
The Economist February 4th 2012
� best work in her 8os. Ms Kusama aspires to do the same. The announcement of the Tate retrospective somehow "flicked a switch in her," says Glenn Scott Wright, director of the Victoria Mira gallery, Ms Kusama's European dealer. Indeed, the art ist has made more than 140 paintings in the past two years alone. Painted on a table that she can ap proach from all four sides, the new can vasses have a fantastic variety of composi tions, vivacious colours and poetic titles. They feel like Ms Kusama's most overtly personal work so far. As artists grow old, they often make lifeless pastiches of their early work, but Ms Kusama has embarked on something fresh and audacious. "Death is just around the corner and I am not yet sure I'm a great artist," she explains. "That is why I am absorbed in painting." • The future of universities
Troubled halls
What Are Universities For? By Stefa n Collini. Penguin; 21 6 pages; £9. 9 9
NIVERSITIES are in a paradoxical position. As Stefan Collini points out in this eloquent and impassioned book, these ancient institutions have never been so numerous or so important. They receive more public money than they ever did. They are lauded as the engines of eco nomic growth and technological advance. And yet they are frequently defensive and troubled, harried by politicians and lack ing a clear sense of purpose and direction. Mr Collini, professor of English litera ture and intellectual history at the Univer sity of Cambridge, is eager to rebuild their confidence. Universities, he says, "provide a home for attempts to extend and deepen human understanding in ways which are, simultaneously, disciplined and illimit able." It is the side-effects of this activity that public debate has seized upon: the im pact on the student's capacity for under standing, or on a country's development of new technologies. But these are not the core purpose of a university. In making his case, Mr Collini rejects the definition of Clark Kerr, the president of the University of California, who de scribed a university as "a series of individ ual faculty entrepreneurs held together by a common grievance over parking". In stead, he goes back, somewhat sheepishly, to Cardinal Newman. Sheepish because, unlike most of those who quote Newman, Mr Collini has actually read "The Idea of a University", including some of its more embarrassing passages. He understands the curious purpose behind Newman's
U
Books and arts
"silky prose": the quixotic and doomed at tempt to found a Catholic university in Dublin, an institution "marginal to English social and cultural traditions". But New man has a way with words: "A university training is the great ordinary means to a great but ordinary end; it aims at raising the intellectual tone of society .. .It is the education which gives a man a clear con scious view of his own opinions and judg ments, a truth in developing them, an elo quence in expressing them and a force in urging them." Mr Collini is moved by Newman's in sistence that a liberal education is not about what students learn or what skills they acquire but "the perspective they have on the place of their knowledge in a wider map of human understanding". But this is a far cry from the mechanisms gov ernment now uses (and Mr Collini's focus is almost entirely on the British govern ment in Westminster) to set goals for the proper expenditure of public money and to turn university students into demand ing "consumers" of higher education. The second half of the book is a disap pointing and repetitive collection of previ ously published attacks on various parts of British government policy. Mr Collini scores many strikes against concepts such as "impact" as a basis for distributing re search funds or the insistence on universi ties as a tool for boosting GDP. "Society does not educate the next generation in or der for them to contribute to its economy," he insists. Ultimately, though, universities have to be paid for, and financing them cannot be justified on Newman's grounds alone. Governments have to make a case to those whose taxes foot the bill. They have to play some role in the decision whether to pay for research into medieval
Tickling the ivories
77
poetry or muscular dystrophy. Moreover, the more families carry directly the cost of educating their young people, the more they will want something more from uni versities than a place on the map of hu man understanding. Universities will always feel the ten sion between the intellectual purity that Mr Collini demands and the grubby busi ness of picking and preparing the future middle class. Reconciling these two roles is the mark of a great university. Indeed, the tension created by these conflicting roles is what helps even the most workaday aca demic retain some independence of thought and intellectual vigour. The gov ernment may fret about outputs and the students care only about their lifetime earnings; but lecturers need the odd dose of Newman to do theirjob well. • The m a king of Rin Ti n Tin
Dog dreams
Rin Tin Ti n: The Life and the Legend. By Susa n Orlean. Simon & Schuster; 324 pages; $26. 99. A tlantic; £16. 99
Wcans grieved and the world wrung its HEN Rin Tin Tin died in 1932, Ameri
hands. Every national newspaper ran an obituary. One radio announcer mourned the passing of "a gentleman, a scholar, a hero, a cinema star". He was a dog, to be sure, but he was also "virtually everything we could wish to be". But of course Rin Tin Tin never really died. The original pup gave up his doggy ghost, but this legendary hound lived on for decades in the body of sons, grandpups and distant relations, populating dreams and animating screens, big and small. Many staked their livelihoods on the pooch; some made a fortune and others lost everything. A woman in Oklahoma continues to breed Rin Tin Tin puppies for starry-eyed buyers. And the mere mention of his name-with its hint of a marching drum or a beating heart-can still evoke a childlike yearning, a craving for something just out of reach. This is how Susan Orlean, a staff writer for the New Yorker who is best-known for "The Orchid Thief" (1998), came to devote nearly a decade of her life to writing this wonderful book. She stumbled on a refer ence to Rin Tin Tin and was startled by the strength of her reaction, "as though I had been waiting for decades just to be remind ed of him again." Ms Orlean was trans ported back to the 1950s, when "The Ad ventures of Rin Tin Tin" was on television and the "buzzing white noise" of her child hood always featured a boy shouting "Yo, ��
78
The Economist Februa ry 4th 2012
Books and arts
� Rinty!" Grappling with the death of her father and the birth of her son-with thoughts of mortality and memory, con tinuity and transience already in her mind-she found herself stirred by the emotional permanence of Rin Tin Tin, "that rare thing that endures when so much else rushes past." There is something uniquely noble, even contemplative, about the look of a German shepherd dog. Developed by a German officer in the late 19th century, the breed grew popular in America in the 1920s as soldiers returned from the front with stories of their loyalty and heroism in battle. Lee Duncan, a young American sol dier stationed in France, could not believe his luck when he stumbled on a whimper ing litter in an abandoned enemy kennel. An animal-lover with a lonely soul, he saved the puppies and kept the finest two for himself, Rin Tin Tin and Nanette (named after two wartime good-luck charms). Back in California, he sensed Rin Tin Tin was destined for greatness. It was less about money-Duncan lacked savvy and was hardly materialistic-than about devotion. He believed his dog was too glorious for a small stage. Soon Rin Tin Tin was gracing the silent silver screen, earning his own handsome salary as well as the nickname "the mort gage lifter" for the way his films kept the Warner Bros studio afloat. When the Acad emy Awards were presented for the first time in 1929, Rin Tin Tin received the most votes for best actor; but the academy decided it would be a more auspicious pre cedent to grant the award to a human. This was just after Duncan's first wife divorced him. "All he cared for was Rin Tin Tin," she told the Los Angeles Times. Silent films were good for dogs. They could seem omniscient-"unknowable but accessible, driven but egoless"-against the pantomime and exaggeration of their
Bow wow wow yi ppie yo
human co-stars. Dogs were also beginning to enjoy a special place in the public's heart. As more Americans moved from the country to the city, pups evolved from farmhands to hearth-warmers who served as "a soft memento of another time". The rise of talkies in the late 1920s meant the end of Rin Tin Tin's contract with Warner Bros, but like a cat this dog had many more lives to live. Few writers can elevate a yarn about a Hollywood dog into a meditation on the durability of myth and the nature of hero ism. Ms Orlean manages this, and also de livers a gripping tale about companion ship, loss, war and show business, and the life's work of some endearingly nutty peo ple. With this book, the story of Rin Tin Tin will more certainly live on. • Tax reform in America
A simple bare necessity The Benefit and the Burden: Tax Reform-Why We Need It and What It Will Ta ke. By Bruce Ba rtlett. Simon & Schuster; 271 pages; $26
F nomic importance and utter lack of sex EW subjects match tax reform for eco
appeal. With a government bleeding red ink, an ageing population and growth lag ging, reform is back on America's political agenda. Bruce Bartlett, a supply-side econ omist, tax expert and former adviser to President Reagan, is among those best equipped to help navigate the murky ter rain. Mr Bartlett held influential economic positions during the country's last great spasm of reform in the 1980s, but he is now held an apostate by many Republicans, for whom the only acceptable tax changes are cuts. His balanced, well-researched primer on America's tax system, "The Benefit and the Burden", will not endear him further to ideologues, but it is a refreshing entree to a difficult subject. The book's no-nonsense approach to tax policy proves surprisingly engaging. Mr Bartlett walks readers through discus sions on income and spending-basic con cepts made baffling within the context of the tax code. He offers a dose of history and the useful perspective of a seasoned Washington hand. America's labyrinthine tax rules are hardly the product of intelli gent design, he explains. The popular de duction for home-mortgage interest that helped create suburban America, for ex ample, was not adopted to boost home ownership but included quite innocently in a 1913 income-tax law that spared inter est of any kind. Where economics has use ful things to say about tax Mr Bartlett is
quick to cite research. And he is prepared to let empirical analysis speak for itself. Mr Bartlett's critique of America's tax system is that it creates a deceptive picture of the influence of government, and is far too costly. On revenues as a share of GDP, America's government looks small rela tive to its European peers. The difference is illusory. European health spending shows up on the government's ledgers whereas America's tax preferences for health insur ance do not. But the government interven tion is there all the same. In 2012 the deduc tion for employer-provided insurance cost some $434 billion, or roughly 3% of GDP. Include these "tax expenditures" in the budget, Mr Bartlett says, and America's state looks as bloated as any in Europe. Net social spending rises to 27.2% of GDP above the level in Italy and Denmark and higher than the OECD average. It is also needlessly costly, riddled with quirks of the sort that allow Warren Buf fett, an American billionaire, and the Re publican presidential contender, Mitt Romney, to pay a lower average tax rate than many poorer households. Rates should be cut, Mr Bartlett argues, but one must also broaden the tax base, leaving few loopholes through which revenue might escape. The value-added tax (vAT) that is common in Europe is a better way. vAT is a tax on consumption; firms receive credits for tax paid on business supplies. The structure improves compliance and efficiency. Europe raises more money than America at less cost to growth; some high tax countries like Denmark outperform America in real growth per head. Mr Bartlett favours the introduction of VAT, but reckons that politics will make this hard to do. It is doubly abhorrent to Republicans, who oppose any new taxes, and who fear that the "painless" efficiency of VAT may make the American govern ment too eager to spend. Democrats, on the other hand, worry that vAT will harm low-income households relative to in come tax, which is more progressive. Euro pean welfare states often rely on tax sys tems that are flatter than America's, using welfare spending to smooth out inequities. America's politics seem ill-prepared for such reforms. Democrats, riding populist outrage at the rich, want to protect the wel fare state and pay for it through tax rises on the wealthy. On the right, well-heeled Americans fume that nearly half of all households pay no federal income tax. Mr Bartlett's political diagnosis is perhaps the book's least satisfying aspect. Little will be accomplished until congressional Republi cans are willing to compromise, he writes, and America's best chance may be to elect a reform-minded Republican president and a Democratic Congress-and to hope. In the end, the weaknesses in America's tax code are not half as debilitating as those in its politics. •
The Economist February 4th 2012
Books and arts
Gay writi ng in America
N e w fiction from India
Stories of consenting adults
Lotus-eaters Narcopolis. By J eet Thayil. Faber and
Faber; 292 pages; £12.99. To be published
Eminent Outlaws: The Gay Writers Who Changed America. By Ch ristopher Bram. Twelve; 3 71 pages; $27. 99
in America in April by Penguin; $25.95
Pgay-rights
ERHAPS the key difference between the movement and the cam paigns for black and women's equality was this: before gay people could band together against discrimination, they first had to know, in the 2oth century's closeted and fearful middle years, that there were other gay people to band together with. And the way they discovered that was through literature-the books that spoke, at first in allusions and interstitial silences, then more and more directly, of what same-sex attraction was and could be like. Given the attention enjoyed by black and women writers and how common place gay storylines now are in fiction, film and television, it is remarkable that Chris topher Bram's "Eminent Outlaws" is the first attempt at a more-or-less thorough outline of this literary tradition. He traces the themes that gay men in particular ex plored: doomed love and self-destructive secrecy in the1940s and1950s (Gore Vidal's "The City and the Pillar" and James Bald win's "Giovanni's Room"); electrifying lib eration and testy relationships in the 1960s (Allen Ginsberg's "Howl" and Mart Crow ley's "The Boys in the Band"); raucous sex ual freedom and the beginnings of happy normalcy in the 1970s (Larry Kramer's "Faggots" and Armistead Maupin's "Tales of the City"); the hammer-blow of AIDS in the 1980s (Tony Kushner's "Angels in America"); and from the 1990s on, the gradual easing of gay experience into the mainstream of American life. The greats are all here-Ginsberg, Bald win, Jack Kerouac, William S. Burroughs, Tennessee Williams, Truman Capote, Christopher Isherwood, Edward Albee, Edmund White and throughout the book Mr Vidal (pictured), who at 86 remains the grand old man (or as Mr Bram has it, "a fairy godfather") of American gay letters. Drawing on biographies and memoirs, Mr Bram, himself a gay novelist of some note, stitches together a relaxed, gossipy narrative about the friendships, rivalries, sexcapades and love affairs that gave gay writers much of their raw material. As the story moves towards his own time (he is 6o), one senses his becoming a little more cautious with the tittle-tattle. But he still of fers plenty of sharp observations on the complicated relationships of his subjects to the vagaries of gay politics and to each other. He is a perceptive literary critic, too, and not shy of praising writers he admires,
Tbutes the city's rise to its natural
HE official history of Mumbai attri
Fairy godfather
even as he chides others for their flaws. Mr Bram attributes the neglect of this facet of literary history to a persistent dis comfort in the straight world with too much overt gayness. But his corrective goes a little too far the other way. Limiting the study to gay, male American writers is fine-books have to draw their boundaries somewhere-but he then confines them to a gay, male American cultural bubble. When influences are discussed, they are usually other writers of the same group, as if the rest of literature were irrelevant. And he almost never has a good word for his subjects' forays into non-gay themes. This seems to be driven by his convic tion, stated in the epilogue, that " a gay man who writes nothing but straight stories works with his heart only half connected." There is surely truth in this; as Mr Bram points out, writers such as Isherwood and Williams who had to disguise their sexual ity in their writing suffered great strain, and their work, denied the nourishing force of personal experience, suffered too. But he suggests that even the successes (such as Albee's "Who's Afraid of Virginia Woolf", a masterful hatchet-job on mar riage) are not worth the trouble, which is questionable, certainly for the new, less traumatised generation of writers. Perhaps because of this stance, Mr Bram does not touch on what is surely a central question for such a book: as being gay becomes ever more normal, and a territory that straight writers explore unhindered (one of the best-known gay films of recent years was "Brokeback Mountain", from the story by the three times married Annie Proulx), what will gay writers write about in future? •
harbour and textile industry. But before cotton mills came to dominate the landscape, Mumbai's merchants grew fat exporting opium to China. The city's main schools of art and architecture and its best public hospital are named for a pioneer of the trade,Jamsetjee Jeejeebhoy, as is a 2-4km elevated road that cuts through the old city. In the shadow of that viaduct lies Shuklaji Street, Mumbai's last connec tion with opium. "It wasn't much of a street," notes Dom Ullis, the narrator of J eet Thayil's debut novel, "Narcopolis", but it was the epicentre of vice: prosti tutes, drug dealers and petty criminals. Dom arrives here to partake in Mum bai's (Mr Thayil calls it Bombay) love affair with opium just as it is drawing to a close, some 150 years after it started. Dom drifts in and out of Rashid's, an old-fashioned opium den where pipe wallahs prepare your smoke for you and serenity prevails. Rashid's is a clearing house for characters and sto ries. Dom meets Rumi, a wife-beater and failed businessman; he brings Xavier, an angry old artist; he befriends Dimple, a eunuch prostitute who in turn tells the story of Mr Lee, a Chinese exile. Then there is Rashid himself, who watches-and fruitlessly resists-as his graceful world of opium-eaters is ren dered obsolete by the nightmare of low-grade heroin. Mumbai forgets opium as those who loved it either die or burn out their brains. A reformed addict, Mr Thayil has had personal experience with the world he describes. But he is also a published poet, who wields his words with care. His efforts are there to be seen. Admira bly, Mr Thayil resists the urge to insert himself into the narrative. Dom Ullis is mostly absent, giving the reader noth ing. The only way to keep track of the book's chronology is through the con versations. New cars, soft drinks and coffee shops indicate the passage of time as India's economy creaks open. Ugly, brutal references to Muslims mean that 1993, when the city erupted in religious riots, has left its scars. And if it's ecstasy and MDMA, it must be 21st century Mumbai.
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Sources: BNP Paribas, Citigroup, Commerzbank, Decision Economics, Deutsche Bank, Economist Intelligence Unit, Goldman Sachs, HSBC Securities, lNG, JPMorgan Chase, KBC Bank, Morgan Stanley, RBC. RBS, Sch roders, Scotia bank, Societe Generale, UBS
Other markets
% change on Dec 31st 2010 Index one in local i n $ Feb 1st week curren� terms +5.3 +5.3 United States (S&P 500) 1,324.1 -0.1 +7.4 +7.4 United States (NAScomp) 2,848.3 +1.1 -30.8 -27.7 China (SSEB, $ terms) 220.0 -1.4 -15.7 -10.2 Japan (Topix) 758.0 -1.2 !!!��(�S ���t l_OQ} �.��_ tiL _ _:.5_! _ .:11 1,257.6 +1.1 World, dev'd (MSCI) -1.8 -1.8 -10.6 -10.6 Emerging markets (MSCI) 1,029.9 +3.0 World, all (MSCI) -3.0 -3.0 320.8 +1.4 �o!!_d!_o!!_Q�(Ci!j!)!.O!!.J.I}_ �� �-i_ _..:t.8.J_ �-l +11.3 +11.3 EMBI+ (JPMorgan) 613.9 +1.2 1,128.5 +0.3 -7.3 -7.3 Hedge funds (HFRX) Volatility, US (VIX) 18.6 +18.3 +17.8 (levels) +43. 1 +40.8 149.7 +9.0 CDSs, Eur (iTRAXX)t +19.7 +19.7 CDSs, N Am (COX)t 102.0 +3.0 -40.3 -41.3 Carbon trading (EU ETS) € 8.5 +11.5 _
_
_
_
*Total return index. tcredit-default-swap spreads, basis points. Sources: National statistics offices, central banks and stock exchanges; Bloomberg; CBOE; CBOT; CMIE; Cotlook; Darmenn & Curl; EEX; FT; HKMA; ICCO; !CO; lSD; Jackson Rice; JPMorgan Chase; Markit; NZ Wool Services; Thompson Lloyd & Ewart; Thomson Reuters; Urner Barry; WSJ; WM/Reuters
The Economist commodity-price index 2005=100 % change o n one one Jan 24th Jan 31st* month yea r Dollar index �l_i_t:e�s_}�:2_ ]2Q.._8 £2q£ - _ _ _ _?�:l - - ��2 Industrials 177.. 9 . . . f\ �l .. .FU. 1_8 9._ 9 _ m, 5 } Jf\11. . Metals 166.4 172.0 Sterling index All items 220.4 219.9 Euro index 181.2 181..0 All items Gold $ per oz 1,669.3 � West Texas Intermediate 99.1 98.5 $ per barrel _ _
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• Provisional !Non-food agriculturals.
Indicators for m o re countries a n d additi o n a l series, g o to: Economist.comfindicators
89
in Malaysia (the president wisely stayed away) and two other planned assassina tions in Afghanistan. He claimed, too, to have fought with the Northern Alliance, America's anti-Taliban allies in Operation Enduring Freedom. He had also secured a video of al-Qaeda and Taliban terrorists undergoing training, which he sold to CBS and several other broadcasters. Oh, what a lovely war
Jonathan l(eith "Jacl
