3
7 The world this week Leaders 1 1 Emerging-market multinationals The rise of state capitalism
38 Justice in Turkey N ot fo r s o m e
38 Justice in Spain Investigati n g the i nvestigator
40 Charlemagne G e r m a ny's d o m i n a nce
12 The euro crisis returns Salve Italia
13 Taxing the rich in America The politics of p lutocracy
13 Nuclear Iran N ot q uite too late
14 Corporate anonymity On the cover The spread of state capitalism in the emerging world will cause increasing problems: leader, page 11. The West's economic woes have coindded with the rise of a new breed of company i n China and other rising powers: see our spedal report after page 48. American fears of Asian innovators, page 64 The Economist online Dai ly a n a lysis and opi nion from
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Li ght a n d wrong
Letters 16 On the City, productivity, sin taxes, Kolkata, euphemisms
Mi ne, a l l m i n e
Nation of s h o p critics
28 John Lewis capitalism The feeli n g is m utual
28 Extradition The ti es that bi n d
29 Schools in Wales
43 Online piracy Sto p pi n g S O PA
44 Mexico's drug war N ot so fast
44 Red-light cameras You're o n film
45 Bankrupt schools 45 Executive clemency
M erkel wants to save it, s h e m ust h e lp Italy's Mario M o nti: leader, page 12. A decent p r i m e m i nister has restored Italy's good n a m e , page 3 5 . France's downgra de, page 37. Germany now stands a lone. But its power may wea ken the e u ro zo n e: C h a rle m a g n e , page 40. A m e rica is recove ri n g from the debt bust faster t h a n Europe: Free exc h a n g e, page 75
The pardoner's tale
46 Lexington
The Americas 47 Mexico's legislature The siesta congress
48 Guatemala's president Quick m a rch
48 Oil i n Canada What goes a ro u n d
Down in the va lleys
30 Labour's fiscal rethink Plan B
30 The Leveson inquiry The p ress responds
The high street B rito ns do n't Spedal report: State capitalism The visible hand After page 48
31 Exports and the economy Made in B ritain The bea uty of t h e bori n g Alex Salmond, Little E n g la n d e r
to toke port in "a severe contestbetween intelligence, which pressesforward, and an unworthy, timid ignorance obstructing ourprogress. "
Europe 35 Italy's prime minister
Editorial offices in London and also:
36 The cruise-ship tragedy
Atlanta, Beijing, Berlin, Br ussels, Cairo, Chicago, Hong Kong, Johannesburg, Los Angeles, Mexico City, Moscow, New Delhi, New York, Pans, San Francisco, Sao Paulo, Singapore, Tokyo, Wa s hington DC
Soak or swim
The euro If Germa ny's Ang ela
South Caroli n a's p ri m a ry
Britain 27 Town-centre retailing
32 Bagehot
First published in September1843
W h o are t h e 1 %?
42 Opti mal tax rates
Studyi n g o n a s h oestri n g
Briefing 23 Booming Mongolia
31 David Hockney
Volume 402 Number 8768
United States 41 Income inequality
A good p rofessor i n Rome Wrecked
36 Russian protests Puti n 's people
37 French politics Down a n otch
wa nt it to decay, but n eith e r d o t h e y li ke t o shop i n it. Those desires a re h a rd to reconcile, page 27 . The J o h n Lewis way, page 28
Middle East and Africa 49 Sanctions and Iran B e leagu ered but u n bowed
50 Persian isolation A sad o ld city
5 1 Shia Islam A sense of lo neli n ess
51 Israel and Palestine Tod d li n g to talks
52 Israel and Azerbaijan Odd but useful fri e n d s
53 Education i n South Africa Sti ll dysfu n cti o n a l
53 Protests in Nigeria Let them have fuel
Mongolia The country that is li kely to grow faster than a ny other i n t h e n ext deca de, a n d h o w i t i s changing, for better or worse, pages 23-25
37 Riots in Romania Anger management
��
Contents continues overleaf
4 Contents
The Economist Ja n ua ry
Asia 54 Taiwan's elections It's alrig ht, Ma
55 Satire in South Korea La m p o o n i n g the pols
55 Urbanising China A nati o n of city s lic kers
56 Parental abduction in Japan C h i ld-sn atchers
Israel Even i n the start-up nati o n , it is h a rd to tu rn young companies into adults, page 61. The n eed for m o re Israelis w h o work, p a g e 6 2 . Ta lks with t h e
57 Reform in Myanmar Follow my lead
58 Banyan Pakista n 's ga m e of chicken
Finance and economics 71 American banks Losi n g a ltitude
7 2 Buttonwood Corpo rate i r rati o n a lity
73 Greece's debt-holders Volu nteers wa nted
73 Austrian banks Vi e n n a 2 . 0
74 China's economy Two twists in the d ragon's tai l
74 Trade statistics
International 59 Corporate anonymity
A progress report o n d e leveragi n g
U lti m ate p rivilege
60 Demography Cutti n g carbon emissions
60 Dissent about prohibition In na reo veritas
Science and technology 78 Exercise and Longevity Worth a ll the sweat
79 Polio A Rotary e n gi ne
Business 6 1 Israeli technology What n ext for the start-u p nati o n ?
Indian energy Power i s essenti a l for t h e cou ntry's lo n g-term growth, a n d that m e a n s coal. B ut electricity i s u n li ke ly t o flow fast e n o u g h , pages 68-70
62 Demography and business in Israel The promised la n d n eeds people
64 Confidence in America G lass h a lf em pty
64 Asian technology D o n 't fear it
65 Flat-panel screens Cracki n g u p
65 Aircraft Leasing If it flies, rent it
66 Opening a business in Brazil Why m a ke it si m p le?
66 Tequila in Mexico Storm in a s h ot glass
Pity the boss Chief executives a re m u ch less powerful t h a n page 67
79 Forensic science Ig n o r a n ce i s b liss
80 Solar energy
The s h ackled boss
Briefing 68 Energy in India The future is black
of Ra uf D e n ktas h, leader of the Turkish -Cypriots, page 94
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Politics
lion is missing from its ac counts. Officials admitted a discrepancy, but said this was due to poor record-keeping, not corruption.
A reward for good behaviour
In an effort to press Iran harder to make it halt its nuclear programme, the European Union agreed in principle to block imports of Iranian oil. Iran urged Arab countries not to increase their production in response to the sanctions. America is also seeking the support for the measure from other big importers of Iranian oil, notably China. Syria's president, Bashar Assad, announced an amnesty for all crimes committed since the beginning of the ten month uprising against him. It would apply to protesters and army deserters who turn themselves in by the end of January. Mr Assad has offered amnesties before but almost no one responded. Russia said it would veto any moves in the UN Security Council to impose sanctions on Syria or authorise the use of force.
Strikes brought Nigeria to a halt after the government removed the country's fuel subsidy regime, causing petrol prices to soar. Under pressure from trade unions, President Goodluck }onathan agreed to lower prices again but said the subsidies would eventually be phased out entirely. At least 51 people, mostly women and children, were killed in clashes in South Sud an's ]onglei state, which lies near the border with the north. The violence is part of a deadly cycle of cattle raids and revenge attacks between some of the country's ethnic groups. In response to concerns raised by the IMF, the Angolan gov ernment denied that $32 bil-
America restored full diplomatic relations with Myanmar after the military controlled civilian govern ment released scores of politi cal prisoners and announced a ceasefire with a rebel group. Meanwhile, Aung San Suu Kyi, leader of the country's democ racy movement, declared that she would stand for a by election seat in parliament.
pagal-Arroyo, who was arrest ed late last year on charges of corruption and electoral fraud.
Punching through Otto Perez Molina, a former general, was sworn in as president of Guatemala. He has promised an "iron fist" against crime in the country, which is one of the world's most violent. Venezuela announced that it would withdraw from the International Centre for Settle ment of Investment Disputes, a tribunal run by the World Bank that serves as the arbitra tor for foreign-investment contracts. In a recent judgment in another tribunal the coun try was ordered to hand over $908m to Exxon Mobil.
Ruffled feathers
Ma Ying-j eou was re-elected as Taiwan's president, defeating Tsai Ing-wen, the country's first female presidential candi date, in a closely fought elec tion. Mr Ma has worked to improve Taiwan's relationship with China and used his first term to strengthen the coun tries' economic ties. His party, the Kuomintang, also retained its control of the legislature. Pakistan's Supreme Court summoned Yousaf Raza Gi lani, the prime minister, to appear on charges of con tempt. Mr Gilani is accused of ignoring instructions to open a corruption case against the president, Asif Ali Zardari. Mr Gil ani insists the president has immunity. His government is determined to hang on, although the army's patience is wearing thin.
An impeachment trial began in the Philippines of the Su preme Court chief justice, Renato Corona. The televised trial is part of President Be nigno Aquino's campaign against corruption. Mr Corona was appointed by Mr Aquino's predecessor, Gloria Maca-
The European Commission said it would begin legal pro ceedings against the Hungar ian government over a central bank law, the forced early retirement of judges and the treatment of its data-protec tion ombudsman. Viktor Orban, Hungary's prime min ister, delivered a conciliatory speech to the European Parlia ment and pledged to work with the commission.
A spat between Romania's president and a popular offi cial in the health ministry triggered protests across the country. Amid violent scenes in Bucharest, the capital, the government backtracked on a controversial health-care reform but failed to stamp out the demonstrations. A Turkish court convicted and jailed three men involved in the 2007 murder of Hrant Dink, an outspoken Turkish Armenian j ournalist. But Mr
Dink's family and others main tain that state officials were involved in the killing, and are continuing to press for a full investigation. The British government scrapped an inquiry by a former judge into the alleged participation of MIS and MI6 in the rendition and torture of terror suspects, after new claims emerged that intelli gence officers had helped to send two Libyans back to the Qaddafi regime in 2004. The government promised to hold a new inquiry once the police complete their inve stigation into the Libyans' allegations.
An XL headache The Obama administration rejected the proposed route for the controversial Keystone XL pipeline that would stretch from Canada to the Gulf coast, but said the companies behind the project could reapply. The White House wants to delay a final decision on the issue, which has pitted environ mentalists against those who say it will create thousands of jobs, until after November's election. Wikipedia and other websites shut down their operations for 24 hours to protest against an online piracy bill in Congress that they argue will curtail internet freedoms and give big media companies the power to have sites closed down that infringe copyright. ]on Huntsman withdrew from the race to be the Republicans' presidential candidate. A moderate, Mr Huntsman had failed to attract much support from Repub lican primary voters. In his withdrawal speech he called for an end to party bickering and endorsed Mitt Romney, whom he described last October as a "perfectly lubri cated weather vane" on important issues. Sarah Palin did Mr Romney's longer-term presidential ambi tions no harm by endorsing Newt Gingrich in the South Carolina primary, which is being held on January 21st.
��
The Economist Ja n u a ry
8 The world this week
Business Standard & Poor's downgrad ed its credit rating for the Euro pean Financial Stability Facili ty, the euro zone's bail-out fund, cutting it by one notch to AA+. The move was triggered by s&P's decision a few days earlier to strip France and Austria of their AAA status and further reduce the ratings of seven other countries in the currency block. s&P had given ample warning that the euro zone would receive a mass downgrade, but politicians reacted angrily, saying that it undermined their efforts to resolve the crisis. As a result of s&P's down grade, Portugal j oined Greece as the second euro-zone coun try to be accorded "junk" status by all rating agencies. The outlook brightened some what for UniCredit's rights issue when it emerged that a fund in Abu Dhabi was in creasing its stake in the Italian bank to 6.5%. UniCredit's share offering is a crucial test of the markets' willingness to invest in the euro zone's banks as they work to meet higher capital requirements by June.
Help is on the way The IMF discussed ways to raise more funds from its mem ber countries in response to the euro crisis. The fund is seeking an extra $sao billion on a voluntary basis to help meet the anticipated demand for bail-out loans. The World Bank cited the threat from the rich world's debt woes and consequential slowdown in capital flows to emerging markets in its latest assessment of the global economy. The bank now thinks GDP in the developed world will grow by 1-4% this year (down from a previous estimate of 2.7%) and by 5-4% in developing countries (down from 6.2%). Federal authorities in America arrested seven people in New York, California and Mas sachusetts in connection with
an alleged insider-trading scheme at several hedge funds. The scheme is said to have included trades in Dell.
Top of the heap
I
American banks Market capitalisation, $bn January
18th 2012
Wells Fargo J PMorgan Chase
Citigroup Bank of America US Bancorp Goldman Sachs
Or4080 120 160
Source: Bloomberg
The worsening investment environment at the end of 2011 took its toll on the fourth quarter earnings of America's banks .JPMorgan Chase and Citigroup did worse than exp ected, posting declines in net profit of 23% and 11% re spectively, compared with the same period in 2010. Goldman Sachs said its net profit was down by 58%. But Wells Fargo, which has a smaller invest ment-banking business than its rivals, saw net income jump by 21%, to $4.1 billion. China's economy grew by 9.2% last year, which was somewhat slower than the 10-4% it chalked up in 2010. The news came with the usual health warnings about the
reliability of official Chinese growth statistics. Meanwhile, China's stock of foreign currency reserves fell at the end of the year for the first time since 2003, albeit by only $40 billion, to stand at a new total of $3.18 trillion. The International Energy Agency reported that the demand for oil fell in the final quarter of 2011 for the first time since the depths of the fi nancial crisis. The agency also noted the potential risk to oil supplies if new tensions with Iran lead to disruption to trade through the Strait of Hormuz. Royal Bank of Scotland sold Aviation Capital, its aircraft leasing business, to Japan's Sumitomo Mitsui Financial Group for $7.3 billion. The sale will help RBS to reduce its non-core assets as it works to rectify its balance-sheet. Avia tion Capital attracted several bids. With a fleet soon to reach 300, it is one of the world's biggest lessors of aircraft. Airbus said that 2011 had been its most successful year yet, as it delivered 534 aircraft to airlines and booked 1,419 net orders (new minus cancelled). That compares with Boeing's delivery of 477 planes and 8os net orders, making it the fourth
n £11.er&9 oi'J
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2 1st 2012
year in a row in which the European aerospace company has bested its American rival on both measures. Boeing, however, took more orders for bigger jets, thereby closing the gap in terms of revenue. Jerry Yang resigned from the board at Yahoo!, which he helped to found in 1995 and led as chief executive for two years until]anuary 2009. Once a shining star in the internet firmament, the Taiwanese born Mr Yang had become a target of investor criticism at the troubled company. In 2008 his opposition to a $48 billion takeover bid from Microsoft brought him a heap of oppro brium; Yahoo! is now worth $20 billion.
Turn around? Eastman Kodak filed for bankruptcy protection; the once-dominant photographic company has been struggling in the digital market. Kodak produced the first camera for consumers in the 188os and in 1976 held 90% of the market for film. It listed $6.8 billion in liabilities in its bankruptcy, from which it hopes to emerge next year after selling off some of its patents.
Other economic data and news can be found on Pages 9 2- 93
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The rise of state capitalism The spread of a new sort of business in the emerging world will cause increasing problems
0
VER the past 15 years striking corporate headquarters have transformed the great cities of the emerging world. China Central Television's building resembles a giant alien marching across Beijing's skyline; the 88-storey Petronas Towers, home to Malaysia's oil company, soar above Kuala Lumpur; the gleaming office of VTB, a banking powerhouse, sits at the heart of Moscow's new financial district. These are all monuments to the rise of a new kind of hybrid corporation, backed by the state but behaving like a private-sector multinational. State-directed capitalism is not a new idea: witness the East India Company. But as our special report this week points out, it has undergone a dramatic revival. In the 1990s most state owned companies were little more than government depart ments in emerging markets; the assumption was that, as the economy matured, the government would close or privatise them. Yet they show no signs of relinquishing the command ing heights, whether in major industries (the world's ten big gest oil-and-gas firms, measured by reserves, are all state owned) or major markets (state-backed companies account for 80% of the value of China's stockmarket and 62% of Rus sia's). And they are on the offensive. Look at almost any new industry and a giant is emerging: China Mobile, for example, has 6oom customers. State-backed firms accounted for a third of the emerging world's foreign direct investment in 2003-10. With the West in a funk and emerging markets flourishing, the Chinese no longer see state-directed firms as a way-station on the road to liberal capitalism; rather, they see it as a sustain able model. They think they have redesigned capitalism to make it work better, and a growing number of emerging-world leaders agree with them. The Brazilian government, which embraced privatisation in the 1990s, is now interfering with the likes of Vale and Petrobras, and compelling smaller compa nies to merge to form national champions. South Africa is also flirting with the model. This development raises two questions. How successful is the model? And what are its consequences-both in, and be yond, emerging markets? The law of diminishing returns
State capitalism's supporters argue that it can provide stability as well as growth. Russia's wild privatisation under Boris Yelt sin in the 1990s alarmed many emerging countries and encour aged the view that governments can mitigate the strains that capitalism and globalisation cause by providing not just the hard infrastructure of roads and bridges but also the soft infra structure of flagship corporations. So Lee Kuan Yew's government in Singapore, an early expo nent of this idea, let in foreign firms and embraced Western management ideas, but also owned chunks of companies. The leading practitioner is now China. The tight connection be tween its government and business will no doubt be on dis play when the global elite gathers in the Swiss resort of Davos
next week. Among Westerners there, government delegates often take the opposite view to those from the private sector: Chinese delegates from both sides tend to have the same point of view, and even the same patriotic talking-points. The new model bears little resemblance to the disastrous spate of nationalisations in Britain and elsewhere half a cen tury ago. China's infrastructure companies win contracts the world over. The best national champions are outward-look ing, acquiring skills by listing on foreign exchanges and taking over foreign companies. And governments are selective in their corporate holdings. Overall, the Chinese state has loos ened its grip on the economy: its bureaucrats concentrate on industries where they can make a difference. Let a thousand mobiles bloom
Yet a close look at the model shows its weaknesses. When the government favours one lot of companies, the others suffer. In 2009 China Mobile and another state giant, China National Petroleum Corporation, made profits of $33 billion-more than China's 500 most profitable private companies combined. State giants soak up capital and talent that might have been used better by private companies. Studies show that state companies use capital less efficiently than private ones, and grow more slowly. In many countries the coddled state giants are pouring money into fancy towers at a time when entrepre neurs are struggling to raise capital. Those costs are likely to rise. State companies are good at copying others, partly because they can use the government's clout to get hold of their technology; but as they have to pro duce ideas of their own they will become less competitive. State-owned companies make a few big bets rather than lots of small ones; the world's great centres of innovation are usually networks of small start-ups. Nor does the model guarantee stability. State capitalism works well only when directed by a competent state. Many Asian countries have a strong mandarin culture; South Africa and Brazil do not. Coal India is hardly an advertisement for ef ficiency (see pages 68-70). And everywhere state capitalism fa vours well-connected insiders over innovative outsiders. In China highly educated princelings have taken the spoils. In Russia a clique of "bureaugarchs", often former KGB officials, dominate both the Kremlin and business. Thus the model pro duces cronyism, inequality and eventually discontent-as the Mubaraks' brand of state capitalism did in Egypt. Rising powers have always used the state to kick-start growth: think of Japan and South Korea in the 1950s or Ger many in the 1870s or even the United States after the war of in dependence. But these countries have, over time, invariably found that the system has limits. The Chinese of all people should understand that the best way to learn from history is to look at its long sweep. But it may take many years for the model's weaknesses to become obvious; and, in the meantime, it is likely to cause all sorts of problems. Investors in emerging markets, for instance, need to watch out. Some may be taking a punt on govern ments as much as companies. State-capitalist governments ��
The Economist Ja n ua ry
12 Leaders �can be capricious, with scant regard for minority share holders. Others may find their subsidiaries or joint ventures in emerging markets pitted against state-backed favourites. Another concern is the impact of the model on the global trading system-which, at a time when the likely Republican nominee for president wants to declare China a currency ma nipulator on his first day of office, is already at risk. Ensuring that trade is fair is harder when some companies enjoy the support, overt or covert, of a national government. Western politicians are beginning to lose patience with state-capitalist
2 1st 2012
powers that rig the system in favour of their own companies. For emerging countries wanting to make their mark on the world, state capitalism has an obvious appeal. It gives them the clout that private-sector companies would take years to build. But its dangers outweigh its advantages. Both for their own sake, and in the interests of world trade, the practitioners of state capitalism need to start unwinding their huge holdings in favoured companies and handing them over to private in vestors. If these companies are as good as they boast they are, then they no longer need the crutch of state support. •
The euro crisis returns
Salve Italia If Germany's Angela Merkel wants to save the euro, she must do more for Italy's Mario Monti
S
ADLY, the lull proved but brief. The first two weeks of the year were surprisingly calm for the storm-tossed euro zone. But a gale is blowing again. First a series of downgrades from Standard & Poor's, a leading debt-rating agency, coincided with a stand-off in the "voluntar y" restructuring talks between Greece and its private bondholders. Now there are signs of a continent-wide recession. The euro crisis is back. Indeed, the next few weeks could be decisive for the single currency's future. Several euro-zone governments must sell huge amounts of debt in bond auctions. They are also due to wrap up negotiations over the new "fiscal compact", demand ed by Chancellor Angela Merkel of Germany to enforce bud get discipline, at a European Union summit at the end of Janu ary. And the brinkmanship in Greece's debt talks could yet lead to a disorderly default (see page 73). What happens in Greece could be dramatic and painful, es pecially for the Greeks. If their country is forced out of the euro zone after a chaotic default it will cause problems for every one. Yet Greece is small and its creditors see a restructuring as inevitable. The crucial country is Italy. Italy is too big for the existing rescue fund to bail out. (Spain is at risk too, but its debt is a lot smaller and the markets are more confident it will be repaid.) Italy is unique in its combina tion of size and punishingly high bond yields (currently 612%). It is hard to see the euro surviving were the world's third-big gest debtor judged unable to pay its creditors. The immediate consequence of this for Mrs Merkel is that any sort of restructuring of Greece must therefore come with a credible plan to "backstop" Italy (and other weak countries), at least in the short term. Without such backing, the markets will simply move on, perhaps very quickly, from Greece to Italy, and the many banks that have lent to it. A credible firewall from the European Central Bank (and possibly the Internation al Monetary Fund) would stop them. But staving off contagion is not enough. Italy also needs lower interest rates on its bonds. Sadly, the country epitomises the economic and political problems in Mrs Merkel's strategy of relying on fiscal austerity to save the euro. In economic terms, Italy's main problem is not public pro fligacy. Its debt may be huge, but it is running a primary budget
surplus (ie, before interest payments), its overall budget deficit is much smaller than France's, and its recent budget puts it on course to eliminate that deficit in 2013. Under a new govern ment, led by Mario Monti, a former European commissioner, Italy has regained the place at the top European table that Sil via Berlusconi lost (see page 35). Mr Monti has not merely pushed through a tough budget, but he is also embarking on a difficult, if overdue, set of liberalising and structural reforms to open up sheltered parts of the economy to competition. Grow-and carry the people with you
It is growth, or rather the lack of it, that is Italy's weakness. Within the euro, it has suffered a big loss of competitiveness as unit labour costs have shot up, largely because productivity has been stagnant or even fallen. And as elsewhere across the euro zone, austerity is not helping. Italy's public sector is trying to deleverage at the same time as the private sector is cutting spending, producing a nasty recession. The drive to cut bud gets and debt as a proportion of GDP becomes ever harder as the denominator shrinks, especially if the answer from Mrs Merkel is always still more austerity. In contrast, America has largely avoided this trap by deferring its public-sector deleve raging into the future (see page 71). Structural reforms are essential, but Italy also needs stron ger demand. Mr Monti is not asking the Germans to embark on reflation, because he knows they will say no. But he is urg ing them to liberalise their own service industries, which should boost consumption. And he wants to see lower interest rates on Italy's debt, to pacify taxpayers facing bigger bills and special interests that will lose from more competition. This re quires more support for bond markets by the European Cen tral Bank or by an expanded bail-out fund. If the economic arguments do not persuade Mrs Merkel, then the politics should. Mr Monti runs a "technocratic" gov ernment that lacks a single elected politician. For the moment, he has strong support both from Italian voters and from the main political parties (which naturally prefer to see him taking the blame for imposing austerity and structural reforms). But democratic consent for such harsh measures rests on being able to show Italians that they will ultimately benefit. Mr Monti says resentment in Italy of Germany as a "ring leader of European intolerance" is already rising. For the euro a populist revolt in debtor countries would be the biggest threat of all. Mrs Merkel should remember that. •
The Economist J a n ua ry
Leaders 13
2 1 st 2 0 1 2
Taxing the rich in America
The politics of plutocracy America's rich should pay more, but there is no need to raise their income-tax rates
1
America's:
percentage share of income earned by top 1% ofearners
N AN ordinary American pres-
I idential election, a candidate
who had earned a fortune in business and then paid an absurdly low tax rate would barely raise eyebrows. Americans have long considered wealth something to admire and pursue, not vilify and redistribute. Alexis de Tocqueville said he knew "of no country . . . where a profounder contempt is expressed for the theor y of the permanent equality of property." But this is no ordinary election. That so much scrutiny has fallen both on how Mitt Romney earned his fortune (in the ruthless world of private equity) and his tax rate (15%, less than what some middle-class families pay) is a sign something has changed. For that, credit a decade in which the median family in America saw its real income fall by 7%, even as the top 1% grabbed a share of national income unseen since the 1920s (see page 41), and a level of unemployment that, though falling, re mains troublingly high. Not many Americans like the tactics or fashion choices of Occupy Wall Street, but quite a few share the movement's opinion that the economy is tilted in favour of the wealthy. And so the rich are now a campaign issue. Barack Obama calls for "millionaires and billionaires" to "pay their fair share": introduce a minimum tax rate on millionaires and re turn the top income-tax rate to 39.6% from 35%, and the other 98% of Americans would not have to pay more, he claims. Re publicans shoot back that raising any taxes would destroy jobs and business confidence. They think you can fill the budget hole by spending cuts alone; many want to cut taxes further. Neither side is talking sense. America's rich should indeed pay more tax; but marginal rates should not go up. History shows that deficit reduction works best when most
2515005 ---1913 30 50 70 90 20 9-"'-'---->.....J'---'-'--'--'-� 0
of the burden falls on spending cuts. That means that middleclass entitlements will have to be reduced, no matter what Mr Obama tells his supporters. But, just as in every other budget squeeze, a portion must come from higher taxes, no matter what the Republicans say. Democrats say only the top 1% need pay more; that's mis leading. Others will have to pay too. But more of the increase should be shouldered by the rich who have done so well from recent trends. Technological change and globalisation have sharpened demand for the most skilled workers, in particular superstars, be they athletes or hedge-fund managers, thus sharply increasing inequality. Tax policy has exacerbated this trend instead of mitigating it. George Bush junior slashed top income-tax rates as well as rates on dividends and capital gains, which explains why Warren Buffett and Mr Romney have such low tax rates. Follow the money
However, restoring the top income tax rates, as Mr Obama pro poses, is not the best way of extracting extra revenue from the rich. It would raise revenues of about 0.3% of GDP and do nothing to make America's grotesquely complicated tax sys tem more efficient. It would be far better to close or limit loop holes and deductions, currently worth up to 7% of GDP, which distort behaviour (by, for example, encouraging people to take out big mortgages) and mostly benefit the affluent. Some de ductions, including mortgage relief, would have to be phased out in stages; but many could go immediately. In a similar way, equalising the rates on capital, dividends and ordinary income would make it possible to lower America's corporate tax rate, currently one of the rich world's highest. The result would be lower rates, more revenue and a more efficient and progressive tax system. If that's where the debate about wealth ends, it will have been worth it. •
Nuclear Iran
Not quite too late Against a rising tide of warlike rhetoric, negotiation must still be the aim of sanctions
R AN is facing sanctions of un
I precedented severity. On De
cember 31st Barack Obama signed into law measures de manded by Congress to punish any foreign financial institution transacting business with Iran's central bank, the conduit for most of its oil contracts. On January 23rd the European Union, which buys about a fifth of Iran's exported oil, is set to ban fu ture purchases. Under American prompting, Japan and South Korea, which together take a similar amount of Iran's oil, are looking for alternative supplies. These measures follow No-
vember's report by the International Atomic Energy Agency (IAEA), the UN's watchdog, detailing aspects of Iran's nuclear activity that make sense only if the aim is to be able to make nuclear weapons. The sanctions are also meant to show a jumpy Israel that there is an alternative to a military attack. This newspaper has favoured sanctions because an Israeli assault might start a regional conflagration, dragging in Ameri ca-and even then might not succeed. But given that a variety of sanctions over the past 30 years has failed to change Iran's behaviour, sceptics, and not just those in Israel, are entitled to ask if sanctions, or indeed anything short of an attack, is really likely to stop Iran getting a bomb now. That is the question posed by Republican candidates in America's presidential ��
The Economist J a n ua ry 2 1st 2012
14 Leaders �campaign, sensing a chance to depict Mr Obama as weak. There is no certain way of getting Iran to drop its quest for nuclear weapons. The latest sanctions will cause it more pain, but in the short run are unlikely to weaken its resolve. China, which is Iran's biggest trading partner and has little truck with sanctions, will probably take up much of the slack created by Europe and by America's Asian allies. Barter deals will get around restrictions on Iran's central bank. And the fragile economies of Europe and America would suffer if Iran's oil ex ports disappeared from the world market. Libya's oil may be flowing strongly again and the Saudis, ever eager to do Iran down, may pump a bit more. But a jittery oil market is likely to send prices higher, helping Iran but not oil consumers. Yet the latest sanctions are nevertheless worthwhile. Their impact may be cumulative and psychological rather than sud den and material. Iran's rulers may regard any sacrifice for the sake of the nuclear programme as bearable, but ordinary Irani ans, even if they patriotically support it, may feel differently and find ways to express their dissatisfaction. Iran's threats to close the Strait of Hormuz and punish Gulf producers who make up the oil shortfall suggest a regime under strain. Moreover time may not be on Iran's side (see page 49).
Though Israel says that the recent movement of centrifuges to a facility in a mountain near Qom suggests that Iran could pro duce a device this year, American intelligence apparently reck ons that Iran, however close to a breakout capacity, is still sev eral years away from having the right sort of missile warheads. Iran has been slowed by the sabotage campaign being waged, presumably by Israel and assorted Western agencies. It has also been rattled by the Arab spring. Don't forget the carrots
Iran's divided regime has yet to reach the point of asking itself whether sticking to its nuclear guns is really worth the pain. It may never do so. Yet the West should persist in reminding it of the gains it would enjoy if it were to eschew deceit and show flexibility, say by letting spent fuel from reactors be taken to neutral third countries. A "grand bargain", seemingly forgot ten, is still worth tabling. In exchange for Iran abjuring nuclear weapons, the West would stop seeking regime change. An end to Iran's theocracy is desirable, but the West is unlikely to get a nuclear deal unless it offers carrots as well as sticks. A bargain will be hard for Mr Obama to sell to voters; but he should ask the Republicans if they really want to start a war. •
Corporate anonymity
Light and wrong Incorporation with limited liability is a privilege.lt should not include anonymity
T IMITED liability-a commer L cial venture that protects its shareholders from personal bankruptcy-is one of the great est wealth-creating inventions of all time. The law allows com panies to borrow money, to take risks and to make contracts as if they were people, but without the human beings who own it going bust if things go wrong, as they would in an unlimited partnership. Limited liability allowed Elizabethan adventur ers to finance voyages to spice islands; it allows Silicon Valley technologists now to make similarly risky bets. But limited liability is a concession-something granted by society because it has a clear purpose. It is unclear why in parts of the world anonymity became part of the deal. Efforts to withdraw that unjustified perk deserve to succeed. In dozens of jurisdictions, from the British Virgin Islands to Delaware, it is possible to register a company while hiding or disguising the ultimate beneficial owner. This is of great use to wrongdoers, and a huge headache for those who pursue them (see page 59). Anonymously owned companies can buy prop erty, make deals (and renege on them), launch intimidating lawsuits, manipulate tenders-and disappear when the going gets tough. Those who seek redress run into baffling bureauc racy and a legal morass. Seeking real names and addresses means dealing with lawyers and accountants who see it as their job to shield their clients from nosy outsiders. Attempts to change this have bogged down. The campaign ers for reform are hardly anti-corporate zealots: they include the World Bank, the OECD (a rich-country think-tank), and an American senator, Carl Levin, who with the support of the ad-
ministration has introduced a bill to rein in the antics of states like Delaware (and a bunch of others including Wyoming and Nevada). But progress is slow, with reformers stuck in an argu ment about who should pay the costs of clarity. If you strip out the obvious self -interests of the jurisdic tions that make money from hiding people's identity, the main excuse offered is privacy. Hiding your identity can have honest commercial reasons: if everyone knows that Exxon Mobil, BP or another oil major is bidding for a patch of Texas, the price will go up. In some countries and industries revealing owner ship is dangerous. Besides, many libertarians would add, priv ate shareholders have the right to be just that. Owning up
Except that the rest of us are giving a limited company's own ers a perk. It does not seem unreasonable to ask who are the main recipients of this benefit (with, say, stakes above s%). Le gitimate concerns for owners' safety, such as biotech firms hunted by animal-rights activists, are rare. In many more cases, such as Caribbean holding companies controlled by well-connected Russians, greater transparency is on the side of democracy and freedom. If the owners of an enterprise really want to preserve their anonymity, they can still opt for an un limited option-but that will be their risk. Reform ought to be simple. Anyone registering a limited company should have to declare the names of the real people who ultimately own it, wherever they are, and report any changes. Lying about this should be a crime. Some dodgy places will tr y to hold out. But anti-money-laundering rules show international co-operation can work. You can no longer open an account at a respectable bank merely with a suitcase of cash. Let the same apply to starting a limited company. •
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Balancing the ledger S I R - Your leader on how to "Save the City" (January 7th) as the world's premier centre for global finance mentioned the potential for damage from political attacks, and you drove home your argument by pointing out that "California doesn't talk down Silicon Valley". Maybe so, but then Go ogle, Face book and Twitter have not plunged the world into the biggest recession since the Depression, demanded taxpayer bail-outs and then used the money to pay executives exorbitant bonuses. The St Paul's Institute shows that now even b ankers themselves think they are paid too much. The City's size crowds out other industries and draws talent into investment banking. We are far too dependent on the City, and the financialisation of the economy has brought us inequality and fragility. It is financiers who remind us so persuasively that we must diversify our portfolios. Doing so could save Britain. RAVIN T H A M B A PILLAI
for Occupy Lo n d o n ( Eco n o mics Worki n g G ro u p ) St Paul's C h u rchyard London
The real impetus that spurred London to international financial supremacy was the introduction of an interest equalisation tax in America in 1963 alongside the long-standing Regulation Q, which limited interest rates paid on American onshore deposits. Furthermore, the Soviet Union was unwilling to keep its dollar deposits in the United States, which had a long history of freezing the bank accounts of unfriendly countries in times of international crisis. Thus American regulatory and market-restrictive measures drove us deposits offshore. The first port of call was London. Once London had built up an international expertise in dollar bond issuance, distribution and underwriting, it became easy to transfer these skills to other currencies. The long history of unintended consequences SIR -
should warn regulators against trying to fix prices or rates in markets that generally function efficiently. M I C H A E L STERN
Di rector Investment Education
PLC
Manchester
After years of handwringing The Economist seems finally to have reached the panic stage in recognising the multitude of threats levelled against the City of London. Was it the Epiphany, or is this another example of Lord D'Abernon's observation that the English mind works best when it is almost too late? SIR -
Flexible hours, cross-training in a variety of skills and diversity in daily assignments make workers happier and more productive. All of this benefits employees and adds to, rather than detracts from, job satisfaction. Those who believe workers are being put upon need to visit some factory floors to see what is really being done out there. ALEXA N D E R BLANTON
Senior a n a lyst Clear H a rb o r Asset M a nagement New York
The smoking gun
FRED E LLIOTI
S I R - Your article on sin taxes in Britain ("The high cost of virtue", December 31st) took at face value claims by the Tobacco Manufacturers' Association that cigarette smuggling in Britain peaked in 2000 as a result of high taxes and a weak euro. In fact, the affordability of tobacco has not changed greatly in the past ten years, while cigarette smuggling has halved. Tobacco smuggling is weakly affected by price. Evidence shows that smuggling has decreased through better law enforcement and by curbing the tobacco industry's own activities. Questionable claims about smuggling are a standard tobacco-industry tactic to resist effective policies to cut smoking, a tactic we expect it will employ when the government consults people on the plain packaging of tobacco later this year.
Milford, Massachusetts
J EA N KI N G
ATILLA ILKSON
Naples, Florida
Schum peter missed the point about the "demonology" of finance (January 7th). The money is ours; it belongs to the taxpayer. The banking industry has been socialised by the Republicans, of all people. Schum peter cited Karl Marx. He should have referred to the Marx Brothers. Imagine that each brother runs a bank and invests in bonds. To cover themselves they buy default insurance. Groucho knows he is covered as he bought insurance from Chico, who's done the same from Harpo, and Harpo being no fool has got cover from Groucho. At the end of the movie they all need a shave and are begging on the street. SIR -
Director of tobacco control
Liberating work S I R - Contrary to what you suggest, America's productivity gains are not being "squeezed" out of workers ("Hard times, lean firms", December 31st). Nor are the gains the result of automation or computers, per se. Instead, the root of the improvement is coming from changes in the way work is performed, changes that simplify work. These include the elimination of layers of supervision and the empowerment of workers to make decisions that were previously reserved for the now-vanished higher-ups.
Ca n ce r Research
UK
B ETIY M C B RI D E
Director of policy B riti s h H e a rt Fo u n dati o n London S I R - If the government legalised prostitution it could have a new "sin tax" that would not diminish. Properly regulated brothels (women's needs should be catered for, too) would bring in income tax, national insurance, even value-added tax. Commercial arrangements ought to discourage the drunken encounters that lead to sexually transmitted infections and unwanted pregnancies, saving
money on both counts. And this would also lead to the partial replacement of emotionally charged marital affairs by the objective logic of the market, thus saving much misery and reducing the huge costs of family breakdown. CECIL S A N D E RS O N
Cheltenham, Gloucestershire
City living S I R - Regarding attempts to revive Kolkata, an intriguing question is whether Mumbai will suffer the same fate ("The city that got left behind", January 7th). Deteriorating infrastructure, cratered roads, worsening traffic, crumbling buildings, filthy beaches, ever-expanding slums, skyhigh rents and property prices, refugees pouring in daily, inadequate schooling, fractious politics, corruption and so on. It is a long list. TA RU N KATARIA
Chief executive, I n dia Religare Capital Markets Mumbai
Delicately expressed S I R - Your article on euphemisms ("Making murder respectable", December 17th) brought to mind the following crime report: She was decapitated and disembowelled. She was however not interfered with. RUSSELL D E N O O N D U N C A N
Thames Ditton, Surrey S I R - Football managers are no longer sacked. They "part company" with their club, for business reasons or to spend more time with their family. When one manager was found to be "seeing" the same blonde as his chairman, he was told his contract would not be renewed as he had "taken the club as far as he could".
Ashton-under-Lyne • M I K E PAVASOVIC
Letters are welcome and should be
addressed to the Editor at The Economi st, 25 StJames's Street, London SWlA l H G E-mail:
[email protected] Fax: 0 2 0 7839 4092 More letters are available at: Economist.comfletters
Brazil's elder statesman
A long time in politics
Modern tragedy
Fer n a n d o H e n ri q u e Cardoso brought
The Rep u b lican can didates debate, the
A n ew fi lm version of"Cori o la n us" marks
macroeco n omic sta bility to B razi l a s
Republica n s of South Caroli n a vote in t h ei r
the di recto ria l debut of Ralph Fi e n n es ,
fi n a nce mi nister a n d then as president. A
p r i rna r y a n d the presi d ent d e livers his
w h o a lso p lays the title role. H e talks t o us
disti n g ui s h ed sociologist i n his fo r m e r
state-of-the-u nion a d d ress. In a week
a b o ut S h a kespeare's co nte m porary
life, h e s h a res his thoug hts o n B razil's
tee m i n g with politics, our corres p o n d ents
releva n ce and wonders w h ether people a re
m u ltiraci a l culture, the drug wa r a n d his
a n d b loggers provi d e live co m m entary o n
m o re i n terested in watchi n g tragedy
relati o n s h i p with the cu rrent president
a l l o ft h e acti o n
d u ri n g ti m es of eco n o m i c h a rdship
Economist.comjnode/21543084
Economist.comjblogsjdemocracyinamerica
Economist.comjnode/21543036
United States: The value of a good education
Europe: Down to earth
H ow m u c h would a h i g h school educati o n b e
A co rrupti o n case may e n co u rage Poles to
worth o n t h e free m a rket?
thi n k a little m o re soberly about thei r
Economist.comfnode/21543032
s h a le-gas revoluti o n
Finance: Owe dear A n u p dated i nteractive debt g raphic s h ows how deeply i n h ock t h e big eco n o m i es a re
Economist.comjnode/21524652
Economist.comjnode/21542918
Asia: Media after the meltdown
M BA diary: Start-up school for grown ups
Japan's h o p e lessly i n s u la r press club loses a
Business: Sharper focus
little g ro u n d , i n crea si n g ca n d o u r
How Fujifi lm m a n a ged to reinvent itself
Economist.comjnode/21542992
Economist.comfnode/21543030
Asia: Yam yesterday, yam today
Finance: Average common denominator
N epa l has ever felt itself a "yam between two
If the e u ro zone stays togeth e r, a n
boulders" (the gia nts In dia a n d Chi n a ) yet
oppo rtu nity fo r a different sort of
n o w h o pes to ben efit from its situati o n
convergence play s h o u ld em erge
Economist.comfnode/21543090
Economist.comjnode/21542968
Europe: We'll always have Prague
Technology: Difference engine Am erica needs to boost dwi n d li n g water
Tym o s h e n ko's h u sba n d , m a ke their h o m es i n
s u p p lies with reclai m e d stuff from sewage
t h e Czech Republi c
wo rks. H ow to sell the i dea to the p u b lic?
Economist.comjnode/21542916
Economist.comjnode/21543024
bri
schools a re i n co m pati b le
Economist.comfnode/21543028
Technology: Something bad out of Africa Google fails to live up to its m otto i n Kenya
Economist.comjnode/21542960
Middle East: Entering the fray T h e fath e r of Gilad S h a lit i s to sta n d for
Why so m a ny U krai n i a n s , i n cludi n g Yulia
fl u
It is a myth that entrepreneurs a n d b usi n ess
Israel's Kn esset
Economist.comfnode/21543094
Links to all these stories can be found at Economist.comf node/ 21543097
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Executive Focus
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partnerships with research institutes, academic institutions and think tanks; over 1 1 ,000 individual resea rchers; and international donor organizations and governments. GDN works i n collaboration with a network of eleven regional partners. GDN is seeking a President & CEO to lead the del ivery of its ambitious capacity b u i l d i n g programs and realize its Busi ness Plan; be an advocate with key partners at the h i ghest levels; and ensure that GDN is adequately resourced. Candidates w i l l be effective leaders and acco m p l i shed senior executives with experience of running complex organizations. Reporting to the G D N Board o f Directors, t h e President & CEO w i l l have t h e executive capa b i l ities, development research expertise, scholarly record and strategic m i n dset to lead GDN to its next level of achievement. Leading the staff of G D N 's global offices i n Cai ro, New D e l h i and Washington DC, the President & CEO w i l l be the voice and the intel lectual inspiration of the organization, articulating its purpose and increasing its visi b i l ity. He/she w i l l bring a profound understanding of the global development research capacity challenges and opportunities to make a n i m pact. For further information and how to apply, please visit www.g d n . int/gdn. The closing date for nominations and appl ications i s 24th February 20 1 2.
The Economist J a n ua ry
21st 2012
20
Executive Focus
171 lnJ matiOOOI I�IIIut� fiX Trop�co/ AgnculnJn• (lfTA J Vnca-ba 1d mtema/lonol I'KHI-proftt n> orrh-lor· tkt •I pllk:lll (R411) 0f811111l:Uttun m'OI d 111 I 7.u htch Rot rrt<·d 171 a Boonl Ill 1'Mi<'f' and ..upptXI<'d pnmonll' bv � (l>n$u/to/IL GrrJUp of lnt•·malloJlol � altura/ R,·. arrh ICGIARJ The ltWttut ·� Rm t anrhnrd nn th d•1 • I<JP11'k'fll 11 ds uf .u/1-Soharan \hlro 71t lf1i tla I� ogrt�ultural o/UJ u llh II (lcJr1fll•ts 1 turltl, hungpt and pr>t •m- b1 ft'dr.t 1 produ ,,, and ron um• r n11. PnhoMIIlll crop quail()· and pradlt<'ill m and ·nerotmg u olth from o�rulturt' 771> IttItlUI has "'""' than wo mtemollooolh• l'!'mtllrd sn�ntw from obool 15 coonm onJ 900 oollonally n•crorl<'d tan bru1 d 111 t'OIIOW . rattans orro. Nnco mlomiOtiOil oll lfT-4 can bt. oblam,d at u:t.ew.ilta.org. 1 an
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U n ited Nations Relief a n d Wo r k s Agency
Special Advi ser to Chief Fi nanc ial Officer
for Palestine Refugees i n the N ear East nd develo pment reqUirements of a populat1on of some 5 m1llton Palestrne refugees llvmg 1n the Gaza S t n p, the Wesl Bank, U N RWA IS the Un1ted Nat1ons agency responsible lor respondmg to the humaOIIan n
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Jordan, Lebanon and the Synan Arab Republic UN RWA 1s comm11ted lo ass1sltng Palestane refugees 10 maantatntng a decent standard of ltv10g, acqurnng
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Ch1 f. ProVId nt Fund Secretan I
w1ll coordinate and manage I he Provtdent Fund Secretarta t . 5/he w11l b e r e s p o n s 1 b l e f o r the m o n 1 t o r i n g and d a 1 l y repor t m g o f l h e Prov1 den1 F u n d 's Investment funds t h rough o u tsourced mvesl ment managers t o ensure mvesl m e n t s a r
II A l l " committed to ,, hll>vrng Jl\ "' ' m 1 1' '·orkfnrn: .1nd i' ' king � te.lm fmm 1 1 '\1 >\ . I mOl"r \t.lt Women .tre panirularl •ncour.1g ·J to apply
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5 February 20 1 2.
The Economist J a n ua ry 21st 2012
Executive Focus
21
8ANl rDR INTER
AT I D N A L S E T T U M £ N T S
The lnttr·American Dev lopm nt Bank, th
I rgest nd
leild ng source of fin ncing for regional development for Latin America and the Caribbean, is looking for dedicated, energetic t�nd team·oriented Treasury professionals for two positions In the fundln
Research Analyst
Basel, Swrtzerland Th BIS mv1 es
who will be responsi ble for an aly ztng , pr icing. negotiating. and executmg bond transactions
of Rese.n;h Rese 1ch Support group A ma er'S graduate you ha srrong rack record en stat1Stocal data processing nd programmong (M tl b pre r�) You also have sound knowltdg onterna 100 ban tng f1nancial markets and macroecortoiTIIC data nd
Jo1n us and pu your ex rt1se to wo
lso prepare tables nd graphs.
Clppio
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t.onS IS 17 february 20U
and Accounting. D eve lop and maintain relationships
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To read the complete job description and apply, please visit our carur site
I opportul'll
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Caribb an and advis int rnal and external clil!nts
Is\ add1t1on. you WJII
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nonoal srabd•ty
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ppbed econome ncs Flu ncy
employer
ct d to participate In
to source financing. provid e hedging In Illiquid
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up
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contrtbute to the automat1on o procedures
on Enghsh 1s ess nil
lso provide advanc d tec h mtil l
with banks and counter pa rt i es .
process data for our regular poblo
to financJal stattsucs and
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Including groups In Tr eas ury. Legal, Risk M an agement .
w1ll be to prcrv1de staustKal and ecortomett1c AS!.Istance to our econom1sts Among your du tes. you Wlli colltc1 ;md will
p r ofe ssi ona l s
support to vanous mternai interdisciplinary areas,
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denominated I n various international cu rr l!ncr es.
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Funding Specialist/ Senior Funding Associate
The GAVI Alhance IS a leadong pubtic-pm e pannershop comm•tttd o saving choldren's hves and prottc11ng BANK FOR I
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D E PUTY DIRECTOR, PROGRA M M E FUNDING TEAM The GAV1 Alliance IS
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Economists a n d S e n i o r Economists
rrang new fund1ng windows looking t ways to wpport new vaCCine
of funchng fDf GAV1 from current and new donors You W111 have t� opportunity lo struaure nd
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1nnov111v
donor comm
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Alongsode an advanced degree on busmess admonostratton, f•nance or other relevant f i elds, you should bnng a solod trac
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monstr te an ability to contnbute to bro
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to artiCulate pohcy ssues, trade·offs and pnonttes to prov1d You should meetings
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nd oth r fora Fonally you should be able to oper U! effectively In
a multocultural env.ronm n and have at for mor
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an 10novauve thm er who can r present the Alht�nce on donors'
d
rs of rei ted work expen nee.
ails, please vtslt our webstle www.gavlalliance.org
If y o u w t s h to a p p ly. p l e a s e e m a t l y o u r c ov e r l e t t e r a n d r e s u m e to recrunmg
gav1alliance.org by t h e 3 1 st January 2 0 1 2 mentton1ng the tttle
of the role tn the subrea hne GAVI Is tommlt
d to diversity within
i
from all qu lified Cllndid tes
The
Economist J a n ua ry
21st 2012
woricforu and encourages applkallons
INf
To f•nd out mo<e about thos oppotluMy and to wbm•t yow CV (on Englosh), pte se It www lxs.orgtcao-s
lpph
Oeadlon or
2012
lOll IS
12 February
tose on monetary and maaoeconomoc ISSU�. foNntoal
ts 0< •nanc I stabcloty ou hllve e•c lent communtCatoon skolls and at le st tour ye rs e xpen nc• at a central ban ont rNt>O
ex
h1gh lev I str teglc
'""'" pos�loons r on 8i Sw\tzerlind tx.t tht>r r so opportunlto to wor •n our repro;entatov offoc on Hong Kong SAR and txiCO W offer com Ut• cond•tlons oj 1100111 employmen and the chance to worlc In n tnt erworonment alongSide colleagu� from morf thlln 50 countres The BIS 1s an tqual opportu ·� employff Suppot mg global mo1
ary and 111(1/ICtDl stDb•l•
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23
Mine, all mine
OYU TOLGOI AND U LAAN BAATA R
The country that is likely to grow faster than any other in the next decade, and how it is changing, for better or worse
"
G tattooed man with that worldly air OIN' to OT?'' drawls Andy, a burly
common to those who have done time in the American army. The gate at Incheon airport in South Korea is packed with trav ellers, mainly Mongolian expatriates on their way home, waiting to board a flight to Ulaanbaatar. Andy's is a fair guess as to the destination of one of the few other West ern passengers. "O T"-Oyu Tolgoi, or "Tur quoise Hill"-is in the middle of nowhere, a desolate spot in the Gobi desert, another hour-and-a-half's flight south of Ulaan baatar (inevitably, "uB"). But it is the site of the biggest foreign-investment project in Mongolia, a copper-and-gold mine that is springing up at a remarkable speed and is expected, by 2020, to account for one-third of Mongolia's GDP. For Andy, who normally "does securi ty" in places such as Afghanistan, Nigeria and Somalia, OT is a rest cure. Conditions are comfortable, the locals are a delight, and nobody tries to shoot him. And there are the transits through UB, a veritable Bangkok of the steppes-at least if your comparators are Kabul and Mogadishu. In the OT bus from UB airport into town, Andy is on tenterhooks waiting for the overnight hotel allocation. He is delighted with his billet-one where overnight
guests are readily tolerated. The other news is less cheery: the airport bus will leave at four in the morning. UB is a boom town on the frontier of global mining. Hotels are bursting; the Irish pubs, of which there are several, are heaving with foreign miners, investment bankers and young local women with very long legs and very short skirts. French bistros serve steaks the size of tabloid newspapers. Dozens of cranes punctuate the skyline. The streets, empty 20 years ago, are now clogged. It is hard to believe on the clear sunny mornings the city en j oys much of the year, but UB's air is now as polluted as anywhere-second only to the Iranian city of Ahwaz, according to a re cent study by the World Health Organisa tion. In the winter, when temperatures av erage from -10 to -30 centigrade, and often fall to -40 at night, UB burns a lot of coal. Another sign of a boom is the effort to keep the city functioning through these crippling winters. When a Singaporean firm was building a joint-venture brewery to make Tiger beer, it was so anxious to fin ish in time for the summer-drinking high season that it hired patio heaters the size of j et engines for the construction site. With out such aids, building stops in the Mongo lian winter. It is too cold to pour concrete.
A glitzy mall on the corner of the main Sukhbaatar Square houses the sort of es tablishments you come across in the better class of airport: chic boutiques, pricey res taurants, expensive-watch shops and, of course, an outlet of Louis Vuitton, which sells posh luggage. The shops usually look empty, which is reassuring for those nos talgic for the UB of the recent past-small, drab and poor, and offering its visitors, as one unhappily put it, a choice of "mutton, mutton and mutton", but at least refresh ingly different from other capitals. Central Tower, as it is known, is a new ornament to downtown Ulaanbaatar. It is built next door to the lot where once stood the former headquarters of the former Mongolian People's Revolutionary Party, the MPRP (it has since dropped the "R " word), which for seven decades until 1990 ruled Mongolia as a one-party state and rock-solid Soviet satellite. The building was burned down in rioting in 2008 after a disputed election. The use to which the site has now been put is as good a symbol as any of the new aspirations of Mongolia's ruling class. Dreams under your feet To pay for these dreams, Mongolia is being dug up and sold to China. Already, more than 8o% of its exports are minerals, a pro portion expected to rise in a few years to 95%. Mongolia makes mining geologists salivate over its known riches and unex plored potential-for copper, coal, gold, sil ver, uranium, molyb denum, and on and on. Some 3,000 mining licences have been issued. It is not just that Mongolia is a treasure- ��
24 Briefing
The Economist J a n ua ry 2 1st 2012
B o o mi n g M o n golia
� chest of geological wealth. It is slap-bang next to the world's biggest and fastest growing market for most minerals. Put to gether Mongolian supply and Chinese de mand, and Mongolia will be rich beyond the wildest dreams of a population many of whom, a generation ago, saw them selves as nomadic herders. Withjust under 3m people, Mongolia has a chance of be coming a Qatar or a Brunei: a country that has only a small population but almost all of it, in global terms, loaded. Brian Fisher, an Australian economist who has conduct ed a study of the economic impact of OT, says Mongolia "sounds like Australia in 1930". In the third quarter of 2011 Mongolia's economy grew by 21% compared with the same period in 2010. Even sober econo mists think the country is going to have to get used to this sort of thing. The IMF ex pects growth to average 14% a year be tween 2012 and 2016. In 2013, the year pro duction is due to begin in earnest at OT, it is forecast to reach 22.9%. Others think it will be at least twice that. Indeed, OT is the force driving many of these short-term projections towards the sky. Its construction is a big factor in this year's boom. From 2013 its sales will start adding an average of about five percentage points a year to the national growth rate up to 2020, when its impact on the economy will peak. By November last year over $3 billion had already been spent on OT, a fig ure that will rise to $6 billion by 2013 and $10 billion by 2020. For Mongolia, a $6 bil lion economy, this is enormous. So is the scale of the logistical challenge of building one of the world's biggest cop per mines in the middle of the desert. All supplies have to be brought in by road, from China to the south. Some 18,ooo workers, including about 1o,ooo Mongo lians and 6,ooo Chinese, have to be housed and fed. Water had to be found, and is to be piped from an underground aquifer over sokm (32 miles) away. Electric ity is to be provided first from China, then by a purpose-built power plant. And local people have to be compensated, coaxed and cajoled into believing that the mine is in their interests, not just those of the for eigners who are running it. The project is a j oint venture between the Mongolian government (34%) and Ivanhoe Mines of Canada (66%), which is in turn 49% owned by Rio Tinto, the min ing giant that is managing OT and has put up most of the money. Already the Tur quoise Hill, where the colour of the soil first betrayed the presence of copper to prospectors decades ago, has vanished. A huge pit is opening up for the first phase of the mine. Two shafts have been sunk for the second, underground, phase. On top of one, a tower is soaring. It will be the tallest structure in the Gobi, and perhaps in Mon golia. The workers are housed in long pre-
fabricated buildings or, for the luckier ones, traditional gers, circular felt tents (equipped with untraditional en suite fa cilities, TV and Ethernet cables). All this is justified commercially by the expectation that this mine will produce 450,ooo tonnes of copper a year, making it one of the world's five biggest mines, as well as being a big gold producer. And it will have a life of at least so years. The more they look, the more potential geolo gists find in the area. It will be what Rio calls a "first-quartile" mine in terms of costs-ie, among the cheapest. And its proximity to China means that the cost of transport should not be prohibitive. The price of copper is especially vulnerable to swings in market sentiment. But global supply is constrained, and barring global economic Armageddon, demand is not go ing to collapse. OT, however, matters not just in itself, but as a test of Mongolia's ability to work with foreign investors to pull off such mammoth undertakings. Next in line is Ta van Tolgoi (Five Hills), the world's biggest untapped coal deposit, also in South Gobi province. Notional shares in this project have already been distributed (electroni cally) to every Mongolian born before March 31st 2011. With a general election due in 2012, this adds political urgency to an ambitious scheme to raise billions of dol lars for the mine through an initial public offering of shares in Ulaanbaatar and Lon don. This will double the market capital isation of the sleepy UB stock exchange. Mongolian coal production is expected to increase from about 16m tonnes a year now to 40m by 2020 and 240m by 2040. Again China provides a ready market, but the mining boom has exacerbated Mongo lian fears of a Chinese takeover by com mercial stealth. So feasibility studies are under way on the costly options of build-
Yurts revisited
D
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ing railways to take coal to Russia, and thence out to Korea and Japan via Vladi vostok, or to Dandong on the Chinese North Korea border and thence by sea to South Korea. A touch of Dutch on the steppes Not everyone in Mongolia looks at the growth projections and goes giddy with delight. Many worry about the economic, environmental, social and strategic costs of becoming "Minegolia". Economists fret about a "resource curse", or "Dutch dis ease". If even the Netherlands can be vul nerable to this-whereby wealth floods in as natural resources are exploited, pushes up the exchange rate, inflation, or both, and renders other industries uncompeti tive-how is poor Mongolia to cope? And the Netherlands never had a year like the one Mongolia can expect in 2013, when the economy will grow by a quarter and the current-account balance will lurch from a deficit of 14% of GDP into surplus. Furthermore, Mongolia, a 2o-year-old democracy, is prone to populist policy making. Even as the economy is booming, political parties are tempted to promise handouts. After pledges made at the previ ous election, every Mongolian, rich or poor, gets 21,000 to grogs ($16) on the 15th of every month. The big parties have de clared a no-handout pact ahead of the next election, and the government has set up a "fiscal-stability fund" to smooth the com modity cycle. But the temptation to dip into the till will mount as voting nears. For economists, the resource curse is a risk Mongolia has little option but to take. As Mr Fisher, the Australian economist, puts it, its comparative advantage is in commodities and mining services. There is no point in trying to compete in manufac turing with "the biggest factory on the planet" next door in China. Mongolia is still a desperately poor country. It has just graduated, in develop- ��
The Economist J a n ua ry
Briefing
2 1 st 2 0 1 2
� ment-bank speak, t o "lower-middle-in come" status, with a GDP of around $2,000 per head. The population of UB has expanded by 70% in the past few years, to about 1.2m now. Some poor people still spend the winter nights beneath the streets (open manholes are a pedestrian hazard), huddling near the pipes for warmth. The city is sprawling outward through valleys in all directions along dirt roads lined with clapboard fences, behind which former herders live in gers. One such herder, given the name Igor by Russians he knew in his youth, de scribes a common life path. A few years ago, herding in Central province, he lost many of his sheep to a dzud, one of the per iodic climatic disasters that hit Mongo lia-a summer drought that results in too little pasture and too little hay for the win ter, followed by heavy winter snow and colder-than-usual temperatures. Igor sold the rest of his livestock to pay for his chil dren's schooling, bought a pickup truck and moved to UB, where he makes a living hiring it out. He finds UB going from bad to worse, as more people come to town and scramble to earn money. All there is to look forward to is the summer pilgrimage home, to drink airag (fermented mare's milk) with his friends in a ger. It is not just the weather that drives herders into town. Some are mining refu gees, fleeing environmental devastation. Besides the licence-holders Mongolia has tens of thousands of illegal gold prospec tors, known as "ninja" miners because the green plastic bowls they carry on their backs to sift for specks of the metal make them look like mutant turtles. Their use of mercury and cyanide has poisoned rivers. Mongolia's most flamboyant environ mental campaigner is a former herder called Tsetsegee Munkhbayar. He made his name helping clean up the Onggi river, and then for his extreme forms of protest, in volving shooting at mining equipment or vehicles. In April 2onhe led a group of sup porters into Sukhbaatar Square on horse back to demand talks with the govern ment. Mr Munkhbayar, a grim-faced man looking out of place behind a desk in his UB office in knee-length boots and tradi tional jacket, believes that if Mongolians exploit the mines, "we will never devel op." He suggests an alternative future of herding, dairy-farming and tourism. As he talks he is interrupted by a loud blare of traditional Mongolian music. It is the ring tone on his mobile. And not a drop to drink One UB resident, visiting the OT site as an interpreter for a foreign journalist, cannot stop herself from weeping at what is being done to the area and to her country. For the outsider, the bleak brown desolation of the Gobi is not a landscape that evokes sympathy. And it needs an awful lot of
Gobi to sustain a flock of goats and camels, so, vast though the OT project is, the num ber of herders directly affected is small. But the translator sees ruin: "You can't drink copper; you can't drink gold." In fact, the aquifer tapped for OT is too deep to affect surface water, too saline to pass human-consumption standards and so big it will be no more than one-third de pleted after so years of the project. The big danger environmentalists see from its use is that even a future natural drought may be blamed on OT. It will be hard for the proj ect to deny water to distressed local herders. That might lead to overgrazing. Such a massive undertaking is bound to distort the local economy and disrupt the environment. Compared with the ninjas, the multinationals and the development banks that will help raise the largest-ever proj ect financing for mining can at least claim to be part of the solution. They are conducting impact assessments and bio diversity studies. The project is also pro viding jobs, and creating more employ ment for locals through subcontracts. But it will struggle to be popular. Oyun Sanjasuuren, an independent member of parliament, says mining is bound to be po litical because it is "the main thing in the country". And the face of Mongolian min ing over the past 15 years has been "mostly ugly". Miss Oyun says she entered parlia ment as a centrist, but now finds herself on the right as the main parties have shifted steadily to the left. OT has not been helped by tactless remarks made in the past by Robert Friedland, Ivanhoe's boss, about "the cash machine we intend to build", and how nice it was to have so few people around and "no NGos". The wealth generated by the miners is an obvious target. And the militant Mr Munkhbayar has many fans even among young urban Mongolians who moan that development is arriving too slowly. Like
The way it was
B o o mi n g M o n golia
him, they wish i t could come from some other industry. Every herder, says one envi ronmentalist, hopes that at least one per son in his family will carry on the life. But that may be changing. Twenty years ago it was hard to meet anyone in UB who identi fied with the city. Even if they were born there, they saw "home" as the " aimag" , or province, from which their parents came. Now a new generation of city-dwellers feels less attached to the countryside and to nomadic herding traditions. Their num bers are swollen by young people return ing from an overseas education to chase the new opportunities the mining boom is throwing up. One such, a young man called Dam din, is finding life difficult. After 15 years in Fair fax, Virginia, he has forgotten most of his Mongolian. He left Mongolia with his mother, who was fleeing his alcoholic fa ther. At school in America the other Asian students were scared of him, despite his short stature; Mongolians, he says, have the reputation of being psychos. Now back in UB, living in a ger with his father who spends his time playing games on Face book, his ambition is to open UB's first skateboard shop. When The Economist encountered him, outside a derelict Buddhist temple in a ger district in the middle of the afternoon, and later at the nearby police station, he had just been punched and robbed of his phone by friends of the friend he had lent it to ("It was 4G, man!"). He was drunk, de spite saying he is always teased as a wuss for sticking to beer when real men drink vodka. He was cradling a little street-pup py he had rescued from his muggers, knowing his grandmother would not let him take it home. He presented as forlorn a picture as could be imagined of the pain and dislocation of being caught between two worlds. But he said he had no inten tion of going back to Virginia. •
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27 Also in this section 28 John Lewis capitalism 28 Extradition 29 Schools in Wales 30 Labour's fiscal rethin k 30 Regulating the press 3 1 Exports and the economy 3 1 David Hockney 32 Bagehot: Alex Salmond, Little Englander
For daily a n a lysis and debate on Britai n , visit Economist.comfbritain
Town-centre retaili ng
Nation of shop critics D U NSTA B L E , H AVAN T A N D R E A D I N G
Britons don't want their high streets to decay, but neither do they like to shop in them. Those desires are hard to reconcile
D though a look at its main street sug
UNSTABLE is not a deprived place, al
gests otherwise. Roughly one in four shops in this Bedfordshire town of 35,000 peo ple, north-west of London, lies empty. Some have acquired a decayed look. The shops that seem to be thriving are weight ed towards chain stores and payday loan outfits. It does not help that Dunstable's high street is part of the AS, a dead-straight Roman road filled with cars. But even the town's purpose-built shopping centres, set back from the main road, are partly empty. Many British high streets are sickly, and some are in a critical condition. In Decem ber a report commissioned by the govern ment claimed that one in three of the na tion's high streets is failing. Almost 15,000 shops in town centres closed between 2000 and 2009, with a further 10,000 losses in the past couple of years. There fol lowed a lousy Christmas season for high street fixtures like Argos, a catalogue chain, Mothercare, a baby clothier, and Thorn tons, a chocolate maker. They plan to close up to one third of their shops. Some retailers did not even make it into the new year. Fully 1.83 fell into administra tion in 2011, up from 165 the year before. Lee Manning of Deloitte, a consultant, believes there will be even more casualties in 2012. On]anuary18th Peacocks, a cheap clothing chain that has been around since 1884, fell
into administration, putting at risk almost 1o,ooo jobs. The economic slump is one reason for the closures. Another is the "rates" proper ty taxes that are inflexibly tied to inflation (and due to rise by s.6% in April). But change in shopping habits is the main cause. The steady march of out-of-town developments with plentiful parking and, more recently, of internet shopping means the proportion of retail spending captured by town centres has fallen from 49.4% to 42.5% since 2000. The retailers that did well over Christmas were often the ones with strong e-commerce arms like John Lewis (see box on next page) points out Natalie Berg at Planet Retail, a consultant. Next, a clothes shop, reported a 3.1% increase in group sales between August lst and Christ mas Eve. That was driven by the internet: sales in Next's stores fell by 2.7%. There is just too much capacity in the high street. The British aisles Curiously, though, Britons claim to trea sure their town-centre shops. Saatchi & Saatchi, an ad agency, has met with 1,508 representatives of Generation Y (16- to 29year-olds). It found that most loved to shop; no surprise there. More strikingly, fully 42% said that, if they were to start a small business, it would be on the high street (versus 31% online and 10% in a shop-
ping mall). How to reconcile a love for buzzing town centres with a revealed preference for out-of-town and internet shopping? Mary Portas, the government's shopping tsar, has counselled various reforms. The most radical is the introduction of an "ex ceptional sign-off" by a secretary of state for all new out-of-town developments, which would also be required to have a quota of affordable shops. Essentially, Britons should be prevented from having more of the kind of shops they want. The government will respond in the spring. Suburban supermarkets are certainly strong competition. Sainsbury's, Tesco and Waitrose now allocate more than one third of floor space to things other than food. Sainsbury's is the seventh-largest clothing retailer by volume; Tesco is one of the country's leading opticians. The super markets together sell almost as much mu sic as HMV, the dominant high-street mu sic shop-and more than Apple or Amazon. But Lord Wolfson, chief executive of Next, thinks the idea of restraining out-of town development could harm the retail economy. "Some high streets might not be viable any more," he says. Where out-of town centres are more accessible, it makes sense to put shops there. Another alterna tive, not always welcome, is to bring mall like shopping into town centres. That has happened in Birmingham and in Man chester, where a terrorist bomb in 1996 wiped the slate clean. Reading has a thriv ing high street, partly thanks to the Oracle, a shopping mall with a big car park, a cine ma and a variety of the chain shops and restaurants Britons love. The high street i s not doomed, says Marc Bolland, chief executive of Marks & ��
28 Britain � Spencer, which sells high-end food and un derwear among other things. M&s's town centre shops (22o out of their 360 stores in Britain) have actually performed better than its out-of-town ones of late-thanks to high fuel prices, reckons Mr Bolland. Of critical importance, he says, is the quality of local government. Councils can do a good deal to spiff up town centres. Keeping the streets safe and clean and building
The Economist J a n ua ry 2 1st 2012 more parking capacity can bring the peo ple that shops rely on. Leigh Park, a suburb of Havant in Hampshire, has shown what a difference lower costs can make. Many landlords of shops in this poor area were fed up with paying business rates on empty units, so they dump ed their property at auction. En couraged by council grants, a developer bought the buildings cheaply, redeveloped
John Lewis as a model
The feeling is mutual A cuddly model of capitalism has been oversold
J
OHN LEWIS, an upmarket department store, has a special place in the minds of Britain's consumers. In a speech to City folk on January 16th, Nick Clegg, the Liberal Democrat leader and deputy prime minister, called for "more of a John Lewis economy". Yet he was enthusing not about the chain's pretty teapots and bed linens or even its fair pricing and kindly service, but the company's part nership model. It is owned by its 76,500 workers-or, to be more precise (which Mr Clegg was not), an independent trust holds all the shares and allots staff an annual bonus. John Spedan Lewis (pictured), son of the store's founder, formed the part nership in 1928 partly to head off rising communist sentiment. But despite his belief that the model could replace tradi tional capitalism, few have adopted it. Even Charlie Mayfield, John Lewis's boss, says it is "not the answer to all ills". The idea of a more caring, cuddly capitalism has long appeal. Staff share ownership schemes emerged in America in the 1920s. In 1998 Gordon Brown, then Labour chancellor, preached of stake holding workers in a "new enterprise culture". In Britain, tax-efficient share option plans started in 1980; 12,500 com panies now have one, double the num ber in 2000, reports Her Majesty's Rev enue and Customs. Mr Clegg wants to give staff a broad right to request shares. Giving workers shares in a firm may have commercial benefits. Employee owned companies are more productive and hardier in a recession, according to a 2010 study by Cass Business School. John Lewis, which also owns Waitrose, a posh grocery chain, seems to bear this out. Staff turnover is low; the shop beat many competitors on Christmas sales. Firms with similar structures concur: Arup, an engineering outfit, attributes its business range and "family feel" to being owned by its 1o,ooo employees. All of which seems less likely to make the blood boil than reports of huge exec-
utive pay-offs. But there is little evidence that shared ownership makes capitalism more "responsible", as Mr Clegg hopes. It does not prevent bad decisions: having a quarter of shares in employees' hands did not save Lehman Brothers from bankruptcy. And the benefits for staff are questionable. It is rash to put a worker's livelihood, savings and pension in one basket case; many employees lost every thing when Enron, an energy-trading company, collapsed in 200L Companies that are wholly-owned by their staff may face barriers to growth. Many firms need a flexible capital base to expand-one reason the partnership model in banking declined. Employee mobility promotes innovation. At base, it is unrealistic to expect many bastions of capitalism to turn their shares over to their workforce, reckons Ian Brinkley of the Work Foundation, a think-tank. It is, he says, hard to imagine someone like Sir Fred Goodwin, the acquisitive former Royal Bank of Scotland boss who over saw its demise, "being reined in by some workers' committee."
A gift he couldn't wait to give
the flats above the shops and offered the commercial space for about half of the go ing rate. A handful of small shops have started to trade in these longtime empty units, including an undertaker, a flower shop and a pet shop. They employ one or two people and manage to get by thanks to the reduced rent. The flats above the shops are let out at normal market rates. Centuries ago high streets looked a little like that, with a jumble of workshops, arti sans and merchants living above. The no tion that they should be purely for com merce is fairly recent. Eventually, high streets may revert to a mixture of uses, and survive. But many unsightly years lie ahead. There is only so much that can be done, even with a combination of local government action and business savvy, to coax Britons back to the town centres they have abandoned. •
Extradition
The ties that bind
Britain is growing restive at its limited room for legal manoeuvre
Tand deportation have provoked heavy
WO new court rulings on extradition
breathing in a country where both issues are increasingly neuralgic. OnJanuary 13th a Westminster district judge said Britain would have to hand over Richard O'Dwyer, a university student who ran a website with links to sites offering free film and TV downloads, to America to face charges of breaching copyright. Though it is not clear that his behaviour constitutes an offence in Britain, the judge ruled that on balance he thought it would. If found guilty, Mr O'Dwyer could face up to ten years in an American prison. Yet Britain's government cannot hand over someone it would dearly love to get rid of: a radical Islamist cleric known as Abu Qatada, once alleged to be Osama bin Laden's right-hand man in Europe. On Jan uary 17th the European Court of Human Rights told Britain it could not deport Mr Qatada to his native Jordan, where he has been convicted in absentia of terrorism. Britain has been locking him up or dogging his footsteps for over a decade. It hoped to deport him after negotiating a no-torture agreement with the biggest wigs in Am man. Not good enough, the court held: in formation obtained by torturing others might still be used in his retrial. Neither decision is the last word. Mr O'Dwyer will almost certainly appeal, and Britain may too. But the judgments have exacerbated unhappiness at what some see as Britain's loss of legal sovereignty. ��
The Economist J a n ua ry
Britain 29
2 1 st 2 0 1 2
Schools in Wales
Down in the valleys P O RT TA L B O T A N D T R E O R C H Y
Slipping standards threaten the Welsh university-going tradition
G coalminer from a grimy town in the
WYN THOMAS, the 12th child of a
Sticking around �
Take extradition first. Few would disagree that an effective system of extradi tion is vital to prevent crooks from evading justice by staying in safe havens. But Brit ain's bilateral treaty with America has been controversial from the start. Drafted in the aftermath of the 2001 terrorist at tacks, it lowered the standard of evidence that America has to present when it asks Britain to ship someone over, with only limited grounds for refusal. (Also due for extradition, among others, is Gary McKin non, who has Asperger's syndrome and al legedly hacked into America's defence es tablishment while searching for UFOS.) And, contrary to expectations, it is snaring more businessmen than terrorists. Most of them are sent westwards. An officially commissioned review found nothing much wrong with the treaty when it reported on September 30th, though it was critical of the far more numerous Europ ean Arrest Warrants which allow EU countries to extract their nationals from other member states for the slimmest of reasons. But a cross-party group of politicians wants policy tight ened up across the board, with higher evi dentiary standards for extradition and clearer criteria to determine where cross border offences are tried. They hope the government will announce new legisla tion in the Queen's Speech in March. As for Mr Qatada, the Strasbourg deci sion is important for two reasons. It is like ly to cheese off a big swathe of the British public, already cross at being told they must let prisoners vote. More importantly, it has extended the fight against torture by using the right to a fair trial protected in Ar ticle Six of the human-rights convention to exclude-for the first time-pro ceedings where testimony is derived from torturing witnesses. The arguments rumble on. •
Rhondda valley, won a place at Oxford University in 1931. He later described in an autobiographical novel how his father "was congratulated on having given a new sheen to the poverty belt". In the poorest pockets of Wales, a university education offered an alternative to working down the mines. Aspirations remained surpris ingly high even as the welfare state grew and the pits closed. Now lacklustre exam results threaten that tradition. As soon as it got devolved government in 1999, Wales set out on a distinctive path of school reform-or lack thereof. League tables of exam results were abolished in 2001. Wales's strong trade unions opposed the creation of any "academy" schools, which are independent of many state re strictions and are widespread in England. Parental choice has been limited to de ciding whether to send a child to a school in which lessons are conducted in English or in Welsh. England's classroom revolu tion, which aims to offer parents the same choice and quality in state schools as exists in the private sector, has had no impact in Wales, not least because the country has few good private schools to emulate. While England has engaged in customer oriented reforms, Wales has indulged in what David Reynolds, an educationalist at the University of Southampton, describes as "producerism's last hurrah". Standards have slipped. Over the past decade Wales has failed to match the im proved exam results in other parts of Brit ain:just 66.5% of GCSE entries got a decent grade in 2011, compared with 69.8% in Eng land. Wales has also lagged England, Scot land and Northern Ireland in tests of how well 15-year-olds can apply their knowl edge devised by the OECD, a think-tank. Its students appear to be going backwards: they gained lower results in the o ECD tests in 2009 than they did in 2006. Although the number of school-leavers has climbed modestly in recent years, the number go ing to university has fallen. In an attempt to reverse this trend, Leighton Andrews, the Welsh education minister, has settled upon a new form of accountability, published last month. This groups secondary schools in Wales into one of five bands, according to the exam re sults achieved by their pupils, their atten dance and how well the school serves chil dren from poor families. That has helped
sort the wheat from the chaff: on January nth BBC Wales produced the first league ta ble for a decade using the banding data. Mr Andrews wants to extend the exercise to primary schools in the coming months. Yet holding schools publicly account able for the achievements of their pupils may not be sufficient to raise standards in Wales in the same way it has in England, says Mr Reynolds. In rural parts of the country, exercising choice is impractical for parents; even in urban areas, sending chil dren to the local school is a deeply in grained tradition. Instead he points to the improvements made by schools that are using data to sharpen teaching. Sandfields Comprehensive School, for example, lies in the middle of a housing es tate close to a steel works and the site of a former petrochemical plant on the edge of Port Talbot. Its pupils are mostly poor, yet the proportion who pass their school-leav ing exams has risen steadily over the past few years. Mike Gibbon, head of the school, attributes its success to a pro gramme overseen by Sam Stringfield of the University of Louisville in Kentucky, in which pupils are tested regularly. The re sults are used to identify gaps in their knowledge that are promptly plugged. This is good, but hardly sufficient, pro gress. As Wales comes around to the disci pline of accountability and transparency that has been commonplace in England for the past decade, English schools are head ing in a radical new direction, towards fi nancial independence and parental over sight. Whether this will greatly improve standards is an open question. What is cer tain is that, if it does, Wales will still lag. •
Taffs not toffs
30
Britain Labour's fiscal rethink
Plan B
The Economist J a n ua ry 2 1st 2012 The Leveson i nquiry
The Street of Shame responds Britain's newspaper editors battle over how to regulate the press
Ed Miliband has changed his policy on the deficit-a little bit
E speeches and announcements since be
D MILIBAND has made a great many
coming Labour Party leader in 2010. It might be that none of them won him as many swing votes as the onslaught he en dured at the hands of irate trade unions on January 17th. Mr Miliband offended the likes of Len McCluskey and Mark Ser wotka, who run the Unite and Public and Commercial Services unions respectively, by softening his opposition to the govern ment's austerity programme. First Mr Miliband gave a speech on Jan uary 1oth which acknowledged that the next Labour government would not be as free-spending as the last. Four days later his shadow chancellor, Ed Balls, went fur ther by suggesting that he would not re verse the coalition's cuts. Shadow cabinet members-including Jim Murphy, the de fence spokesman, and Stephen Twigg, who carries the education p ortfolio-have also pointed to specific government cuts that they support. For a politician striving to slip off the tag of "Red Ed", the ire of left-wing and often militant union bosses is welcome (Dave Prentis of Unison, another large union, weighed in on January 18th). Opposition politicians sometimes offend their own supporters to show their commitment to the centre ground. Mr Miliband boasts of his courage in condemning the phone hacking perpetrated by the now-defunct News of the World but his willingness to pick a fight with the unions-which helped to make him Labour leader and still fi nance the party-is much braver. Some un ion figures talk of cutting donations in re-
0 VER the past three months Lord
Justice Leveson, an appeal court judge, has presided over a mighty airing of Fleet Street's dirty laundry. His inquiry, set up following revelations of phone hacking at Rupert Murdoch's News of the World newspaper, has heard of misery inflicted by intrusive and immoral re porters. Lord Justice Leveson will almost certainly call for the press to be reined in. The stakes are high for the newspaper editors who testified this week. Yet they hardly presented a united front. Three lines of argument emerged. The first is represented by regulatory refuse niks who resist more constraints on the press. Leading that camp (which includes Richard Desmond, the idiosyncratic owner of the Express newspapers) is Ian Hislop, editor of the satirical magazine Private Eye. That magazine routinely publishes stories which embarrass the mighty, including proprietors. "If the state regulates the press, then the press no longer regulates the state", the aphoristi cally-inclined Mr Hislop asserted. Exist ing laws against harassment and illegal accessing of data should simply be more firmly applied, he added. The Daily Mail and Mail on Sunday took a second position, conceding that some form of tighter regulation is neces sary but trying to keep politicians at arm's length. Mr Murdoch's News Inter national shares this instinct. From that
taliation, but they have as much to lose from this as Labour. Their political influ ence depends on their financial support. Labour figures hope that their belated nudge towards fiscal conservatism will im prove the party's poll rating on economic competence. The government has led on this vital score despite a sluggish economy, rising unemployment and a deficit-reduc tion plan that is behind schedule. Voters, confronted by sovereign debt crises in Eu rope, grudgingly support the fiscal squeeze applied by George Osborne, the chancel lor of the exchequer. But a nudge is all it is so far. Labour lead ers have not abandoned their view that Mr Osborne's cuts are proceeding too quickly. Neither have they conceded that the previ ous Labour government erred in running a fiscal deficit even before the financial crash occurred. They are certainly not commit ting to match the spending cuts that Mr Os borne is planning beyond the next elec tion, which is scheduled for 2015. Labour's new line has been interpreted as an igno-
stable, James Harding, editor of the Times, supported a more independent and "muscular" Press Complaints Com mission, the now-discredited self-regu latory body. In a leader, he resisted a law setting out how regulation should work, because journalists should "question politicians, not answer to them". It may not work out that way. Jeremy Hunt, the culture secretary, has hinted regulation may need to be put on a sta tutory footing to ensure that financial penalties imposed for bad behaviour are enforced. That has emboldened a third group of mainly left-leaning editors, who believe media custodians need a legal stick as well as a regulatory carrot. Alan Rusbridger, editor of the Guardian, which broke the hacking story, says Britain's titles are "under-regulated". This panoply of views means any solution Lord Justice Leveson proposes will displease some noisy interests. And further arguments are to come. The in quiry will shortly pro be relations be tween the police and the press, including payments to officers for information. Although many civil cases against News International have been settled out of court, there could still be legal proceed ings ahead. Cosy relationships between politicians and newspaper executives will be laid bare. When it comes to the big story the public was never meant to read, there is no end to the scoops.
minious climb-down by Mr Balls, who has vociferously made the Keynesian case against austerity, but he has actually con ceded little in substance. Indeed, Labour's fiscal hawks worry that they are now stuck with the worst of all policies: one which prevents the party from full-throatedly deploring the govern ment's cuts, without actually persuading voters that Labour has embraced parsimo ny. Others fear that the new policy is too complicated for the public to grasp. There is a graver worry for Mr Mili band. Economic credibility might only be Labour's second biggest challenge. More fundamental, perhaps, is Mr Miliband himself, who is yet to impress voters as a leader. In a YouGov poll published on Jan uary 15th, 70% of respondents said he "does not look or sound like a possible prime minister". Only 47% thought that he had the wrong policies. Labour have taken a small step towards a more credible fiscal message. The party is reluctant to address the question of its messenger. •
The Economist J a n ua ry
Exports and the economy
Made in Britain
Exports are growing, but too slowly to rescue the economy
J
Britain
2 1 st 2 0 1 2
UST over a mile from Liverpool]ohn Len non Airport, named for one of Britain's most successful exports, sits the Hale wood operations of Jaguar Land Rover. Its foreign sales would make a Beatle envious. Over the December holidays the Tata owned car factory ran extra shifts to keep up with demand. An expansion to the fa cility, which could create 1,500 jobs, is re portedly under consideration. JLR is al ready building a new engine plant in Wolverhampton. Other car firms are en joying similar success. In 2010 Nissan in vested over £400m in its state-of-the-art Sunderland factory, which produces for ex port to more than 90 countries. As Britain's economy stumbles toward a likely recession, hopes are pinned on ex ports, particularly to faster-growing parts of the world. George Osborne, the chancel lor, flew to China this week and marvelled at that country's hunger for goods and ser vices. Since 2007 the pound has dropped nearly a quarter on a trade-weighted basis. A devaluation in the early 1990s helped Britain export its way out of recession. Can it repeat the trick now? There are some encouraging signs. Brit ain's trade deficit shrank from 4% of G D P in 2007 to around 1% of GDP by early 2011. But the economy might have been expected to do better after such a big depreciation. The obstacles have been many. Falling global demand blunted the impact of a cheap pound in 2008 and 2009. Once global trade recovered, so did Britain's appetite for imports-despite a rise in relative im port prices of roughly 20% since 2007. A de cade of strong sterling has chipped away at the capacity of manufacturing industry and factories cannot be rebuilt quickly. The financial-services industry, which ac counted for a third of British exports in 2008, has been slow to recover. A deeper concern is that Britain has be come too dependent on moribund rich world markets. The share of exports going to Europe has fallen in the past decade, but the continent still accounts for half of Brit ish exports (see chart). That market is shrinking; the Economist Intelligence Unit, our sister company, forecasts that the euro zone economy will contract by1.2% in 2012. One Conservative MP, Douglas Carswell, has complained that it is like being "shack led to a corpse". America absorbs more British exports than any other single coun try and its economy still looks relatively ro bust. British exports to that country fell 4%
in the year to September, but showed signs of recovery, along with America's econ omy, in October and November. The emerging economies of Asia and Latin America seem a better long-term bet than Britain's established markets. But the combined share of British exports going to the three emerging-market giants-China, India and Brazil-is less than s%. Britain can boast neither the large natural-resource en dowments nor the focus on production of capital goods, like machine tools, that ap peal to rapidly industrialising economies. And firms have been lamentably slow to build trade links with these fast-growing economies. That may be a legacy of Brit ain's past imbalances: when the domestic economy was strong, there was little incen tive for its firms to go to the trouble of find ing customers in unfamiliar markets. The recent success of Britain's car in dustry suggests all is not lost. Domestic car sales fell by 4.2% in the year to November, but exports to China rose 23%, and sales to India were up by 67%. Foreign carmakers who built export-oriented operations in Britain in previous decades have taken ad vantage of the fall in sterling to expand
I
Ti me to B RIC it? British exports, 2010, % Annual GDP growth 2011-16, forecast, %
United States 16.5
Middle East & north Africa 5.0
3.3
- Rest of world 20.0
Sources: ONS; Economist lntelligence Unit
market share, particularly in emerging markets. Luxury outfits like JLR, Rolls Royce and Bentley hawk Britishness to the new rich. The car industry may, then, offer a blueprint for a rebalancing with "exports at its heart", in David Cameron's phrase. For that to occur, however, producers in other industries long battered by dear ster ling must find a way to learn from and du plicate the success now on display in Liver pool. Let it be. •
David Hockney
The beauty of the boring Love and technology transform an unremarkable bit of Yorkshire
AMERICA'S soul resides in its wilder .1"\.. ness, France's in its towns and Eng land's in its countryside. The burst of hawthorn in a hedgerow or frost on a ploughed field have inspired many of its best painters and poets. The latest to follow in the tradition of Constable, Gainsborough and Wordsworth is David Hackney, who, with the opening of his latest exhibition at the Royal Academy this week (and the death of Lucian Freud last year) has no rivals for the title of Britain's greatest living artist. At 24, Mr Hackney left "boring, sti fling" England for California, seeking more light, shadow and sexiness than
were available in 1960s Bradford. Age has brought him home, and opened his eyes to the beauty of the place. East Yorkshire, where he lives and paints, is flat and dull, its colours muted. Yet he sees, and cap tures, brilliance in this unremarkable landscape. The pictures are enhanced by his enthusiasm for technology. Some of the most successful were drawn on an iPad: even the printouts are luminous. The volume of work is as remarkable as its intensity: wall after wall is covered with paintings of the same bit of ground, in different seasons and different lights. The passion for a beloved landscape is as touching as the beauty of the work.
31
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Britain
Bagehot
The Economist J a n ua ry 2 1st 2012
I
Alex Salmond, Little Englander
In his determination to dismember Britain, Scotland's leader has some surprising allies
ALEX SALMOND, leader of Scotland's pro-independence party 1"'\. and first minister of the Scottish government, has a revela tion to share. Over the years, he confides, there has been a ten dency among some people in Scotland to blame things that go wrong on the English. He adopts a sorrowful air, as if pondering for the very first time-man's capacity for grievance. Happily, Mr Salmond has a plan. He intends to hold a referen dum on Scottish independence in the autumn of 2014. Grant his homeland its independence from the United Kingdom, he says, and the honest folk of Scotland will be friends with the "plain people of England". Flanked by a pair of large Scottish Saltire flags, he quotes the homespun wisdom of a childhood family friend, predicting that, after independence, England will lose a "surly lodger" and gain a "good neighbour". Mr Salmond calls himself the most Anglophile figure in Scot tish politics. He has "great faith" that the English people can craft a modern new identity without the "appendage" of Britain. In a public lecture in London on January 24th, he plans to argue that the example of an independent Scotland will "reinvigorate" Eng land, and old English traditions of radicalism. Alas, there are a couple of reasons sharply to distrust Mr Salm ond's vision of the Scots and English shaking hands over the corpse of Great Britain. One involves breathtaking political hy pocrisy. A more serious problem centres on Mr Salmond's oddly old-fashioned understanding of identity in modern England. Start with hypocrisy. For Mr Salmond to act dismayed by anti English grumbling requires a degree of political chutzpah border ing on performance art. He is the man who once accused Marga ret Thatcher of imposing a "government of occupation" on Scots, and referred to the British government's taxation of oil revenues from Scottish waters as probably "the greatest act of internation al larceny since the Spanish stole the Inca gold". As first minister, he has shown a genius for stoking cross-bor der resentments. There was indignation in England this month when he declared that-after Scottish independence-the British government should be liable for the bailed-out Royal Bank of Scotland and its vast debts (London officials failed to regulate the banks, sniffed the first minister). North of the border, Mr Salmond is portraying a legal wrangle with the British government over
how to hold his referendum as a conspiracy by "Westminster pol iticians" to keep Scotland's mineral resources. Defences can be mounted for Mr Salmond. He is an elected politician, opportunism is what politicians do. Mr Salmond is no bigot. He says, with feeling, that modern Scottish identity is open to all: Pakistani Scots are as Scottish as any other. Where Mr Salmond needs challenging, urgently, is over his vi sion for Britain. There he is out of date, and capable of wreaking real harm. Since his days as a gadfly member of the House of Commons in the 1980s, Mr Salmond has portrayed the British state as a relic, calling it "fundamentally unattractive" and sunk in xenophobic decline. As late as 1999, according to his biographer David Torrance, Mr Salmond told the BBC that Britishness had been claimed as an identity by thugs and racists, while English ness was an "aristocratic, almost medieval concept". Follow that line, and independence sounds like a progressive act to promote friendship between the yeomen of England and the brave hearts of Scotland, liberating two ancient cultures from the moth-eaten baggage of imperialist, embittered Britishness. But Britishness has evolved. Two decades ago, it was a com placent default identity, with many English using Britain when they meant England. Now, it is becoming a consciously-chosen layer of identity, especially among immigrants, from British Mus lims to black Britons and beyond. Englishness is the subject of a tussle. To some, it carries nastily tribal, exclusive overtones. Racists want to appropriate the Eng lish flag of St George, as they appropriated the Union flag for a time, decades ago. Their adversaries, like the left-wing singer Bil ly Bragg, are as enthusiastic as Mr Salmond about England's rad ical tradition. In between those two poles, there is evidence sug gesting a link between the rise of Englishness and feelings of being ill-served by the status quo. YouGov, a pollster, recently compared voters who called themselves English with those who identified as British. Those feeling "English" were more likely to want to leave the European Union, by a margin of 58% to 37%. New research by IPPR, a think-tank, shows Englishness rising in popularity, alongside a growing sense that the English are not fairly represented in the British Parliament. Not only British, but also
Painfully for Mr Salmond, who professes to love the EU and loathe the Tory party, his strongest sympathisers in the House of Commons are English Conservative MPS on the Eurosceptic right. Many are tempted to wave goodbye to a Scotland they see as a "subsidised People's Republic", says a Conservative MP from the 2010 intake. The move would have the happy side-effect of depriving Labour of scores of seats. The traditional Tory attach ment to the union no longer stirs the grassroots, says the MP, who during his hunt for a seat earned his loudest cheer by asking why the English could not declare independence from Scotland. Mr Salmond rejects such talk. Tory right-wingers do not mean what they say, he snaps: "They want to hold Scotland fast." The SNP leader has a right to argue for Scottish independence. But to make that case, he is seeking to make the English into for eigners, and deny millions of hyphenated Britons, from Anglo Scots to black British, the country in which they feel at home, Brit ain. That is not a progressive act, nor a modern one. Warm words about friendship between neighbours cannot excuse it. • Economist.comfblogsfbagehot
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35 Also in this section 36 The wrecking of a cruise ship 36 Russian protests 37 French politics 37 Riots in Romania 38 Justice in Turkey 38 Justice in Spain
40
Charlemagne: Germany stands alone
For daily analysis and debate on Europe, visit Economist.comfeurope
Italy's prime minister
A good professor in Rome
RO M E
Mario Monti has restored Italy's good name in Europe. Now he wants help
B January 30th, Italy's new prime minis
EFORE the European Union summit on
ter, Mario Monti, will have visited the Ger man chancellor, Angela Merkel, the French president, Nicolas Sarkozy, and the British prime minister, David Cameron, whom he saw on January 18th. Herman Van Rom puy, president of the European Council, has been to see him in Rome. And the French, German and Italian leaders plan a pre-meeting just before the summit. It is a far cry from most of the second half of last year, when Europe's leaders did as much as they could to avoid being caught in a photograph with Mr Monti's scandal-tainted predecessor, Silvio Berlus coni. Italy, it seems fair to say, is back at the top table. And that could have far-reaching effects on the euro crisis. For, as he is mak ing increasingly plain, Mr Monti's ideas on how to resolve it are significantly at odds with those of the Germans who have until now been doing most of the ordering-and choosing pretty thin gruel. "Adherence to fiscal discipline is a nec essary condition for growth," he told an audience at the London Stock Exchange on January 18th. "It is not however a sufficient condition." His message to Mrs Merkel and Mr Sarkozy is that the EU must move from reliance only on austerity towards some growth-stimulating measures. This was a view repeated by Standard & Poor's, the rating agency that downgraded nine euro-
zone countries, including Italy, on January 13th. Unlike his colleague from France, also downgraded, and the European Commis sion, Mr Monti did not criticise s&P: in deed, he shared much of its analysis. Mr Monti, who served as the EU's com missioner for the single market and then competition between 1995 and 2004, is a rare creature: an Italian economic liberal. He is not a proponent of harrying Berlin to reflate to boost domestic consumption. But he would like to see the Germans do more to liberalise their own services, to bolster the EU's single market (indeed, he wrote a report for the commission in May 2010 ad vocating further liberalisation). In London this week Mr Monti pledged to back a British effort to complete the sin gle market, and thus to improve competi tiveness throughout the EU. Although he believes it is unrealistic to expect Mr Cam eron to go back on his refusal in December to sign up to the proposed fiscal compact between EU members, he is keen to in volve the British as much as possible. Speaking before his visit to London, in his office in Palazzo Chigi in Rome, Mr Monti says: "The more the UK feels dis tanced from European construction, the less others are able to benefit from the full influence of the many good things that the UK can help us all to achieve, and therefore there are many areas where I think it would be beneficial to have the UK fully at
the table." Mr Monti acknowledges in his charac teristically unhurried, measured way that "it is rather unusual for Italy to be at the forefront of pro-market initiatives." But he plans to practise at home what he has been preaching abroad. "I am convinced that it is also in Italy's national interest," he says. On January 19th his cabinet was due to ap prove an extensive package of measures designed to free up markets and increase competition in a country where cosy car tels have long been the norm. His govern ment of technocrats, which took office in November 2011, is also trying to force la bour-market reform on the trade unions and fiscal compliance on Italy's legendari ly tax-shy self-employed. This amounts to a hugely ambitious programme. Resistance to change in Italy can be for midable, and violent. Both the advisers most closely associated with labour-mar ket reforms in the past 13 years have been shot dead. Since Mr Monti's government stepped up a drive for increased tax com pliance, there have been repeated attacks on branches of the tax-collection agency, some involving rudimentary bombs. Taxi drivers, who expect to lose from the gov ernment's liberalisation, caused mayhem in Rome this week, blocking traffic and det onating home-made parcel bombs. But the prime minister argues that he has at least two advantages: his experience in Brussels grappling with multinationals and national governments, and the fact that his government is not beholden to any one political faction or interest group. Al though unelected, and responsible for an emergency budget in December that in flicted considerable pain on Italians, Mr Monti's administration remains surpris ingly popular. The prime minister believes that "there was in Italy a hidden demand ��
The Economist J a n ua ry 2 1st 2012
36 Europe
� for a boring government which would try to tell the truth in non-political jargon." Some would add that he has also bene fited from the sheer terror spread among Italians over the way that the euro-zone crisis suddenly engulfed their country last year. Benchmark sovereign-bond yields that have repeatedly bobbed around 7%, and a spread between Italian and German debt that has frequently topped 500 basis points, help to explain why they have been so ready to entrust their fate to a govern ment of perceived experts. So far. But there is a danger, the prime minister fears, of the "spread effect" turning against his government. Many Italians had hoped that ditching Mr Berlusconi would save them from the wrath of the markets and see bond yields coming down. As Mr Monti noted when speaking on January 18th to the London School of Economics (LSE) they did, gratifyingly, fall at first. But yields then climbed back up towards the sort of levels they had reached under Mr Berlusconi. Sure enough, some Italians have reacted to this by asking if a change of government was really necessary. "Austerity is not enough, even for bud getary discipline, if economic activity does not pick up a decent rate of growth," Mr Monti warns. "A lowering in interest rates does not depend only on Italy's efforts but
also, and essentially, on Europe's ability to confront the crisis in a more decisive way." At the LSE, he even donned a university cap, with the quip that he hoped it could represent a cap on interest rates. He is studiously vague on how such a cap might be imposed, not least because he and his fellow leaders have agreed not to issue appeals to the independent Euro pean Central Bank. And, though he has also said he favours the idea of Eurobonds, he appears to think they are unlikely to come in time to help with the current crisis. But he has left fellow euro-zone leaders in no doubt that, unless some action is taken soon to reward Italians for their efforts by bringing down interest rates, his govern ment might be replaced by something a lot less palatable to them. When Mr Monti referred earlier this month to the threat of growing Euroscepti cism in Italy, it was widely seen as an allu sion to the populist Northern League, Mr Berlusconi's junior coalition partner dur ing his time in office. But he says the danger is much broader than that. "What I see now, week after week, in parliament is a widening of the spread of this atti tude ...The degree of impatience-cum-hos tility to the EU, to the ECB and to Germany is mounting." It is a warning that his fellow leaders should take to heart. •
The wreck of the Costa Concordia AT LEAST 11 people died and 26 are still missing after an Italian-operated cruise ship struck a rock on January 13th off the island of Giglio. Coming on the day that Standard & Poor's downgraded Italy's debt by two notches, the wreck of the 114,500-tonne Costa Concordia was seen by many Italians as an uncomfortable metaphor for their country's financial plight. Worse was to come. Costa Cruises, a subsidiary of the American-based Carnival group, said the captain, Francesco Schettino, had gone off-course without permission ( apparently as a gesture to a retired skipper from Giglio) . And evidence accumulated that he had refused to accept the gravity of the accident, delayed the ship's evacuation and abandoned his post before everyone was off. In a Lea ked recording from the investigation, he protests feebly as a Local coast guard commander orders him (in vain ) to return. Mr Schettino was put under house arrest, accused of manslaughter.
Russian protests
Putin's people M O SCOW
The Kremlin is unlikely to offer the protesters many concessions
R thrived in a crisis; he enjoyed sponta USSIA'S first president, Boris Yeltsin,
neity. By contrast, Vladimir Putin does not like uncertainty and prefers a plan-like the one he hatched four years ago when he appointed Dmitry Medvedev to keep the presidential seat warm until he was able to return to the Kremlin in March 2012. So when protests erupted after rigged parliamentary elections in December, Mr Putin suspected a subversive plan and blamed America. The idea that protests were a natural response to blatant electoral fraud does not fit the Kremlin's view of a world based on interests, not values. Mr Putin's article in the pro-Kremlin Izvestia newspaper on january 16th confirms this. Its title, "Russia is collecting itself", is a quotation from a dispatch in 1856 from Alexander Gorchakov, the then foreign minister, to Russian embassies in Europe after the Crimean war. "Russia is re proached for isolating itself. .. They say Russia is angry. Russia is not angry. It is col lecting itself," the foreign minister wrote. The Crimean war led to big domestic re forms, including the abolition of serfdom. Mr Putin's manifesto offers no such radical plans, but calls rather for consolidation in the face of turbulence. It portrays the protests as a jostling for political power. "At every opportunity 're bels' turn into 'self-satisfied masters' who oppose any changes and jealously guard their status and privileges." He goes on to say that "today, there is a lot of talk about different ways of renewing the political process. But what is up for discussion? How to arrange state power? How to pass it on to 'better people'? And after that, what? What concerns me is that there is no dis cussion about what should be done be yond the election." Mr Putin promises to create 25m new jobs for the middle class. Yet the well heeled Muscovites who plan to come out on the streets again on February 4th say their main concern is the dishonest elec tion and the Kremlin's disrespect for them. Mr Putin promises to "sweep away all that stands in the way of our national develop ment." But, as the protesters' slogans of "Russia without Putin" suggest, his system is seen as part of the problem. The protesters say they are driven not by political interests or parties but by civil and human values and, above all, dignity. Telling them to get over the rigged elections and promising future jobs, as Mr Putin ��
The Economist J a n ua ry �
Europe 37
2 1 st 2 0 1 2
does, is only likely to strengthen their re solve. Although the Kremlin has let them protest, it has reserved the right to ignore their demands. An attempt by Alexei Ku drin, a former finance minister who sym pathises with the protesters, to set up a dia logue with the Kremlin has got nowhere. Mr Putin has given some ground, includ ing over the idea of restoring the election of governors. But a new bill is full of safe guards that would still let the Kremlin filter candidates and sack them. The protesters are also wary of opposi tion leaders out for their own political gain. As several Russian journalists have noted, some of the more creative ideas are being born outside politics altogether. One is the launch of the "league of voters"-a civil association led by popular bloggers, writers and journalists that would moni tor the fairness of the process rather than support any political party. The protests will not discourage Mr Pu tin or stop him going back to the Kremlin. But, by the same measure, his return may not stop Russia's middle class from collect ing itself. • French politics
Down a notch PARIS
A French downgrade also downgrades Nicolas Sarkozy's re-election chances
ARCANA such as credit ratings are not J-\. the usual butt of cartoonists and chat show hosts. But thanks to President Nicol as Sarkozy, France's AAA rating became a national symbol last year. Every voter knew it was bad news when Standard & Poor's (s&P ), a ratings agency, downgraded France from AAA to AA+ on January 13th. s&P blamed the euro-zone crisis and France's high debt. It also stripped Austria of its AAA rating and downgraded seven other countries. But Germany kept its top rating, despite being on credit watch. Had Germany also been downgraded, Mr Sar kozy's failings might have come under less intensive scrutiny. It was Mr Sarkozy himself who report edly said last year that, if France lost its AAA, "I am dead". Fran<;:ois Baroin, finance minister, added that France could preserve its social model only if it kept the top rat ing. A poll this week for Europe 1, a radio station, found 68% of the French cared about the rating and thought its loss would have grave consequences. The main worry is that France's cost of borrowing will rise though so far rates have been steady. Fran<;:ois Hollande, the Socialist presi dential candidate, tried to capitalise on the news. His poll lead over Mr Sarkozy has
narrowed: 28% of voters now plan to vote for him in the first round, against 26% for Mr Sarkozy, though he still has a clear lead for the second, decisive round, says one re cent poll. "It is not France which has been downgraded, but a government and a president," Mr Hollande declared. Two other presidential candidates, the National Front's Marine Le Pen and the centrist Fran <;:ois Bayrou, also hope to benefit from vot ers' disillusion after the downgrade. Who is to blame? Socialists point out that, since Mr Sarkozy became president in 2007, France's budget deficit has shot up from 2.7% of GDP to 7.1% in 2010 (and then 5.7% last year). The government says this mostly reflects the crisis of 2008-09. An analysis by the independent Cour des Comptes found that 40% of the deficit in 2010 was due to the crisis and to stimulus measures announced by Mr Sarkozy to combat its effects; a tenth stemmed from the tax cuts Mr Sarkozy made at the start of his term; and the rest was inherited from previous governments. The Socialists re tort that the right should still take responsi bility since it has had the Elysee since 1995. Mr Sarkozy hopes the impact of the downgrade will fade over the three months before the first round of the elec tion. Yet even some supporters are asking why he elevated the AAA rating's impor tance, knowing that there was a big risk of losing it. America lost its AAA rating last year amid public (and market) indiffer ence. Mr Sarkozy took the risk, advisers say, because it was the only way to get the French to accept his budget cuts last year. Yet the downgrade also puts pressure on Mr Hollande. lt is bad for Mr Sarkozy in the short term, says Alain Mine, an econo mist who is close to the president, "but in the medium term it puts severe spending constraints on all candidates, and it will be harder for the Socialists than for Mr Sar kozy to give up spending plans." Mr Hol lande insists on his pledges to create 6o,ooo new teaching jobs and reverse the raising of the retirement age from 6o to 62. But the crisis is forcing the left to curb its ambitions, says Thomas Chalumeau from
I
A certain idea of France Budget deficit and government debt* estimate , % of G D P
201
Deficit
6
I AA+ I
4
Debt 120 100 80 60 40 20
0
France Nether-
0
Italy Austria Germany lands Sources: OECD; Standard & Poor's *Maastricht criteria
Terra Nova, a leftish think-tank in Paris. The hardest part of s&P's move is that France has parted company from Ger many (see Charlemagne). s&P cited la bour-market rigidities as more justifica tion. Mr Sarkozy plans big labour-market reforms later this month, "a French version of Schroder's Agenda 2010", says an advis er, referring to reforms by the Germans in 2003. One possibility is using money from higher vAT to lower employers' social charges. But the election is closing in. • Riots in Romania
Anger management B U C H A R EST
The government struggles to contain a growing protest movement
R combustible follc
OMANIANS are not often thought of as That may change after the country was overrun by street protests that show no sign of letting up. Bu charest, the capital, saw its worst violence for 20 years, as protesters burnt tyres and scuffled with riot police. Dozens were hurt and the city centre was damaged. The riots were started by a public spat between Raed Arafat, a popular health care official, and Traian Basescu, Roma nia's president, over a plan to privatise a medical-emergency system set up by Mr Arafat. The Palestinian-born doctor quit after Mr Basescu had called a television talk show to denounce his "leftist views". The pro-Arafat demonstrations began on January 13th and reached their violent peak two days later, thanks partly to foot ball hooligans, well used to fighting with the police. On January 16th the police made over 100 arrests. That largely stopped the violence but did not quell the anger. As the protests spread, the govern ment said it would rethink its health plans. On January 17th it gave Mr Arafat his job back, pledging that he would be part of the team working to revise the proposals. "Not even the president is perfect," said Emil Boc, the prime minister, blaming the crisis on "misunderstandings". Mr Arafat said he was amazed by his support. By then the protesters had other things on their minds. As many as 10,000 people continued their protests in 6o towns and cities across the country, demanding snap elections and Mr Basescu's resignation. Several told reporters that the treatment of Mr Arafat had just been "the spark" for the protests, and that their anger was deeper. They had a wide range of grievances, from poverty to the effect of austerity measures linked to an IMF programme and inconsis tent tax rises. Some even called for the re�� turn of Romania's monarchy.
The Economist J a n ua ry 2 1st 2012
38 Europe �
The protest movement is an odd mix of students, the retired and the poor. So far it has steered clear of any political affiliation. Opposition figures who ventured into Bu charest's University Square, the heart of the protests, got a chilly reception. How ever, with a general election due at the end of November (calls to bring it forward are likely to go unheeded) the protests mark "the start of electoral campaigning," says Sorin Ionita, head of the Romanian Expert Forum, a Bucharest-based think-tank. The opinion polls give the opposition more than twice as much support as the ruling Democratic Liberal Party. That means that Mr Basescu, whose mandate expires in 2014, may after November find himself working with a less docile prime minister than Mr Boc. Even if he can navi gate to day's choppy waters, the former sea captain can expect storms ahead. • Justice in Turkey
Not for some ISTA N B U L
His supporters protest over the verdict in the Hrant Dink murder trial
Twhen an Istanbul court gave its verdict HEY never expected real justice. But
this week at the end of a controversial trial for the 2007 murder of Hrant Dink, an Ar menian newspaper editor, his family and lawyers were still shocked. The judge ac quitted all 19 defendants on charges of be longing to an "armed terrorist organisa tion". Just one received a life sentence for conspiring to murder Mr Dink, who was gunned down in broad daylight outside the offices of AGOS, an Armenian weekly. Another suspect who had worked as an in formant for the intelligence services was cleared, only to be sentenced instead to over ten years in jail for the 2004 bombing of a McDonald's restaurant in Trabzon. Fethiye Cetin, a lawyer and close family friend, described the trial as a "comedy from start to finish." "But they reserved the biggest joke for last," she added, as she stood outside the courthouse alongside Mr Dink's stony-faced widow, Rake!. Mr Dink, who deconstructed myths around the 1915 massacres of some 1.sm Ar menians by the Ottoman Turks, ran afoul of the authorities when he called the epi sode genocide. He was slapped with a docket of court cases accusing him of "in sulting the Turkish identity". Another crime was to have exposed the Armenian roots of Ataturk's adopted daughter and Turkey's first female pilot, Sabiha Gokcen. Mr Dink wrote several prescient columns predicting his own tragic end after the au thorities had warned him to keep in line.
J ustice i n Spain
Investigating the investigator M A D RID
Spain's most famous judge goes on trial
A PAINTING on the ceiling of Madrid's ./"\. supreme Court shows a scene of Goya-like intensity, with knife-wielding savages and children being throttled to death. On the wall a sculpture depicts the crucifixion of Jesus. As Spain's most famous magistrate, Baltasar Garzon, went on trial on January 17th, supporters claimed he was suffering crucifixion. His enemies, who claim he has abused his powers and want him barred from the judiciary for 17 years, see him as more like the villains on the ceiling. Mr Garzon has made many enemies. They include supporters of Augusto Pinochet, the former Chilean dictator arrested in London on Mr Garzon's or ders in 1998; and backers of the military junta that ran Argentina, since he used international human-rights law to prose cute and jail their henchmen in Spanish courts. But if his enemies abroad are numerous, so they are at home. Mr Gar zon took on Socialist-led state terrorism and corruption in the conservative Peo ple's Party (PP), which now runs Spain, as well as drug barons, arms traffickers and the Basque terrorist group, ETA. Mr Garzon faces not one trial, but three. In each he is charged with prevar icaci6n, knowingly dictating unjust mea sures during investigations (as a magis trate he prepares cases, but does not try them). To face such a rare charge three times is unknown. The first trial involves a PP corruption case known as "Giirtel". Mr Garzon ordered police to tape con versations between suspects in prison and their visitors. That included their lawyers, some of whom the judge sus pected of laundering their clients' money. The lawyers claim this damaged their clients' right to a fair defence. In a second case, Mr Garzon is acThe murder trial was seen as a test of the ruling Justice and Development (AK) Party's commitment to the rule of law. For Turkey's 6o,ooo ethnic Armenians, justice for Mr Dink might have salved the wounds of the past. "This verdict sends a clear mes sage that Armenians are fair game," said an Armenian businessman. Turkey's prime minister noted that the outcome had "dis turbed the public's conscience" and said the appeals process was not yet exhausted. Even Turkey's allies worry about its le gal system. In a report citing Mr Dink's case, Thomas Hammarberg, the Council of Europe's human-rights commissioner, re buked Turkish judges and prosecutors for
cused of abusing his powers by opening an investigation into the deaths of 114,000 people under the Franco dic tatorship. Mr Garzon had named 34 former generals and ministers, including Franco himself, whom he suspected of crimes against humanity. All were dead. The third case alleges that Mr Garzon should have disqualified himself from court decisions involving Banco San tander. His accusers claim Mr Garzon received money from the bank during a sabbatical at New York University, al though the university denies this. Some merely see jealous Spanish judges anxious to get rid of a colleague who has outshone them. Others see a rogue magistrate getting a taste of his own medicine. But the cases really raise questions about Spain's judicial system. If Mr Garzon is a multiple prevaricador, why was he not stopped long ago? And if not, does this suggest that Spanish judges displaying even a flash of independence are likely to be prosecuted?
Garzon on the defensive
"giving precedence to the protection of the state over the protection of human rights." He criticised lengthy pre-trial detention pe riods of up to ten years. A former chief of staff, Ilker Basbug, recently joined several other generals in pre-trial detention. Sadullah Ergin, the justice minister, has announced reforms to reduce sentences for supposed terror crimes-such as prais ing the imprisoned Kurdish rebel chief, Abdullah Ocalan-and to raise the bar for evidence to detain suspects. These are wel come, if modest, steps. But they are too late for the scores of journalists, hundreds of students and thousands of Kurdish politi cians and protesters still behind bars. •
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Social I n n ovation Business:
H i t a c h i p rovid es s o l u t i o n s w h i c h c re a t e a w i n - w i n
situation for o u r cu sto mers a n d for society. Like o u r train w h ose l ig htweight a l u m i n i u m body offers m ore accel eration a n d passen g e r space, w h i l e u s i n g less en ergy.
hitach i.eu
H ITAC H I
ln spire the Next
The Economist J a n ua ry 2 1st 2012
40 Europe
Charlemagne
I
And then there was one
Germany now stands alone. But its power may weaken the euro zone
REDIT-RATING agencies are a favoured scapegoat of many
C European politicians, incurring mounting wrath as they
downgrade the debt of one sovereign after another. They stand accused of ignorance over European reforms or even of being part of an Anglo-American conspiracy to destroy the euro. Such opprobrium owes much to the fact that, although they are flawed arbiters, the rating agencies can speak uncomfortable truths. The decision by Standard & Poor's, one of the big three, to downgrade nine European governments on January 13th was an example. s&P punctured the optimism over recent bond auctions in Italy and Spain. It chastised governments for their inadequate re sponse and their misguided obsession with austerity. And by drawing so many into the net, it made clear that the problem is not just individual countries, but the euro zone as a whole. Above all, by downgrading France from its AAA status-and by leaving Germany as the only top-rated country with a "stable" outlook-s&P has changed the balance in Europe. At a stroke, it has restored the dividing line down the Rhine that generations of leaders have tried to efface, ever since the European Union's fore fathers pooled their coal and steel industries in the 1950s. With the loss of its top status, even if by only one notch, France has lost its symbolic parity with Germany. In spirit, at least, France leaves the directorate of virtuous, solvent northern states that set the terms of the Eu's response to join the Club Med problem coun tries. The Franco-German tandem has become a unicycle. The balance of power has long been shifting from the French president to the German chancellor. Yet as the crisis has gone on, Angela Merkel and Nicolas Sarkozy have cleaved to each other to the point where many have come to resent the diktats of "Mer kozy". Now the very notion of "Merkozy" sounds hollow. As Thierry Breton, a former French economy minister, puts it, "Berlin is alone in the cockpit." It is surely no coincidence that Mrs Merkel is making a point of widening her circle of friends. Instead of huddling only with Mr Sarkozy, she is hosting informal dinners with other leaders, start ing with the prime ministers of Portugal, Sweden and Austria on January 19th. She likes Italy's technocratic prime minister, Mario Monti. Her entourage insists that none of this supplants the part nership with France. But plainly she feels a need to supplement it.
Such meetings may be similar to those she organised in 2007, when Germany held the rotating EU presidency. In a sense Ger many now acts like a permanent president. It is an old tenet of European politics that the Franco-German partnership is necessary to disguise German strength and French weakness. With the fiction now dispelled, what will be the con sequences? Any change will be incremental. Germany will not forsake France. It is still too uncomfortable to wield unilateral power overtly. Some have called Germany an "adolescent hege mon", but it is probably even less than this. The Germans domi nate by default, not by choice. Mrs Merkel speaks of "a strong Germany in a strong EU". But these days Germany is strong main ly because the rest of the EU is so weak. The Germans know what they do not want: no transfer union, no Eurobonds and no transformation of the European Central Bank into a lender of last resort. But it is harder to discern a vision for Europe behind the slogan of a "stability union". Germany wields power in Europe in three ways. As the biggest economy it has the deepest pockets, so its views tend to prevail. Second, it has the force of example. Its economic output has surged above pre crisis levels and unemployment is at an historic low. Others might now copy its model of "ordo-liberalism", balanced bud gets and labour-market reforms. And third, Germany's attach ment to legal order pushes it to enshrine its doctrines in European treaties, creating political turbulence across the union. It also overemphasises deficit-cutting. This risks pushing Eu rope into a co-ordinated and self-defeating recession-a "suicide pact", in the words of Joseph Stiglitz, a Nobel-prize-winning American economist. Certainly Greece looks like being sucked into a death spiral. Recent talk of "growth-enhancing" measures has centred on overdue structural reforms in weaker states. But perish the thought of boosting German demand to help others. Or even of pursuing structural reforms in Germany itself. More important, the German prescription misdiagnoses the crisis as caused by poor enforcement of fiscal rules, rather than by poor design of the euro itself. In a recent paper,Jean Pisani-Fer ry, director of the Bruegel think-tank in Brussels, says the fragility of the euro zone is due to an "impossible trinity" in its structure: no mutualisation of debt; no monetary support for states by the ECB; and a feedback loop between unstable sovereigns and banks. At least one, if not all, of these constraints needs to be bro ken to save the euro. Standing alone, and stubborn
Alas, the changing power balance in Europe will make it harder to alter the perilous route that Germany has charted. Although protectionist and abrasive in his quest for a core Europe, Mr Sar kozy is right on many points-wanting the ECB to act as a lender of last resort, for instance. He will struggle to be heard, even if he is re-elected in May. And although s&P criticised the emphasis on austerity, its confirmation of Germany's AAA rating will be taken as vindication of Mrs Merkel's policies. For many Germans, in their relative well-being, the crisis still feels distant, even abstract. This means Mrs Merkel's priority will be to limit Germany's large liabilities. Even the slow sinking of France may not shift her until it is too late. Mrs Merkel has made many a course adjustment over the past two years. But her ten dency to change only at the eleventh hour risks disaster for all. • Economist.comfblogsfcharlemagne
41
Income inequality
Also in this section
Who exactly are the 1%?
42 Optimal tax rates 43 Online piracy 44 Fast and Furious 44 Red-Light cameras
The very rich in America increasingly work in finance, marry each other and care passionately about politics
M
ITT ROMNEY is not the first multi millionaire to seek the presidency, nor the richest. Ross Perot, the record-hold er, spent some of his billions earned from computer data on losing bids in 1992 and 1996. Since then men who owe their or their family's fortunes to oil, sport, pub lishing, trial law, ketchup, beer and best selling autobiographies have followed. But Mr Romney, who earned his $2oom or so as a private-equity executive buying and selling companies, is the first candi date from the world of high-octane fi nance. As such, he illustrates the changing complexion of America's rich. The wealth iest 1% of Americans not only get more of the pie (see chart); they are increasingly creatures of finance. The average household income of the 1% was $1.2m in 2008, according to federal tax data. The ultra-rich skew that average upwards: admission to the 1% began at $380,000 in 2008. The Congressional Bud get Office puts the cut-off lower, at $347,000 in 2007, or $252,000 after sub tracting federal taxes and adding back transfers. Measured by net worth, rather than income, the top 1% started at $6.9m in 2009, according to the Federal Reserve, down 23% from 2007. The richest 1% earn roughly half their income from wages and salaries, a quarter from self-employment and business in come, and the remainder from interest, dividends, capital gains and rent. Accord-
45 School trouble in Pennsylvania
ing to an analysis of tax returns by Jon Ba kija of Williams College and two others, 16% of the top 1% were in medical profes sions and 8% were lawyers: shares that have changed little between 1979 and 2005, the latest year the authors examined (see chart). The most striking shift has been the growth of financial occupations, from just under 8% of the wealthy in1979 to 13.9% in 2005. Their representation within the top 0.1% is even more pronounced: 18%, up fromn% in1979. Steve Kaplan of the University of Chi cago thinks finance explains much of the rise in inequality. Updating a series devel oped by Thomas Piketty and Emmanuel Saez, Mr Kaplan notes that the share of in come going to the 1% reached an So-year
I
45 Official pardons 46 Lexington: South Carolina's primary
high of 23.5% in 2007, only to sink to 17.6% in 2009 as the financial markets deflated (see chart). The trend is even more pronounced for the top 0.1%, whose share of total in come rose to 12.3% in 2007 but sank to a still disproportionate 8.1% in 2009. Mr Kaplan and Joshua Rauh of North western University note that investment bankers, corporate lawyers, hedge-fund and private-equity managers have dis placed corporate executives at the top of the income ladder. In 2009 the richest 25 hedge-fund investors earned more than $25 billion, roughly six times as much as all ��
The age of Mammon Percentage of earners in top profession*
Percentage of tota l income earned by America's * :
lHE GREATCRASH
'
top
25
1% of earners
20
- 1979
0
10
1% income bracket by
- 2005 20
30
40
15 10
1913
30
40
so
60
10
so
90 zooo o9t
Sources: Thomas Piketty and Emmanuel Saez (1913-2007), Steve Kaplan (2008-09); Jon Bakija, Adam Cole, Bradley Heim
* Excluding capital gains !Estimate INon-finance
The Economist J a n ua ry 2 1st 2012
42 United States
� the chief executives of companies in the s&P sao stock index combined. Although the 1% have been gaining share in most countries, a recent OECD re port shows that the trend began sooner, and has gone further, in America. Some scholars, noting that inequality has risen more in English-speaking countries, think social and political values may play a role: in mainland Europe and Japan, corporate governance, tax laws and unionisation have tended to lessen income disparities. But the relatively large role of the financial sector in English-speaking countries could also be a factor: even more of the top 1% work in finance in Britain than in America. Membership in America's 1% is relative ly stable; three-quarters of the households in the percentile one year will still be there the next. Although the proportion shrinks over time, one study found that the vast majority of the top 1% were still in the rich est 10% a decade later. Kinship plays a big part: rich parents tend to produce rich kids. High levels of educational attainment and stable families help in this. According to Gallup, 72% of the 1% have a college degree, and half have a postgraduate degree; those are two to three times the proportion of the other 99%. The 1% are more likely to be married and to have children. The rich also increasingly marry people like themselves. Mr Bakija and his co-au thors found that between 1979 and 2oos, the share of spouses of the 1% who had blue-collar or "miscellaneous" service-sec tor backgrounds declined slightly, from 7.9% to 6-4%. The share of spouses who worked in finance, property and law rose from 3-S% to 8.8%. Politically, Gallup polls find that the 1% are more likely than the 99% to identify themselves as Republicans (33% to 28%) and less likely to be Democrats (26% to 33%). A survey of 104 wealthy families in the Chicago area, led by Benjamin Page of Northwestern University, found the bud get deficit was their leading worry, fol lowed by unemployment; for the broader population, the reverse is true. Still the rich, like most voters, have eclectic views, often supporting liberal and conservative posi tions simultaneously. For example, Keith Whitaker, who advises wealthy families on behalf of Wells Fargo, says many of them sympathise with the Occupy Wall Street movement. A lot of them became rich by building businesses and consider Wall Street "the place where businesses are taken apart and run by someone else". Bob Perkowitz embodies these contra dictions. A rich entrepreneur, he now de votes much of his time to a non-profit envi ronmental outfit. He is a lifelong Republican who objects to George Bush ju nior's tax cuts for the wealthy, and backed Barack Obama in 2008. Having restruc tured companies himself, he has no trou ble with Mr Romney's private-equity work
Optimal tax rates
Soal< or swim CAM B RI D G E , MASSAC H U S ETTS
How to raise the highest rates without doing too much damage
D doing well economically stifle
simultaneously giving people many ways to avoid paying it. So the first task of tax reformers must be to minimise such opportunities by having a broader tax base, better enforcement and similar tax rates for different kinds of income. That is relatively uncontroversial. But their other finding is likely to raise a few eyebrows. They reckon that if the tax system were reformed to make evasion impossible, the top tax rate might be able to rise to as much as 83%-that is, to levels last seen in the 196os-without hurting the economy. This is because people do not seem greatly to adjust how much they work when tax rates change. Higher top rates may also discourage big earners from spending too much of their time trying to bargain for a larger share of the overall pie. Now all that remains is to remove the loopholes. On past experience, Ameri ca's rich need not lose sleep over that.
but agrees with Occupy Wall Street that corporations have too much power. Until recently he split his time between conservative Charlotte, North Carolina, and liberal Washington, D C . His wife, Lisa Renstrom, used to manage hotels inherited from her father, a prosperous Republican businessman. Now she campaigns on cli mate change and backs Wealth for the Common Good, a group of rich people who back Occupy Wall Street. Her father used to give his occupation as "capitalist". "I grew up believing that [capitalists] were making the world a better place," she says. "The capitalism we have has left us with degraded infrastructure, threats to our health, and global warming." Most of the 1% prefer not to talk about
their good fortune. As the New York Times recently observed in an article on the 1%, "Some envisioned waking up to protesters on the lawn; others feared audits by the IRS or other punitive government action." But Mr Perkowitz and Ms Renstrom are utterly typical of the 1% in that they are far more politically engaged than the average 99-percenters. Nearly all the rich people surveyed by Northwestern vote, 68% make campaign contributions, nearly half had contacted a member of Congress and a fifth had solicited contributions on behalf of a candidate. A good chunk of those calls were meant to help their businesses. But many were motivated by the common good, defined in as many different ways as the sources of their wealth. •
OES raising taxes on those who are
growth and slow down the recovery? That depends on how rich people be have when their taxes rise. Do they work less when they are allowed to keep a smaller chunk of their income? Do they move their money offshore? Do they take a larger share of their earnings in forms that are more lightly taxed? Economists have looked at the effects of many past changes in tax rates to try to answer such questions. Martin Feldstein, a Harvard econo mist, found that the taxable income of the rich adjusted dollar-for-dollar with tax rates when America cut its highest tax rate from so% to 28% in 1986, so that tax revenues stayed the same. This would suggest that raising top tax rates is likely to produce little extra revenue, while distorting economic behaviour further. But others have found that this adjust ment in taxable income is driven largely by people altering when and how they take their income in order to minimise their tax burden. For instance, there was a big fall in taxable income after tax rates rose in 1993; but most of this seems to have come from a few rich people hur rying to cash in their stock options before taxes rose. Thomas Piketty of the Paris School of Economics, Emmanuel Saez of the Uni versity of California, Berkeley, and Stefa nie Stantcheva of MIT argue in a new paper that this is why few studies have been able to show any significant long term effect from raising top tax rates. But such avoidance, they say, is merely a symptom of a poorly designed tax sys tem. lt is silly to have a high tax rate while
The Economist J a n ua ry
United States 43
2 1 st 2 0 1 2
Online piracy
Stopping SOPA
N EW Y O R K
A backlash from the internet community against attempts to rein in content thieves
AFTER this week a lot more people will fi know that SOPA stands for the Stop Online Piracy Act. Some 30m-4om of them, estimated Wikipedia's founder, Jim my Wales, could have gone to the English language version of his website on Janu ary 18th only to find it replaced by a dark, foreboding page headlined "Imagine a World Without Free Knowledge" and ex plaining SOP A's perils. A few other sites such as Reddit, a popular link-sharing ser vice, shuttered themselves too, while Goo gle blacked out its logo for American users, who number about s6m a day. The backlash against soP A has taken the bill's supporters-media firms and oth ers who want tougher protection for intel lectual property-by surprise. The House of Representatives Judiciary Committee seemed to be hustling it through: the first hearing in November was stacked with friendly witnesses and just one opponent, from Google. But now it is getting bogged down. Even before blackout day, the White House had weighed in with criticisms; Eric Cantor, the House majority leader, was said to have promised not to hold a floor vote until there was consensus; and Lamar Smith and Patrick Leahy, respectively the sponsors of SO PA and its marginally mil der Senate sibling, the PR OTECT IP Act or PIP A, suggested cutting out one of the most controversial provisions pending further discussion. Both SOPA and PIPA target websites
outside the United States that carry pirated content. Since American law cannot di rectly touch such sites, S OPA would allow copyright holders to ask American sites to take down links to them, payment proces sors and ad networks to stop doing busi ness with them, and internet-service pro viders to block traffic to them via a technique known as DNS filtering. If these firms failed to act within five days, they could then be sued. To music and film executives, who want to defend their intellectual property from theft, such measures are the last line of defence against an explosion of pirated content, much of it carried on foreign sites. Critics, who include big companies like Go ogle as well as start-ups and all manner of geeks, argue that the law could put a heavy burden on smaller American sites, stifle innovation and enable censorship, and that D N S filtering could disrupt the in ternet's addressing system, causing securi ty problems. (Putting filtering on hold at least for now is Messrs Smith and Leahy's proposed sacrifice.) Those critics are therefore now claim ing victory for the net-heads polity against big business and its lobbyists on Capitol Hill-and with some justification. The bills have powerful backers: according to Open Secrets.org, which publishes political fi nance data, between July 2009 and June 2011 pro-soP A interest groups donated $8sm to members of the House and $4sm
to senators, while the anti camp gave $17m and $27m respectively. (How much has been spent lobbying for and against the bills themselves is not known.) Yet the battle lines are not drawn neatly, either along the traditional liberal-conser vative divide or along the money trails. In Congress, supporters and opponents alike come from both parties and from all gener ations. Some big beneficiaries of media money oppose the bills, and some who got more from the internet industry in 2010 support them. Outside Congress SOP A's critics tend to lean left, but their right-wing bedfellows include Michele Bachmann, the tea party's recent lamented presiden tial hopeful, the Heritage Foundation and various conservative pundits wary of in trusive regulation. In fact, the only place where support for SOPA and PIPA is almost unmixed is in the House and Senate Judiciary Committees, whose members count the media industry among their most generous donors. As sured of a friendly hearing there, the me dia industry seems to be in shock at the in trusion of politics from the outside world. The Motion Picture Association of Ameri ca accused the sites holding blackouts of an "abuse of power" and a "gimmick" that turned their users into "corporate pawns". (Wikipedia is a non-profit.) But the pawns are also voters, and the bills are now an election issue. One of SOP A's leading supporters, Bob Goodlatte, a representative from Virginia, faces an election challenge from a Democrat and a Republican who are both anti-soP A. An other Republican, Paul Ryan, found him self the target of a campaign on Reddit after sending a constituent a non-commi tal letter about SOPA. Whether or not for that reason, Mr Ryan subsequently came down against the bill. Mr Ryan's stance may have influenced the decisions to remove D N S filtering from SOPA and PIPA. He chairs the House Bud get Committee, a powerful job. Darrell Issa, one of SOP A's few opponents on the Judiciary Committee, has meanwhile played a clever hand with net-savvy vot ers by proposing an alternative bill, called OPEN, which waters down the harshest provisions, and-better still-putting it up on a website for editing by the public. Oth ers take a different tack: instead of a blan ket law, they say, it would be better to beef up investigations and enforcement against the few big offenders. The proposed watering-down of the bills is only temporary, however, and PIP A is still due for a Senate committee hearing on January 24th. But getting the bills passed in an election year was always a long shot, and the well-organised furore makes it increasingly likely that legislators will be inclined to shelve them at least un til next year. That would indeed be a vic tory for the pirates. •
The Economist J a n ua ry 2 1st 2012
44 United States Mexico's drug war
Not so fast
Red-light cameras
You're on film LOS A N G E LES
The trouble with outsourcing traffic-law enforcement A U STIN
The simmering controversy over Operation Fast and Furious
" VOU don't lose guns. You don't walk I guns. You don't let guns get out of your sight," said Carlos Canino of the Bu reau of Alcohol, Tobacco, Firearms and Ex plosives (ATF), in an angry interview with congressional investigators. He was talk ing about Operation Fast and Furious, a fa tally misconceived effort to fight drug-traf ficking that had led some of his colleagues to lose guns deliberately. The operation, outlined in two congres sional reports last summer, began in 2009 in the Phoenix, Arizona, field office of the ATF, which is under the Department of Justice. The department was trying to be more active in Mexico's fight against its drug gangs, and decided that agents would allow known "straw purchasers" to buy guns from American shops. The straw buy ers, the ATF reasoned, would bring the guns to the gangs. When the guns turned up again, the agents might be able to use them as evidence to build bigger cases. A similar effort, Operation Wide Re ceiver, which ran from 2006 to 2007, was shut down because it was ill-conceived and dangerous. When the idea was re vived many field agents in Phoenix were appalled. There might have been more re sistance, but the operation was hidden from other border policing agencies, and even from ATF agents in other offices. The critics got little attention until De cember 2010, when Brian Terry, a Border Patrol agent, was shot dead during a fire fight. Two rifles recovered at the scene were part of Operation Fast and Furious. Whis tle blowers started to come forward. In Jan uary 2011 William Newell, the special
Unintended consequences
A BOUT one in five Americans lives in ./"\. one of the roughly 700 counties or cities that have signed contracts with private firms to install street cameras to record drivers who speed or run a red light. In theory, those systems sound like a good idea. Knowing they can be filmed, drivers might behave better. The vendors say that their cameras are one reason why traffic deaths have been falling. On the other hand, drivers also some times overcompensate by accelerating when the light turns yellow, or slamming on the brakes so that the car behind goes into them. Critics therefore say that the evidence is mixed, and that traffic deaths have fallen for other reasons, such as safer cars and fewer miles driven. But aside from that debate, many drivers obj ect to getting a big fine for that most American of peccadillos, the so called "rolling stop" (not actually a stop at ali) when turning right on a red light. A nationwide backlash is occurring, as residents vote the cameras out in referen dums and cities try to cancel their con tracts with vendors. Phineas Baxandall at the us Public Interest Research Group, a non-partisan advocacy, says the trend toward privatis-
ing the enforcement of traffic laws poses inherent conflicts of interest. Municipal ities typically sign up because they are strapped for cash. When the contract involves revenue-sharing between the vendor and the municipality, there is an incentive to issue more tickets than nec essary. But even flat-fee contracts can cause problems, if the system is implicit ly tuned to recoup that fee by, in effect, setting a quota of tickets to be issued. Karen Finley, the boss of Redflex Traffic Systems, one of the three largest vendors, denies any such conflict of interest. "We provide just one more tool for law enforcement," she says. "We don't even decide who gets a ticket; that is all done by a police officer." The problem, counters Mr Baxandall, is that this police officer works for a city or county and has a boss and a budget. As cities from Houston, Texas, to San Bernardino, California, have discovered, getting rid of the systems is usually not a cheap option either, because contractual obligations lead to fines or litigation. Cities that have not yet signed up, says Mr Baxandall, may do better to build a roundabout at an intersection instead, or put flashing lights at crossings.
agent then in charge of the Phoenix office, announced 20 indictments. Most were of straw buyers who could have been indict ed much earlier. The battle over Operation Fast and Furi ous has only become more serious since then. There are more troubling questions about how much senior officials in the Jus tice Department, up to and including Eric Holder, the attorney-general, knew about
the operation, and when. Last February the department issued a letter denying the allegations that the A TF had allowed gun walking. In March Barack Obama told Un ivision that neither he nor Mr Holder had authorised the operation. Six weeks later, in May, Mr Holder told the House Judiciary Committee that he had "probably" first heard of Operation Fast and Furious "over the past few weeks". Last month the department withdrew its February letter, saying it was not correct. Testifying again a few days later, Mr Holder was sanguine when asked to clarify the difference between lying to Congress and misleading it: "Well, if you want to have this legal conversation, it all has to do with your state of mind." He added that the de partment would not be turning over any materials related to the operation from lat er than February. But he is being hauled in to give more testimony next month. Whatever happens, he will not be the only victim. Over the course of the opera tion some 2,000 guns were sold. Several hundred have since been recovered at doz ens of crime scenes in the United States and Mexico. The rest are lost. The grim thing is that many of them will someday b e found. •
The Economist J a n ua ry
United States 45
2 1 st 2 0 1 2
Ban krupt schools
Studying on a shoestring CH ESTER, P E N N SYLVA NIA
A financial crisis threatens to shut down schools in the middle of term
T HE Chester Upland school district is one of the poorest in Pennsylvania. It gets about 70% of its budget from state funds (richer school districts get most of theirs from local property taxes). Most of its 3,600 students come from low-income families, and about 8o% are eligible for free or cut-price school lunches. Academically, it is no better off. Only half its students graduate. The district was under state over sight from1994 until 2010. 1t also had an un successful four-year stint under the super vision of Edison, a for-profit education group. Little wonder, then, that pupils have been fleeing the district's schools. Nearly half the children living there attend inde pendent charter schools. The decision to come out of state over sight in July 2010 may not have been wise. The new school board inherited debts of about $2om, an unsustainable budget and an unaffordable workforce. The school board had to lay off 28% of the district's staff last year. But the district still cannot af ford to pay its bills. Its bank account is al most empty, but it owes suppliers $4m. Without state help, Chester Upland cannot pay for school-bus fuel and electricity, nev er mind salaries for teachers, drivers and lunch ladies. It owes millions to insurance companies and to the state pension plan. So Chester Upland is seeking $18.7m from Harrisburg, the state capital. The state has refused, claiming the district has mis managed its finances. It has already pro vided two rounds of emergency money, some of which helped the district to avoid default on bond payments last year. But overall, state funding has fallen by $17m. State legislators have called on Pennsylva nia's secretary of education to declare the district officially "distressed", but the state says the district does not meet the criteria. Remarkably, teachers and other staff have agreed to work for nothing for as long as they can. "We're doing it for the kids," says John Sexton, who teaches fourth grade students (9- and lO-year-olds). Their parents, meanwhile, are worried. They have protested and have held candlelight vigils. One parent has started an online pe tition. The pupils are worried, too. Some older ones walked out of classrooms in protest last Friday. Even the championship winning basketball team is at risk-no school means no team. The district has filed a federal suit against the state, the governor and Penn sylvania's secretary of education. OnJanu-
I hope I stiLL have a teacher
ary 17th a federal judge ordered Pennsylva nia to keep the school district temporarily afloat with a $3.2m advance, but the pro blem is far from solved. The infusion is enough to pay staff for just one month, and no long-term decisions have been made. Worse, as Thomas Persing, the acting assis tant superintendent, points out: "We are just the first domino." Other Pennsylvania school districts have serious economic problems, too. Reading is in pretty bad shape. Philadelphia is laying off 1,40o peo ple. And Carlisle is using sheep to trim its playing fields. • Executive clemency
The pardoner's tale
WAS H I N G TO N , OC
A row in Mississippi
" T HE governor shall have power to grant reprieves and pardons," states the constitution of Mississippi. But until his final days in office, Haley Barbour did not make much use of it. He granted no pardons or other forms of clemency at all during his first four-year term, and only eight in his second-until this month, when he issued over 200 before stepping down on January 1oth. The objects of his mercy included murderers, kidnappers, sex offenders, a carjacker and an arsonist. The last-minute fit of compassion from Mr Barbour, a Republican who toyed with running for president this year, has Missis sippi up in arms. Victims and their rela tives complain that blind justice has been supplanted by caprice. The state's attor ney-general, a Democrat, points out that not all the beneficiaries seem to have ful filled the constitution's requirement that they provide 30 days' notice of their inten-
tion to seek a pardon in a local newspaper. He has persuaded a judge to prevent any more of them being released from prison (five already have been) while he seeks to have their pardons overturned. Members of the state legislature, meanwhile, have introduced a bill to curb the governor's powers of clemency. In his defence, Mr Barbour has pointed out that he was simply following the rec ommendation of Mississippi's parole board in the vast majority of cases. What is more, only 26 of those pardoned were still in prison. The rest had completed their sentences, in some instances years before, and simply wanted their records cleared so that they could vote, own a gun, or seek the sorts of jobs normally denied to felons. Many of those still behind bars, including several murderers, had spent part of their sentence working at the governor's man sion as part of a long-standing rehabilita tion scheme. Mr Barbour says he consid ered them so reformed he let his grandchildren play around them. What makes Mr Barbour's pardons es pecially unusual, argues P.S. Ruckman of Rock Valley College, is the number of them that went to violent criminals. Governors around the country issue hundreds of par dons every year, but most of them cause no fuss because they go to people convict ed of minor offences, long after they have left prison. It is when governors start dis pensing clemency in more serious crimes, and especially commuting sentences, that matters become more controversial. All states have some sort of system for obtaining pardons from the governor, an independent body, or a combination of the two. For federal crimes, it is the president who doles them out. But many governors (and recent presidents) have become wary of exercising their power of late, for fear of stirring up just the sort of controversy now facing Mr Barbour. Two of the stingiest presidents, pardon-wise, are also the two most recent: George Bush junior and Ba rack Obama. For all politicians, the biggest concern is that someone they help will em barrass them by committing another crime. Such episodes hampered the presi dential ambitions of Mike Huckabee, a for mer governor of Arkansas, and, most noto riously, Michael Dukakis, who supported a furlough programme that went sour. But such reticence only makes matters worse, argues Margaret Love, a former "pardon attorney" to presidents George Bush senior and Bill Clinton. In states where pardons are relatively routine, such as Alabama, Connecticut, Georgia and Illi nois, they are also uncontroversial, she notes; when they come out of the blue, as in Mississippi, they attract more scrutiny and criticism. Both Ms Love and Mr Ruck man agree that America probably needs more pardons, not fewer-and that Mr Bar bour's antics have made that less likely. •
The Economist J a n ua ry 2 1st 2012
46 United States
Lexington
I
The Palmetto primary
Almost gentlemanly, by South Carolina's bare-knuckle standards
E MAY have been a fine ambassador to China, but in the end H]on Huntsman did not have either the killer instinct or the
common touch to win really big in politics. When he broke into Mandarin to make a point about China, he only underlined his own standing as a member of America's mandarin class rather than a man of the people. Though such mistakes were not quite fatal in the New Hampshire race, where he came third, Mr Hunts man bowed to the inevitable six days later. Like Tim Pawlenty, Herman Cain and Michele Bachmann, he has now quit the fight for the Republican nomination. That left five main candidates duking it out ahead of the January 21st primary in South Caroli na. They are Mitt Romney, the deep-pocketed bookie's favourite; Ron Paul, the libertarian Pied Piper; and three men-Newt Ging rich, Rick Santorum and the struggling Rick Perry-competing to be the "authentic" conservative alternative to Mr Romney. However, Mr Huntsman did not go quietly. True to form, he departed in patrician style, scolding his rivals for a "toxic" race that had "degenerated into an onslaught of negative and perso nal attacks not worthy of the American people and not worthy of this critical time in our nation's history." Long live the Queensbury rules. But is he right? Having been elected twice as Utah's governor, Mr Huntsman is no stranger to the cruel ways of politics. But Utah is plainly a gentler place than South Carolina. In Columbia, the state capital, his parting shot had puzzled politicos scratching their heads. Hell, by the stan dards of the Palmetto State, where in the 1970s the notorious Re publican strategist Lee Atwater honed the dark arts of character assassination, this primary has been downright gentlemanly. Consider the South Carolina primary of 2000, towards the end of which someone spread the lie that John McCain (like Strom Thurmond, the state's arch-segregationist and favourite son) had fathered an illegitimate black child. "We gutted McCain in three days," a consultant working against him is said to have boasted later. Or the election of 2010, when Nikki Haley, cam paigning for governor, suddenly faced utterly unsubstantiated claims that she was a serial adulteress. Nothing of that sort had happened in this primary by the time The Economist went to press, less than two days before polls opened. For example, none of Mr Gingrich's rivals reminded vot-
ers that the former House speaker was indeed a serial adulterer. Nor, for all their eager wooing of the evangelical Protestant vote, did Mr Gingrich or Mr Santorum (both Catholics) make a meal of the fact that Mr Romney is a Mormon, a religion that many South Carolinians regard as a cult. What insults did fly were mostly pretty lame. Mr Gingrich says that he is a "Reagan conservative" and Mr Romney a "Mas sachusetts moderate", a state and noun that the party's conserva tives have glued together to make into a term of abuse. Mr Santo rum shrugged off Mr Huntsman's endorsement of Mr Romney as "moderates backing moderates". Mr Romney's people labelled Mr Gingrich "an unreliable leader" and Mr Paul's called him a "serial hypocrite". Mr Santorum boasts that he alone is a "full spectrum conservative" (ie, a practising social conservative as well as a deficit- and foreign-policy hawk) and that Mr Romney's philosophy is the same as Barack Obama's. So far, so tame. The closest thing to a knife fight has been Mr Gingrich's por trayal of Mr Romney as a callous wrecker of humble livelihoods. His super-PAc's video attacking the "King of Bain" is vicious. But criticism like this does not go down well in all conservative quar ters. "Out of bounds for those who value the free market," splut tered Rush Limbaugh, a right-wing radio jock. So after a debate in Myrtle Beach on January 16th Mr Gingrich tried something new, joining Mr Perry in daring Mr Romney to publish his tax returns. In the same debate Mr Gingrich delivered a peroration on the vir tues of making people work that impressed his tea-party audi ence so much that they gave him a rapturous standing ovation. There followed something marvellous to behold: the further, rapid expansion of the former speaker's already prodigious ego. Since Mr Gingrich likes to say that he is a historian, he will re member that when South Carolina voted to secede, a unionist from Charleston observed that the state was "too small for a re public, and too large for an insane asylum". It certainly felt too small after his Myrtle Beach success to accommodate Mr Ging rich's gargantuan self-belief. His euphoric campaign team rushed to immortalise the moment by releasing a new ad they called, of course, "The Moment". Only Mr Gingrich, it declared, has what it takes to debate toe-to-toe with Mr Obama. Later the historian called on Messrs Santorum and Perry to be sensible and stand aside, lest by splitting the conservative vote they let in the dreaded moderate. Mr Perry duly obliged. What elections are for
Comedy, vanity, pomposity, flashes of mendacity: the Republi can campaign has not been edifying. But to call it toxic and un worthy goes too far. By the time the primaries reached South Car olina the weaker candidates had vanished, allowing the survivors to delve deeper into their opponents' weaknesses. Mr Perry has been outed as a foreign-policy nincompoop (he thinks Turkey is run by terrorists) and Mr Gingrich has put his over weening vanity on display. His rivals have forced Mr Romney to disclose that although he is worth some $2oom or more, his over all tax rate (since most of his money comes from capital gains) is only 15%, and that he considers speaking fees documented at $374,327 a year to be "not very much". This gives useful informa tion to voters choosing a candidate to take on a president who will put fairness at the heart of his re-election campaign. Isn't that what primaries are for? • Economist.comfblogsflexington
47 Also in this section 48 Guatemala's new president 48 Canada's oil industry
For daily analysis and debate on the Americas, visit Economist.comfamericas
Mexico's do-nothing Legislature
The siesta congress
M EXICO CITY
Reforms languish while overpaid, underworked lawmakers bicker
A FTER a fortnight of Christmas fiestas, ./'"\. Mexicans groggily returned to work
two weeks ago. Or rather, most of them did. For the 500 deputies and 128 senators of the national Congress, the holidays roll on until February. Mexico's lawmakers sit for only 195 days a year, the second-fewest among Latin America's bigger countries. (Their $11,200-a-month pay, however, is the highest after Brazil's.) When they do stir themselves to vote, it is more often to block rivals' bills than to pass reforms. Gridlock in the palace of San Lazaro partly explains why Felipe Calderon's presidency, which ends in December, now looks like a six-year damp squib. Mr Calde ron has identified many of Mexico's bottle necks. But most of his big proposals have floundered in Congress. A modest fiscal re form passed in 2007 was eased along only by an electoral law to help the opposition. Last year a competition law tentatively prodded the country's mighty monopo lies. But changes to the backward energy sector in 2008 were diluted beyond recog nition. A reform of the political system has been similarly gutted and is yet to pass. And there is still no sign of a promised law to improve competition in telecoms. Even where there is consensus, Con gress contrives to disagree. All the main parties say they want to merge the 2,ooo plus local police forces, which are helpless
before the country's drug mafias. But five years into the war on organised crime, the relevant laws have not passed. In 2010 Mr Calderon proposed a labour reform mak ing hiring and firing easier. The Institution al Revolutionary Party (PRI), the biggest opposition group, rejected it, only to pro duce a similar plan itself last year. But in December Congress delayed all labour bills indefinitely. The same month, it ap proved three counsellors to the electoral authority, 14 months late. Earlier, confirm ing a Supreme Court judge took 15 months. The Senate has been the less obstruc tive chamber. Mr Calderon's conservative National Action Party (PAN) is its biggest force, and the Senate leaders of the PRI and leftist Party of the Democratic Revolution (PRD) are more reformist than their coun terparts in the lower house. There, many PRI legislators owe political debts to En rique Pena Nieto, their presidential candi date, who does not want to give the PAN any victories before the July poll. The PRD candidate, Andres Manuel Lopez Obrador, also has a base in the lower house. Co-operation has been especially rocky since 2009, when the PAN attacked the PRI in mid-term elections. The mood soured further when the PAN formed a brief elec toral alliance with its ideological oppo sites, the PRD, to push the PRI out of some governorships. With this deal, "the presi-
dent cancelled the possibility of working according to agreement and consensus," says Heliodoro Diaz, a PRI congressman. Such rivalries exist in any democracy. Yet "in Latin America, [Mexico's Congress] stands out as a bad performer," says Victor Lapuente, a political scientist at Gothen burg University in Sweden. Unsurprising ly, there has been more conflict since one party rule ended in 1997. No president has had a legislative majority since then. But Brazil's leaders have coped under worse conditions: neither Luiz Inacio Lula da Sil va nor Fernando Henrique Cardoso ever controlled more than 20% of Congress. Building coalitions is harder in Mexico, where congressmen are wedded to their parties and hard to buy off. No politician, from president to mayor, may stand for consecutive re-election. This quirk means that politicians depend on party bosses, not voters, for their next job, making it es sential to toe the party line. (Mr Calderon's political reform included re-election, but was crushed in Congress.) Voters are unusually loyal too. Mr La puente and Jose Fernandez-Albertos, of the Institute of Public Goods and Policies in Madrid, found that in Brazil parties often do well in presidential elections but badly in simultaneous congressional races, or vice versa. In contrast, in Mexico they tend to register near-identical levels of support, as voters rarely split their ballots. This link gives lawmakers every incentive to scup per the president's agenda. The July 1st elections will completely re new both houses of Congress as well as the presidency. Mr Pena's boosters say that if the PRI wins all three-it already has most state governors-the deadlock will end at last. PRI lawmakers insist they will stop blocking legislation only if Mr Pena ��
The Economist J a n ua ry 2 1st 2012
48 The Americas
� wins. "There will be labour reform after the elections of July 2012, when we have a president identified with the principles of the revolution," Armando Neyra, a PRI congressman, said in December. Others doubt that Mr Peiia will be so revolutionary. He recognises that the oil in dustry needs foreign private investment, which the PRI has blocked. But many a president has buckled before the mighty oil-workers' union. Mr Peiia turned against the labour reform after unions com plained. He has befriended the teachers' union, the biggest of all (as did Mr Calde ron). And he has been given friendly cover age by Televisa, a TV giant eager to protect its dominant position. Mexico's future is uncertain, but its legislators will have plen ty of time to ponder it during their summer holiday-which begins in April. • Guatemala's new president
Ouicl< march -
G UA T E M A LA CITY
A former general must move fast to meet expectations
"
Thas
HE change has begun. The change arrived," declared Otto Perez Molina as he donned Guatemala's presi dential sash on January 14th. Quoting Ma yan astronomers who set the start of a new 5,125-year epoch in 2012, Mr Perez, a former general, vowed to save the country from its "crisis" of crime and poverty. Guatemala has grave problems and fee ble means to combat them. Its murder rate of 39 penoo,ooo people, partly spurred by drug gangs, is among the world's highest. Slow violence is done on a bigger scale by malnutrition, which stalks half the coun try's children, the worst rate in the Ameri cas. Government revenues are just over a tenth of GDP, the region's lowest share. Mr Perez won the election by pledging an "iron fist" against crime and corruption, which he says have "infected" the state. Supporters hope for army-style efficiency. Critics worry that as head of military intel ligence during some of the country's 36year civil war, he must have known of the atrocities committed by his side. Mr Perez's backers note that he negotiated the 1996 peace accords, which shrunk the army. The president has promised results fast. Mauricio Lopez Bonilla, the interior minis ter, says he hopes to cut the murder rate to 30-35 per 1oo,ooo by July. He plans to in crease the police force's ranks by 40% and the army's by 22%. Claudia Paz y Paz, the at torney-general, will stay on, despite pursu ing several of Mr Perez's former army col leagues. The UN-sponsored anti-impunity commission, CICIG, is likely to be invited
to stay after its mandate expires in 2013. Mr Perez has promised to reduce the share of children who are malnourished to 40%. That requires cash. He hopes to find some money by cutting ties to publicly funded NGOs with opaque accounts, on which the previous government relied. But the necessary sums can only come from raising the tax take, via reforms that busi ness leaders have delayed for years. The appointment as finance minister of Pavel Centeno, who has an academic rather than corporate background, is a first step. Congress will be a trial for Mr Perez, whose Patriot Party has only about 6o of the 158 seats (politicians change allegiance at will, so the total will vary). Some con gressmen from the left-leaning UNE and populist Lider parties skipped his inaugu ration. The Patriots should be able to form a majority via a rickety alliance. But Guate mala's disposable parties and footloose politicians mean he may only have a few months to pass a fiscal reform. Mr Perez might take heart from the op position's woes. Lider's Manuel Baldizon, a businessman from lawless Peten, cam paigned on promises of the death penalty and unaffordable handouts. But Lider now controls just 24 seats. One of its congress men was killed on January 13th, as he was reportedly set to defect. UNE did not field a presidential candidate after its hopeful, Sandra Torres, was disqualified for being only recently divorced from the then-presi dent. Her sister Gloria, a former party sec retary, is wanted for money-laundering. Mr Perez's iron fist is unlikely to crush all of Guatemala's problems. But if he can make his mark, today's unhappy epoch may at least be shorter than 5,125 years. • Canada's oil industry
What goes around VANCO U V E R
A proposed pipeline to the Pacific runs into trouble
Slay a decision last year on a proposed
OON after Barack Obama chose to de
Alberta-to-Texas oil pipeline called Key stone XL, Stephen Harper, Canada's prime minister, warned that his country would not be left at the altar. "This does under score the necessity of Canada making sure that we're able to access Asian markets for our energy products," he said. The threat was clear: if the United States did not want oil from Alberta's dirty tar sands, Canada would build a pipeline to the Pacific and ship the stuff to Asia. There, says En bridge, the firm behind the project, each barrel might fetch $20 more (counting shipping) than in America. On January 18th Mr
0bama rejected Keystone XL. New calls for
Canada to look west will surely follow. Yet the domestic opponents to the Northern Gateway pipeline, linking Ed monton with the port of Kitimat, seem to be copying the campaign against Keystone XL. In 2010, 55 of Canada's native tribes (called First Nations) signed a declaration rejecting the project. At the first day of the National Energy Board's (NEB) hearings on the pipeline, held on January 10th, the chiefs of the Haisla tribe said they feared an oil spill would ruin their fishery. Some 4,300 people have signed up to speak. The pipeline's opponents still face an uphill battle. A December poll by Ipsos Reid found that British Columbians back it by 48% to 32%. And Mr Harper is close to the oil industry. Joe Oliver, the natural-re sources minister, recently wrote an open letter accusing "radical groups" with "funding from foreign special-interest groups" of delaying and undermining the debate. Vivian Krause, a blogger in Vancou ver, has released documents showing that American foundations have given $300m since 2000 to Canadian green and aborigi nal groups for environmental campaigns. Enbridge is also campaigning for Gate way. It promises to use double-hulled tank ers with local pilots to maximise safety, and notes that Vancouver has not had an oil spill in 50 years. And it is courting the First Nations with jobs, contracts and fi nancing for a 10% stake in the pipeline. The firm says that 20 of the 43 tribes directly af fected by the project now support it. The NEB's recommendation is not due until the end of 2013, giving the pipeline's opponents time to make their case. As the hearings progress, Canada's big green groups will j oin the aborigines. But per haps the biggest factor in Gateway's fate will be America's final verdict on Keystone XL. (Republicans in Congress forced Mr Obama to make a decision within 6o days, but Keystone XL's proponents plan to reap ply.) Gateway's critics might need to hold their noses and join the "drill, baby, drill" crowd south of the border. •
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Th e visible hand
The crisis of Western libera l capitalism has coincided with the rise of a powerful new form of state capitalism in emergi n g markets, says Adrian Wooldridge
AC K N O W L E D G M E N TS Apart from the people mentioned in the text, the author would like to thank the following for their help with this special report: Todd Berman, Hans Christiansen, Dag Detter, Joseph Fan, Juan Fernandez, Mickael Gibault, Sergei Guriev, Arthur Kroeber, Nicholas Lardy, Jin Liqun, Nan Lin, David Michael, Randall Morek, Andrei Shleifer, Konstantin Sonin, Seda Pumpyanskaya, John Quelch, Sven-Olaf Vathje, Geng Xiao and George Yip
The Economist Jan uary 21st 2012
BEATRICE WEBB grew up as a fervent believer in free markets and limit ed government. Her father was a self-made railway tycoon and her mother an ardent free-trader. One of her family's closest friends was Her bert Spencer, the leading philosopher of Victorian liberalism. Spencer took a shine to young Beatrice and treated her to lectures on the magic of the market, the survival of the fittest and the evils of the state. But as Be atrice grew up she began to have doubts. Why should the state not inter vene in the market to order children out of chimneys and into schools, or to provide sustenance for the hungry and unemployed or to rescue fail ing industries? In due course Beatrice became one of the leading archi tects of the welfare state-and a leading apologist for Soviet communism. The argument about the rel ative merits of the state and the market that preoccupied young Beatrice has been raging ever since. Between 1900 and 1970 the pro-statists had the wind in their sails. Governments started off by weaving social safety nets and ended up by nationalising huge chunks of the economy. Yet be tween 1970 and 2000 the free marketeers made a comeback. Ronald Reagan and Margaret Thatcher started a fashion across the West for privatising state-run industries and pruning the wel fare state. The Soviet Union and its outriggers collapsed in ruins. The era of free-market tri umphalism has come to a judder ing halt, and the crisis that destroyed Lehman Brothers in 2008 is now en gulfing much of the rich world. The weakest countries, such as Greece, have already been plunged into chaos. Even the mighty United States has seen the income of the average worker contract every year for the past three years. The Fraser Institute, a Canadian think-tank, which has been measuring the progress of economic freedom for the past four decades, saw its worldwide "freedom index" rise relentlessly from 5.5 (out of10) in 1980 to 6.7 in 2007. But then it started to move backwards. The crisis of liberal capitalism has been rendered more serious by the rise of a potent alternative: state capitalism, which tries to meld the powers of the state with the powers of capitalism. It depends on govern ment to pick winners and promote economic growth. But it also uses cap italist tools such as listing state-owned companies on the stockmarket and embracing globalisation. Elements of state capitalism have been seen in the past, for example in the rise of Japan in the 1950s and even of Germany in the 1870s, but never before has it operated on such a scale and with such sophisticated tools. State capitalism can claim the world's most successful big economy for its camp. Over the past 30 years China's G DP has grown at an average rate of 9.5% a year and its international trade by 18% in volume terms. Over the past ten years its GDP has more than trebled to $11 trillion. China has taken over from Japan as the world's second-biggest economy, and from America as the world's biggest market for many consumer goods. ��
CONTE NTS
5 Something old, something new A brief history of state capitalism
6 State capitalism's global reach N ew m asters of the u niverse
9 A choice of models T h e m e a n d variati o n s
12 Pros and cons Mixed bag
1 5 Going abroad 17
The world in thei r ha nds
The long view A n d t h e wi n n e r is . . .
A list of sources is at Economist.comjspecialreports An audio interview with the author is at Economist.comjaudiovideof spedalreports
3
S P E C I A L R E P O RT S TA T E C A P I TA L I S M
The power and the g lory Share of nationa l/state-controlled companies' capitalisation on MSCI national stockmarket index J u n e 201 1 , % of tota l China
June
Brazil
Russia
Share of nationa l/state-controlled companies in MSCI emerging-ma rket index by industry sector
2011, %
0
10
20
30
40
50
60
70
Energy Utilities Telecommun ication services
•
Biggest global Listed companies by revenue, 2010, $bn
422
Walmart
378
Royal Dutch Shel l
Sources: Deutsche Bank;
�
4
355
309
Exxon Mobil
Fortune; The Economist
BP
f
National and or state-controlled companies
• Private firms
Finan c ials Industrials Materials
273
Sino pee Group
240
226
China State Grid National Petroleum Corporation
222
Toyota
The Chinese state is the biggest shareholder in the country's 150 biggest companies and guides and goads thousands more. It shapes the overall market by managing its currency, directing money to favoured industries and working closely with Chinese companies abroad. State capitalism can also claim some of the world's most powerful companies. The 13 biggest oil firms, which between them have a grip on more than three-quarters of the world's oil reserves, are all state-backed. So is the world's biggest natural-gas company, Russia's Gazprom. But successful state firms can be found in almost any industry. China Mobile is a mobile-phone goliath with 6oom customers. Saudi Basic Industries Corpora tion is one of the world's most profitable chemical companies. Russia's Sberbank is Europe's third-largest bank by market capi talisation. Dubai Ports is the world's third-largest ports operator. The airline Emirates is growing at 20% a year. State capitalism is on the march, overflowing with cash and emboldened by the crisis in the West. State companies make up Bo% of the value of the stockmarket in China, 62% in Russia and 38% in Brazil (see chart). They accounted for one-third of the emerging world's foreign direct investment between 2003 and 2010 and an even higher proportion of its most spectacular ac quisitions, as well as a growing proportion of the very largest firms: three Chinese state-owned companies rank among the world's ten biggest companies by revenue, against only two European ones (see chart). Add the exploits of sovereign-wealth funds to the ledger, and it begins to look as if liberal capitalism is in wholesale retreat: New York's Chrysler Building (or 90% of it anyway) has fallen to Abu Dhabi and Manchester City football club to Qatar. The Chinese have a phrase for it: "The state ad vances while the private sector retreats." This is now happening on a global scale. This special report will focus on the new state capitalism of the emerging world rather than the old state capitalism in Eu rope, because it reflects the future rather than the past. The report will look mainly at China, Russia and Brazil. The recent protests in Russia against the rigging of parliamentary elections by Vladi mir Putin, the prime minister, have raised questions about the country's political stability and, by implication, the future of
204
196
Japan Post Holdings
Chevron
Health care Information te c hnology Consumer discretionary Consumer staples
nil
state capitalism there, but for the moment nothing much seems to have changed. India will not be considered in detail because, although it has some of the world's biggest state-owned compa nies, they are more likely to be leftovers of the Licence Raj rather than thrusting new national champions. Today's state capitalism also represents a significant ad vance on its predecessors in several respects. First, it is develop ing on a much wider scale: China alone accounts for a fifth of the world's population. Second, it is coming together much more quickly: China and Russia have developed their formula for state capitalism only in the past decade. And third, it has far more so phisticated tools at its disposal. The modern state is more power ful than anything that has gone before: for example, the Chinese Communist Party holds files on vast numbers of its citizens. It is also far better at using capitalist tools to achieve its desired ends. Instead of handing industries to bureaucrats or cronies, it turns them into companies run by professional managers. The return of history
This special report will cast a sceptical eye on state capital ism. It will raise doubts about the system's ability to capitalise on its successes when it wants to innovate rather than just catch up, and to correct itself if it takes a wrong turn. Managing the sys tem's contradictions when the economy is growing rapidly is one thing; doing so when it hits a rough patch quite another. And state capitalism is plagued by cronyism and corruption. But the report will also argue that state capitalism is the most formidable foe that liberal capitalism has faced so far. State capitalists are wrong to claim that they combine the best of both worlds, but they have learned how to avoid some of the pitfalls of earlier state-sponsored growth. And they are flourishing in the dynamic markets of the emerging world, which have been grow ing at an average of s.s% a year against the rich world's 1.6% over the past few years and are likely to account for half the world's GDP by 2020. State capitalism increasingly looks like the coming trend. The Brazilian government has forced the departure of the boss of Vale, a mining giant, for being too independent-minded. The French government has set up a sovereign-wealth fund. The The Economist January 21st 2012
��
S P E C I A L R E P O RT S TAT E C A P I TA L I S M
� South African government is talking openly about nationalising companies and creating national champions. And young econo mists in the World Bank and other multilateral institutions have begun to discuss embracing a new industrial policy. That raises some tricky questions about the global eco nomic system. How can you ensure a fair trading system if some companies enjoy the support, overt or covert, of a national gov ernment? How can you prevent governments from using com panies as instruments of military power? And how can you pre vent legitimate worries about fairness from shading into xenophobia and protectionism? Some of the biggest trade rows in recent years-for example, over the China National Offshore Oil Corporation's attempt to buy America's Unocal in 2005, and over Dubai Ports' purchase of several American ports-have in volved state-owned enterprises. There are likely to be many more in the future.
The rise of state capitalism is also undoing many of the as sumptions about the effects of globalisation. Kenichi Ohmae said the nation state was finished. Thomas Friedman argued that governments had to don the golden straitjacket of market disci pline. Naomi Klein pointed out that the world's biggest compa nies were bigger than many countries. And Francis Fukuyama asserted that history had ended with the triumph of democratic capitalism. Now across much of the world the state is trumping the market and autocracy is triumphing over democracy. Ian Bremmer, the president of Eurasia Group, a political risk consultancy, claims that this is "the end of the free market" in his excellent book of that title. He exaggerates. But he is right that a striking number of governments, particularly in the emerging world, are learning how to use the market to promote political ends. The invisible hand of the market is giving way to the visi ble, and often authoritarian, hand of state capitalism. •
Something old, something new IN S E PTEM B E R 1789 George Washington appoi nted Alexa nder Hamilton a s Ameri ca's fi rst ever treasury secretary. Two years
owned enterprises have a combined value
of a lmost $2 trillion and employ 6 m people. The n ew ki n d of state ca pita li s m
later Hamilton presented Con g ress with a
started in Singapore. Lee K u a n Yew, its
" Report on M a n ufactures", his plan to get
founding father, was prime minister for
the yo u n g country's economy goi ng and
more than 30 years and a tireless advocate
provide the u n derpi n nings for its hard
of"Asian values", by which he meant a
fo ught i n dependence. H a mi lton had no
mixture of fa mily values a n d autho ritar
time for Adam Smith's ideas about the
ianism. He rivalled Beatrice Webb in his
hidden h a n d . Am erica n eeded to p rotect
faith i n the wisdom of the state. But he also
its infant i n d ustries with tariffs if it wanted
grasped that Sin gapore's best chance lay in
to see them grow up.
attracti n g the world's most powerful corpo
State capitalism has been around for
rations, though he rejected the laissez-faire
almost as long as capitalism itself. An glo
ideas that flourished in Asia's other great
Saxons like to thi n k of themselves as the
port city, H o n g Kong.
pere n nial defenders of free-ma rket ortho
Singapore could easily have remained 1.3 billion people i nto the world eco n o my.
doxy against conti nental E u ropea n a n d
a ti ny oddity but for a succession of earth
Asian heresy. In rea lity every risi n g power
s h a king events. The first was the oil embar
has relied on the state to kickstart growth
go i m posed by the Arab petrostates in the
Soviet com munism. This was i nitia lly seen a s o n e o ft h e great tri u m p h s ofliberalism, b u t it
The fi nal event was the collapse of
or at least to protect fragile industries.
wake of the 1973 Yom Ki ppur war, quadru
Even B ritai n , the crucible of free-trade
pli n g the price of oi l and s hifting the bal
soon u n leashed dark forces. Com m u nist
thi n ki n g , created a giant national cha mpi
a n ce of power i n the world economy. Arab
a ppa ratchi ks-tu r n ed-oliga rchs grabbed
govern m e nts tightened their control over
c h u n k s of the economy. Between 1990 and
the n ewly valuable oi l companies a n d
1995 the cou ntry's G D P dropped by a third.
o n in the form of the Eastindia Company. The appetite for i n d ustrial policy grew with the eati n g , and after the second
amassed growi n g financial surpluses. For
M a le life expecta n cy s h ra n k from 64 to 58.
world wa r interventi o n became a m a rk of
them the economic s h ock was proof of the
O nce-ca ptive nations broke away. In 1998 the
civi lisation as well as common sense. Th e
power of their oil weapon. For the Chin ese it
country defaulted on its debts.
Europea n s created i n d ustrial powerhouses
demonstrated the i m portance of securi n g a
a n d welfa re states. The Asians poured
safe supply of oil a n d other raw materials.
resources into n ational cha m pions. This long era of state activism has
The second event was Deng Xiaoping's
The post-Soviet disaster created a cravi n g for order. Vladi mir Puti n , then Rus sia's p resi dent, reasserted di rect state co n
transformation of China. Deng borrowed
trol over "strategic" i n d ustries a n d b rought
left a surprisi n g ly powerful legacy, despite
h eavi ly from the Singaporean model. H e
the remai ning p rivate-sector oligarchs to
the more recent fashion for privatisation
embraced globalisation b y creati ng special
heel. Butjust as i mportant as the backlash i n
and deregulation. The rich world still has a
economic zones and inviti n g foreign com
Russia was the o n e i n Chi n a . The collapse of
large n u m ber of state-owned or state
panies in. He espoused corpo ratism by
the Soviet Union confirmed the Chi n es e
domi nated companies. For exa m p le,
forci ng state enterprises to model them
Com m u nist Party's deepest fear: that the end
Fra n ce owns 85% of EDF, an en ergy com
selves o n Western companies. And he
of party rule would mean the breakdown of
pany; Japan 50% of Japan Tobacco; a n d
con centrated resources on nati o n a l cham
order. The o n ly safe way forward was a j udi
Germany 32% o f Deutsche Telekom . These
pions and investment in research and
cious mixture of private enterprise a n d state
n u mbers add up: across the OECD state-
development. By doing a ll this, h e plugged
capitalism .
The Economist Jan uary 21st 2012
5
S P E C I A L R E P O RT S TA T E C A P I TA L I S M
State capitalism's global reach
New masters of the un1verse •
H ow state enterprise is spreading
6
THE HEADQUARTERS OF China Central Television, de signed by Rem Koolhaas, a Dutch architect, looks like a monstrous space invader striding across Beijing. The headquar ters of the China National Offshore Oil Corporation resembles an oil tanker emerging from a shimmering sea. It was designed by Kohn Pedersen Fox, an international firm of architects, and sits directly opposite China's ministry of foreign affairs. All over central Beijing you see state companies erecting giant monu ments to themselves, reflecting their huge power and their vi sion of themselves as agents of modernisation. That vision is not confined to Beijing. Petronas, Malaysia's state-owned oil company, has built an 88-storey tower in the heart of Kuala Lumpur. In Moscow's spanking new Moskva City Business Complex two sleek glass skyscrapers sit side by side the headquarters of Sberbank and VTB, Russia's largest and sec ond-largest state banks. The most striking thing about state-owned enterprises (soEs) is their sheer collective might in the emerging world. They make up most of the market capitalisation of China's and Rus sia's stockmarkets and account for 28 of the emerging world's 100 biggest companies. True, the state-owned sector as a whole has been in rapid retreat. It now makes up only about a third of China's and Russia's GDP, against almost all of it two decades ago. But this decline is the result of selective pruning rather than liberalisation. Governments have been letting go of the small in order to strengthen their hold over the large. This has resulted in a couple of paradoxes. The soEs are be coming wealthier and more powerful even as the overall state sector shrinks, and governments are tightening their grip on the commanding heights of the economy even as the private sector grows. The concentration of power in an inner circle of SOEs has been gathering pace over the past decade: China's 121 biggest soEs, for example, saw their total assets increase from $360 bil lion in 2002 to $2.9 trillion in 2010 (though their share of GDP has declined). And it has been given an extra boost by the 2007-08 fi nancial crisis: in 2009 some 85% of China's $1-4 trillion in bank loans went to state companies. Governments are becoming more sophisticated owners. Only a handful of SOEs are still reporting directly to government ministries. Most governments prefer to exercise control through their ownership of shares: they have become the most powerful shareholders across much of the developing world from China to Thailand and from Russia to Saudi Arabia. Sometimes they hold all the shares, particularly in oil companies like Malaysia's Petronas, transport firms like China's Ocean Shipping Company and quasi-military outfits like Russia's United Aircraft Corpora tion. But increasingly they prefer to dilute their shareholdings. The United Nations Conference on Trade and Development de fines a state-owned company as one in which the state owns more than 10% of the shares. Some governments have mastered the art of controlling companies through minority stakes: in Rus sia, for example, the state has retained golden shares in 181 firms. State enterprises have become more productive, thanks to a mixture of judicious pruning and relentless restructuring. In China their return on assets increased from 0.7% in 1998 to 6.3% in
2006 (though some say the figures are misleading). They have also become more international: companies that once served only their domestic market, such as Baosteel and Shanghai Elec tric, are striding onto the global stage. These three develop ments-more sophisticated methods of control, more productive use of assets and rapid globalisation-are going hand in hand. The hard core of the state-owned sector are the national oil companies: the 13 giants that control more than three-quarters of the world's oil supplies. Governments continue to keep a heavy hand on this industry. The Chinese state owns 90% of the shares in Petro China and 8o% of those in Sinopec. Even so, the national oil companies are being transformed by the same forces that are transforming the state-owned sector in general. A few companies preserve the great tradition of state-spon sored incompetence and overmanning. Venezuela's Petroleos de Venezuela, which is central to the patronage machine of the country's president, Hugo Chavez, is an obvious example. More surprisingly, so is Mexico's Pemex, which has successfully resist ed numerous attempts to reform it. Malaysia's Petronas has im proved dramatically over the past five years. Saudi Arabia's Aramco, which controls more than a tenth of the world's oil and with it the fate of the world economy, is almost as well managed as private-sector oil companies such as Exxon Mobil. The Saudi monarchy has slimmed the company's workforce, brought in professional managers, contracted out ancillary work and formed alliances with international companies. The world is their oyster
More generally, national energy companies are no longer content just to sit at home and pump the oil or gas. They are in creasingly venturing abroad in order to lock up future energy supplies or forming alliances with private-sector specialists to increase their access to expertise and ideas. Gazprom has been buying up oil and gas companies across eastern Europe and Asia. In 2008 it bought a 51% stake in Naftna Industrija Srbije, a Serbian energy giant. Chinese oil companies have been striking deals across Africa: in 2006 Sinopec bought a huge Angolan oil well for $692m. The multiplying alliances between national and in- ��
II
Too precious to let go Proven oil and gas reserves,
2010
Billion barrels of oil equivalent National and/or state-controlled companies
50
100
150
- Global private firms
200
250
300
NIOC (Iran) Saudi Aramco PDVSA (Venezuela) Kuwait Petroleum Gazprom (Russia) Qatar Petroleum NOC. SOC. MDC (Iraq) ADNOC (UAE) Turkmengaz Libya NOC Exxon Mobil PetroChina NNPC (Nigeria) Rosneft (Russia) Lukoil (Russia) Sources: Oliver
•
Wyman; The Econamist The Economist January 21st 2012
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S P E C I A L R E P O RT S TA T E C A P I TA L I S M
The acquisitive state
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� ternational companies are not always successful: BP, for exam ple, will not rush into any future deals with Russia's Rosneft. But they are plugging national energy companies into the global market for people and ideas and closing the gap between the state-run and the private sector. State capitalism also has a collection of companies that sit at the opposite end of the ownership scale from national energy companies: national champions that formally are privately owned but enjoy a huge amount of either overt or covert sup port from their respective governments. Sometimes such gov ernments prefer to exercise their patronage at arm's length be cause they have little experience of the sector; this is often true of the IT industry in China. Sometimes they offer their patronage to a private company after it has become a winner. Either way the end result is the creation of a new class of state companies: na tional champions that may not be owned by governments but are nevertheless closely linked to them. China's Lenovo likes to think of itself as a private-sector computer company, but the Chinese Academy of Sciences pro vided it with seed money (and still owns lots of shares), and the government has repeatedly stepped in to smooth its growth, not least when it acquired IBM's personal-computer division for $1.25 billion in 2004. Brazil's Vale also considers itself a private sector mining company, but the government treats it as a nation al champion and recently forced its boss, Roger Agnelli, to step aside because it did not like his plans to sack workers. There is a long list of national champions that operate in the shadow of the state, including China's Geely in cars, Huawei in telecoms equip ment and Haier in white goods. The wealth of nations
8
State capitalists are not just running companies; they are also managing huge pools of capital in the form of sovereign wealth funds (swFs). Leviathan is becoming a finance capitalist as well as a captain of industry. The sovereign-wealth business was pioneered decades ago by the petrostates and by Singapore. The Kuwait Investment Au thority was set up in 1953. But more recently the business has been turbocharged by two developments: the surge in energy prices and China's accumulation of a vast current-account sur-
plus. To day's swFs account for some of the world's biggest pools of capital. The Abu Dhabi Investment Authority controls $627 billion, putting it in the same league as some of the largest Ameri can mutual funds. Saudi Arabia's SAMA foreign-holdings com pany in December 2011 controlled $473 billion, China's SAFE In vestment Company $568 billion and China Investment Corporation $410 billion. In all, the world's sovereign-wealth funds control about $4.8 trillion in assets, a figure that is likely to rise to $10 trillion by the end of this decade. Sovereign-wealth funds come in two varieties: "savings" funds intended to find productive homes for investments, and "development" funds that also promote economic develop ment. China Investment Corporation has focused on producing a portfolio of financial assets, for example, whereas Abu Dhabi's various investment funds have been more interested in funding the region's economic development to prepare for the day when the oil runs out. In 2008 Abu Dhabi created a fund that special ises in investing in high-tech companies, both at home and abroad. In its first big deal it formed an alliance with Advanced Micro Devices, an American chipmaker, to create a local semi conductor manufacturer, GLOBALFOUNDRIES. The financial crisis of 2007·08 shifted the argument in fa vour of the second kind of fund. Soon after China Investment Corporation was set up in September 2007 it saw the money it had put into American investment banks turn to ashes. Petros tate SWFS have increased their emphasis on investing in science and research. Sovereign-wealth funds in Kuwait, Qatar, Russia, China, Kazakhstan and Ireland have been asked to support do mestic financial institutions. Almost all funds are taking a more active interest in the way the companies they own are managed, for example by demanding a seat on the board. Nasser Saidi, chief economist of the Dubai International Fi nancial Centre, argues that the rise of the emerging world will in evitably force the global financial system to change, from a hub and-spokes model (with London and New York acting as the hubs) to a spider's-web model of many interconnected hubs. The 2007-08 crisis has dramatically speeded up this process: SWFS now like to do much of their business with each other rather than going through rich-world intermediaries. In 2009 China Investment Corporation and the Qatar Investment Au thority signed a joint-venture agreement. In the following year a consortium of nine funds, including the Government of Singa pore's Investment Corporation, China Investment Corporation and the Abu Dhabi Investment Council, invested $1.8 billion in BTG Pactual, a Brazilian investment bank spun off from UBS, a Swiss bank. It is possible for a coun try to have any or all of these Deep pockets institutions in place without Largest sovereign-wealth funds being a member of the state Assets, December 2011, $trn capitalist club. Norway 0.4 0.8 1 .2 boasts the world's 13th-big China* gest oil company by revenue, UAE Statoil, and its third-biggest sovereign-wealth fund, the Norway Government Pension Fund, Saudi Arabia with $560 billion in assets, Singapore but requires both of them to Kuwait behave like regular compa Hong Kong nies. These various elements Russia can also be put together in a variety of ways. The next Qatar section will look at some of Austra lia the different forms that state Source: Sovereign capitalism can take. • *Estimate Wealth Fund Institute
I
The Economist January 21st 2012
A choice of models
Theme and variations
State capitalism i s not a L L the same
IT IS EASY for a casual visitor to China to be fooled into thinking that he is in a normal capitalist country. The big cities are dotted with Starbucks and Kinkos. The newspapers run stories about small businesspeople falling prey to loan sharks. Business executives are whisked around in Mercedes cars with blackened windows. Their wives and mistresses idle their after noons away in doga classes-yoga that includes the pet dog. But the form of capitalism on display is highly idiosyncrat ic. Company bosses are routinely moved to rival companies without any explanation. Company headquarters have space set aside for representatives of the armed forces. And the deeper you look, the queerer things become. In his indispensable book, "The Party", Richard McGregor points out that the bosses of Chi na's so-odd leading companies all have a "red machine" sitting next to their Bloomberg terminals and family photographs that provides an instant (and encrypted) link to the Communist Party's high command. What might be called "the party state" exercises a degree of control over the economy that is unparalleled in the rest of the state-capitalist world. The party has cells in most big compa nies-in the private as well as the state-owned sector-complete with their own offices and files on employees. It controls the ap pointment of captains of industry and, in the SOES, even cor porate dogsbodies. It holds meetings that shadow formal board meetings and often trump their decisions, particularly on staff appointments. It often gets involved in business planning and works with management to control workers' pay. The party state exercises power through two institutions: The Economist Jan uary 21st 2012
the State-Owned Assets Supervision and Administration Com mission (SASAC) and the Communist Party's Organisation De partment. SASAC, which holds shares in the biggest companies, is the world's largest controlling shareholder and the state-capi talist institution par excellence. It has been spearheading the policy of creating national champions by consolidating and pruning its portfolio: the number of companies under its super vision has declined from 198 in 2003 to 121 today. It has also been implementing the party's policy of creating a "harmonious soci ety" by regulating pay. In 2009 the average SOE boss earned $88,ooo and the highest-paid, the chairman of China Mobile, $182,000. High pay in soEs has been a big source of disharmony. SASAC can be something of a paper tiger. It has been trying for years to force the SOEs to pay higher dividends to the govern ment, with only limited success. Similarly, nobody believes that the SOE bosses' nominal pay bears any relation to their real re muneration. However, nobody would apply the term "paper ti ger" to the Organisation Department. Created by Chairman Mao in 1924, it has become the world's mightiest human-resources de partment. It appoints all the senior figures in China Inc. In 2004 it reshuffled the heads of the three biggest telecoms companies. In 2009 it rotated the bosses of the three biggest airlines. In 2010 it did the same to the chiefs of the three biggest oil companies, each of which is a Fortune sao company. Even the most successful top executives of China's SOEs are cadres first and company men second. They care more about pleasing their party bosses than about the global market. The party state has reinforced its power by creating "verti cal" business groups. In most emerging markets (including Hong Kong next door) business groups are "horizontal": companies sprawl into adjacent businesses-telecoms companies into ho tels, shipping companies into property-in order to exploit their local connections. In China business groups focus on particular industries. The party state encourages companies to band to gether into industry clusters by giving them preferential access to contracts and stockmarket listings. It also encourages them to es tablish subdivisions such as a domestic holding company, a fi nance company, a research institute and a foreign division. SA SAC typically owns 100% of the shares in the holding company. The holding company in turn owns a smaller proportion of �� 9
S P E C I A L R E P O RT S TA T E C A P I TA L I S M
�
shares-say 6o%-in the foreign division. This makes it possible for business groups to present lots of different faces-for instance, an inward-looking one in the form of the holding company and an outward-looking one in the form of the international divi sion. It also allows the party state to exercise control of an entire chain of companies. Thus PetroChina might look like a regular Western company, with a listing on the New York Stock Ex change. But in fact it is the international division of a huge group called China National Petroleum Corporation, the foreign head of a dragon whose body and raison d'etre lie in Beijing. The Kremlin as capitalist-in-chief
In Russia the past decade has seen a remarkable strengthen ing of the power of the state, which during Boris Yeltsin's period of "wild privatisation" looked as if it might crumble. The Krem lin has turned scattered companies into national champions. Aeroflot reabsorbed regional airlines spun off in the 1990s. Rus sian Technologies rolled up hundreds of state companies, many of which had little to do with technology, into a vast conglomer ate. The government has also renationalised industries that were privatised in the 1990s. Rosneft, an oil company, took over most of Yukos from Mikhail Khodorkovsky, once Russia's richest man, and Gazprom bought Sibneft from Roman Abramovich. As a result the Russian state once again controls the com manding heights of the economy-only this time through share ownership rather than directly. The state holds huge chunks of the shares of the country's biggest and most strategic companies, including Transneft, a pipeline company; Sukhoi, an aircraft maker; Rosneft; Sberbank; Unified Energy Systems, an electricity giant; Aeroflot; and Gazprom. The Kremlin has also established control over Russia's oli garchs, reducing once-mighty rottweilers to shivering chihua huas and transforming supposedly private companies into or gans of the state. The brutal persecution and imprisonment of Mr Khodorkovsky helped to instil obedience, and periodically
centra ted even if the Kremlin had not been so ruthless. Oil and gas companies, which account for 20% of the country's GDP and 6o% of its exports, thrive on economies of scale and scope. Poor infrastructure encourages vertical integration; for example, met al companies have been buying ports to ensure that they can get their goods out on time. Still, having so much political power in so few hands has enormously increased this concentration. This quintessentially Russian form of state capitalism has nevertheless been embracing the global market. Oil and gas companies have been buying similar firms abroad or listing on foreign stock exchanges. In July 2006 Rosneft raised $11 billion by selling 15% of its shares on the London stock exchange. Russia's sovereign-wealth funds have been particularly keen on buying foreign companies, in part because Russia's own business prac tices are so murky. And Russian businesspeople have bought lots of property abroad, particularly in London. Petrostate capitalism
Oil and water may not mix, but oil and royalty mix very well to create petrostate capitalism. Middle Eastern monarchs have been using oil to keep themselves in funds for decades. But these days some of them are taking a remarkably sophisticated approach to managing their economies, embracing professional management. The al-Maktoums, who rule Dubai, created Dubai World, a huge state-owned holding company, to run their projects. The Saudis have handed the day-to-day management of their biggest companies, Saudi Aramco and Saudi Basic Industries, to professional managers. The petro-roy als have also become enthusiastic practi tioners of state-sponsored modernisation. The al-Maktoums have been trendsetters because they never had much oil to begin with. It now accounts for under 5% of the emirate's GDP. They have provided Dubai with a world-class airport, an important fi nancial hub and a scattering of "knowl edge villages" and "silicon centres". Even conservative Saudi Arabia claims to be building four tech-enabled cities. But the Gulf model of modernisation from above has been plagued by two familiar curses, cronyism and bubbles. There is only so much that professional managers can do to prevent the local royals from damaging the region's companies. Bahrain's Gulf Air and Kuwait Airways have been albatrosses. Dubai World accumulated $8o billion in debt building the world's tal lest skyscraper and a palm-shaped artificial island. The state of Dubai had to be rescued by neighbouring Abu Dhabi. The problems of cronyism and corruption have proved even more toxic in other parts of the Middle East. In Egypt Hosni Mubarak, the president until the Arab spring, handed the man agement of the state companies to incompetent people while making sure his cronies did well out of privatisation. In Algeria SOES are notorious dens of patronage and typically run at only so% of capacity. In Syria the overwhelming majority of the coun try's top 250 SOEs have been in the red for many years.
These varieties of state capitalism all have one thing in common: politicians have far more power than they do under liberal capitalism
10
the state waves a bloody stick at the oligarchs to keep them in their place. They dutifully pick up the tab for public works (such as the 2014 Winter Olympics) and keep out of politics. The private-sector oligarchs have been replaced at the heart of the economy by state-sector bureaugarchs, most of them for mer KGB officials who have close ties with Vladimir Putin and have spent the past decade steadily accumulating power (though not personal stakes in the businesses). Mr Putin, cur rently the prime minister, is chairman of the supervisory board of Vnesheconombank, a state development bank. Igor Sechin, the deputy prime minister, was chairman of Rosneft until Dmi try Medvedev, Russia's president, ordered government ministers to step down as chairmen of state companies' boards of direc tors last year to tidy things up. Such people form the board of Russia Inc, a company that is headed by Mr Putin, dominated by the KGB and dedicated to controlling the country's most lucra tive assets, from oil and gas to nuclear power, diamonds, metals, arms, aviation and transport. The result is a highly unusual form of capitalism, domin ated by a handful of gigantic firms and controlled by a clique of security officials. Two state-controlled companies, Sberbank and Gazprom, account for more than half of the turnover of the Rus sian stock exchange. Russian capitalism would have been con-
Leviathan as a mi nority investor
Brazil is the most ambiguous member of the state-capitalist camp: a democracy that also embraces many of the features of Anglo-Saxon capitalism. But it is worth examining for two rea sons. First, it is a weather vane for state capitalism, a leading pri vatiser in the 1990s that is now forcing its biggest mining comThe Economist January 21st 2012
��
S P E C I A L R E P O RT S TAT E C A P I TA L I S M
� pany, Vale, to keep workers it does not need, and obliging a bunch of smaller companies to embark on subsidised consolida tion. And second, it has invented one of the sharpest new tools in the state-capitalist toolbox. Brazil has spent most of its modern history in pursuit of state-driven modernisation. A survey in the early 1980s showed that it had more than soo SOEs. Brazil launched a privatisation drive in the 1990s to deal with hyperinflation, surging deficits and general sclerosis. But more recently it has moved in a new di rection. The government has poured resources into a handful of state champions, particularly in natural resources and telecoms. It has also produced a new model of industrial policy: replacing direct with indirect government ownership through the Brazil ian National Development Bank (BNDES) and its investment subsidiary (BNDESPar); and swapping majority for minority ownership by acquiring shares in a broad spectrum of different companies. Sergio Lazzarini, of Brazil's Ins per Institute of Educa tion and Research, and Aldo Musacchio, of Harvard Business School, have christened this model "Leviathan as a minority shareholder". This minority-shareholder model has several advantages. It limits the state's ability to use SOES to reward clients or to pur sue social policies. Private shareholders have just enough power to kick up a fuss. But it also gives the state more influence for its money. By 2009 BNDESPar's holdings were worth $53 billion, or just 4% of the stockmarket. Yet the state spoke with a loud voice across corporate Brazil. Messrs Lazzarini and Musacchio have also shown, in a detailed study of 296 firms traded on the Sao Paulo stock exchange between 1995 and 2003, that this model can increase firms' returns on their assets. Brazilian companies typically underinvest in productivity-boosting equipment be cause the capital markets are so underdeveloped. State holdings provide them with money that they cannot get elsewhere. Yet this clever version of state capitalism is currently in dan ger of overreaching itself. Petrobras's discovery, in November 2007, of huge deposits of oil buried deep beneath the Atlantic seabed has filled politicians' heads with dreams of grand pro jects. The shift in the world's balance of power from America to China has also helped to persuade many Brazilians that the fu ture lies with state capitalism. The result has been a burst of un wise interventionism. The government is trying to force Petro-
The Economist Jan uary 21st 2012
bras to use expensive local equipment suppliers despite doubts about their competence. It removed Roger Agnelli from his post as CEO of Vale despite his outstanding record. It has also taken to creating national champions through forced mergers: BRF (Sadia and Perdigao) in the food sector; Oi (which was made to buy Bra sil Telecom) in telecoms; Fibria (vcP and Arucruz) in pulp and paper. Even the most sophisticated models of state capitalism are not safe from over-zealous politicians. The new elite
These varieties of state capitalism all have one thing in common: politicians have far more power than they do under liberal capitalism. In authoritarian regimes they can restructure entire industries at the stroke of a pen. Even in democratic ones like Brazil they can tell the biggest companies what to do. In Chi na party hacks can find themselves running the country's big gest companies (and SOE bosses sometimes get big jobs in the party). In Russia they may be running the biggest companies while also sitting in the cabinet. But there are nevertheless limits to Leviathan's power. State-owned enterprises often have a good deal of opera tional freedom. Edward Steinfeld, a professor at the Massachu setts Institute of Technology who spent many years serving on the board of China National Offshore Oil Corporation, recalls that the company's relationship with its political bosses had "less to do with rigid top-down control than with mixed signals, ambiguity and even outright silence". Such enterprises can also wield a lot of influence over their supposed political masters. China's soEs have successfully frus trated attempts to make them pay more dividends. State-owned energy companies arguably have more influence over energy policy in state-capitalist countries than private energy compa nies have in liberal countries. Over a drink Russians will happily speculate about whether the Kremlin runs Gazprom or Gazprom runs the Kremlin. State-owned enterprises are also producing a more sophis ticated generation of managers: people who have learned about business in the world's best business schools, who have worked abroad and have a far less blinkered view of the world than their predecessors. Katherine Xin, of China Europe International Busi ness School (CEIBS) in Shanghai, says that many SOEs want their managers to have a world-class business education. Baosteel has been sending its senior managers on executive MBA courses for more than a decade. It also brings in academics from Switzerland's IMD business school to provide tailor made courses. CNPC has been sending high-flyers to get MBAS in America since 1999. Ms Xin points out that the Chinese version of the Harvard Business Review is a must-read in the upper echelons of state owned companies. Members of this new generation of managers are changing the management of the public sector, too, as they alternate between the corporate domain and gov ernment. There are currently 17 prominent Chinese political leaders who have held senior positions in large SOEs. Conversely, 27 prominent business leaders are serving on the party's Central Committee. If state capitalism allows politicians to shape companies, it also allows companies to shape politicians. •
11
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Pros and con s
Mixed bag SOEs are good at infrastructure projects, n o t so good at i n n ovation THE HIGH-SPEED train journey from Beijing to Shanghai is a revelation to a visitor used to Britain's dilapidated railway system. Young women in neat red uniforms take pity on a for eigner and guide him to his seat. The train quickly accelerates to its cruising speed of 300km an hour and reaches Shanghai, 1,318km (820 miles) away, in under five hours. The new station there is a festival of sweeping curves. The feeling of travelling so fast for so long is disconcerting. The countryside whizzes by in a blur, though the ride is impecca bly smooth. Even more disconcerting for a Westerner is the feel ing that he is being left in the dust. This is no prestige proj ect for the Chinese elite. The queue to get on the train is more like a serum. The smell of last night's alcohol hangs in the air. For many Chinese people high-speed trains are be coming a normal convenience. A visit to the headquarters of Rus sian Railways can feel a bit like a voyage back in time. The guards wear the peaked hats and gruff manners of the Soviet era. A display shows the children of railway workers triumphing in chess and athlet ics. Vladimir Yakunin, the company's boss, started his career with the KGB. He concedes that his company is a giant of an organisation: it has 1.2m employees, 2o,ooo stations, 86,oookm of track, a net work of schools and health clinics and even an equestrian school. He also agrees that the state's influence is all-pervasive. Three white telephones next to his desk provide him with direct access to the Kremlin (he says he has a separate line to his old friend, Mr Putin). He cannot even sell one of the chairs that surround his vast table without the government's permission. Yet Mr Yakunin is a dynamo of a man who has changed re cruitment policies to attract high-flyers, introduced total quality management and brought in Ernst & Young, an international firm of accountants, to audit the books. He also points out that some of the oddities of his company, such as its schools and clin ics, have been around for a century and derive from the difficul ties of running a railway in the middle of nowhere. There is no such thing as pure capitalism or pure socialism, he argues; only more or less sensible solutions to practical problems.
tween state-owned and private companies. "Private" champi ons such as Huawei, the telecoms giant, have repeatedly been given government help. This makes it hard to produce precise calculations about the productivity of the two sectors. Second, ownership is not the only thing in play. Some of the problems, and the successes, of state capitalism have more to do with rapid development than with state ownership. Third, everything de pends on context. It is quite possible for state capitalism to work well in some areas (eg, infrastructure) and badly in others (eg, consumer goods). It is also possible for it to boost growth at one stage of development and impede it at another. State capitalism's most obvious achievements are in infra structure. China has produced a large number of world infra structure records, such as the largest hydroelectric project, the Three Gorges dam, and 6,4ookm of high-speed rail. It has also scattered new airports and railway terminals across the land. Even Russia's more rough-and-ready railway system works pretty well, despite punishing weather. B C G, a consultancy, argues that this infrastructure boom will continue for some time yet. Over the next 20 years the BRIC countries will account for more than half of the growth in road travel and more than 40% of the growth in air travel. The Consul tancy also points out that state institutions are well placed to fe ed this boom. Sovereign-wealth funds are favouring infrastruc ture projects to avoid the volatility of the stockmarket. Chinese companies are building roads and railways in Africa, power plants and bridges in South-East Asia and schools and bridges in America. In the most recent list of the world's biggest global con tractors, compiled by an industry newsletter, Chinese compa nies held four of the top five positions. China State Construction Engineering Corporation has undertaken more than 5,000 pro jects in about 100 different countries and earned $22-4 billion in
It is quite possiblefor state capitalism to work well in some areas (eg, infrastructure) and badly in others (eg, consumer goods)
Not as simple as it looks State capitalists like to set China's recent successes against America's mounting failures. They add that Uncle Sam was quick to nationalise General Motors when it needed to. Anti state capitalists argue that Russia is a Potemkin village and China a paper tiger. For instance, China's high-speed rail looked less wonderful last year when 39 people were killed and about 200 injured in a collision in China's eastern Zhejiang province, after which maximum speeds were reduced across the country. A balanced assessment of state capitalism has to allow for three caveats. The first is that there is no clear dividing line be12
revenues in 2009. China's Sino hydro controls more than half the world's market for building hydro power stations. State capitalism has also enjoyed some success in tackling second-generation infrastructure problems such as building the information superhighway and mandating higher environmen tal standards. China's mobile-phone network is the world's larg est, yet it suffers from fewer dropped calls or areas with no signal than America's. China has the world's biggest number of inter net users, 420m, of whom 364m have broadband. It has also turned itself into a pioneer in some areas of green energy: it is the world's largest exporter of solar panels, for example. Big bets on green technology can easily turn into big mistakes. But generally infrastructure belongs on the positive side of the ledger. State capitalism has also been successful at producing na tional champions that can compete globally. Two-thirds of emerging-market companies that made it onto the Fortune 500 list are state-owned, and most of the rest enjoy state largesse of one sort or another. Governments can provide companies with the resources that they need to reach global markets. They can also insist on mergers that produce global giants. The obsession with national champions can be dangerous: mating two dinosaurs seldom produces a gazelle. But champi ons have their uses. They can boost national pride, they can en sure that local companies can compete for the best and the brightest with foreign multinationals and they can help emerg ing countries to establish global standards rather than playing by The Economist January 21st 2012
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� other people's rules. The Chinese are determined t o do this with
the growing market for the "internet of things". The most interesting argument in favour of state capitalism is that it makes it easier for emerging countries to learn from the rest of the world. National champions are the corporate world's greatest learning machines. To produce them you need to study the best of the breed. And once you have them you can deepen your learning still further-by listing them on foreign exchanges (which introduces you to the world's sharpest bankers and an alysts), or by taking over foreign companies (which can provide you with rare expertise). China's Geely International got access to some of the world's most advanced carmaking skills when it took over Volvo for $L8 billion. Shanghai Electric Group en riched its engineering knowledge by buying Goss International for $1.5 billion and forming joint ventures with Siemens and Mit subishi. Saudi Basic Industries Corporation has become more cosmopolitan by purchasing companies in dozens of countries. All this success is producing much !-have-seen-the-future and-it works euphoria. The bosses of state industries like to ar gue that they have the best of both worlds-the ability to plan for the future but also to respond to fast-changing consumer tastes. Even outsiders can sound giddy. Ms Xin of CEIBS points out that the best state companies are infinitely better than their predeces sors just five years ago. China Mobile, she says, is as good as al most any of its rivals in the West. Edmund Tse, of Booz & Com pany, argues that the system is much more flexible than it looks at first sight. In October 2007 China's president, Hu }intao, unveiled his highest priority for the future at the 17th National Congress of the Communist Party in the Great Hall of the People: improving the country's "capacity for independent innovation". China had al ready been working hard at this. The government had invited Western champions such as Microsoft and Google to establish research facilities, instructed domestic champions to be more in novative and poured money into science and technology clus ters (Beijing's Zhongguancun Science Park was already home to nearly 2o,ooo high-tech enterprises as Mr Hu spoke). But it need ed to redouble its efforts in the future. Other state-capitalist countries are equally keen on inde pendent innovation. The Russian elite is excited about Skolkovo, a high-tech park-cum-enterprise-zone just outside Moscow. Skol kovo is supposed to act as a factory for indigenous technologists and entrepreneurs, a magnet for foreign multinationals, an inspi ration for young people, an insurance policy against over-reli ance on energy and a bridge between the scientific and the busi ness worlds. Dubai contains a knowledge village, a media city, an IT corridor and a huge finance centre.
registered electronics group, has an unrivalled ability to mass produce iPads and the like; it employs 270,000 people in its fac tory complex in Shenzhen. Huawei is a master of improving on other people's technology and bringing it to market at lightning speed. China's Pearl River delta is swimming with small compa nies that dominate tiny market niches. China's universities mass-produce graduates in disciplines that have been forgotten in the West, such as mining and heavy engineering. China would be better off exploiting these advantages rather than try ing to build the next Silicon Valley. Of productivity and power There is striking evidence that state-owned companies are not only less innovative but also less productive than their priv ate competitors. The Beijing-based Unirule Institute of Econom ics argues that, allowing for all the hidden subsidies such as free land, the average real return on equity for state-owned compa nies between 2001 and 2009 was -1-47%. Older studies suggest that productivity decreases with every step away from 100% private to 100% state-owned. An OECD paper in 2005 noted that the total factor productivity of private companies is twice that of state companies. And a study by the McKinsey Global Institute in the same year found that companies in which the state holds a minority stake are 70% more productive than wholly state owned ones. But poor productivity has not stopped them from making lots of money. In 2009 just two Chinese state-owned compa nies-China Mobile and China National Petroleum Corpora tion-made more profits ($33 billion) than China's sao most prof itable private companies combined. In 2010 the top 129 Chinese
The downsides Yet the odds on any of these efforts succeeding are low. Governments are good at providing the see dcorn for innovation: America's, for instance, provided some of the funding for Stan ford University and even helped to found the first venture-capi tal company. But they are bad at turning seedcorn into bread. Josh Lerner, of Harvard Business School, describes state-spon sored innovation as a "boulevard of broken dreams", a term more often applied to the entertainment industry. Malaysia's $150m BioValley, which opened in 2005, is now known as the "Valley of the Bio Ghosts". Dubai has produced more red ink than new products. The architects of Skolkovo worry that Dmi try Medvedev's impending retirement from the presidency will doom their project before they have opened the first building. Dan Breznitz and Michael Murphee, of the Georgia Insti tute of Technology, argue that the pursuit of indigenous innova tion could prove to be a distraction. Foxconn, a huge Taiwanese14
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� s oEs made estimated net profits of $151 billion, so% more than
the year before (in many cases helped by near-monopolies). In the first six months of 2010 China's four biggest state commercial banks made average profits of $211m a day. State companies have been gobbling up private ones. They have also been gobbling up capital. State-owned companies in China pay interest of only 1.6% when they borrow from state banks, but private ones are charged 4.7%-if they can get a loan at all. In 2009 private firms accounted for only 2% of China's official outstanding loans. The result has been an epidemic of bankrupt cies and suicides in the private sector even as state companies are splurging out on extravagant new headquarters. Those state companies have a vast appetite for talent, too. Two Chinese with recent MBA degrees explain that they chose jobs with state-owned companies because they pay more than private ones and as much as multinational ones and offer shor ter hours and cast-iron job security. But they were shocked by the extravagant perks and widespread corruption they found. A Rus sian who is currently studying for an MBA tells remarkably simi lar stories. The soEs are recreating the old "iron rice bowl" G obs and perks for life) with modern materials. Yet there is little chance that state companies will be re formed soon. They provide comfortable berths for leading poli ticians and their children and hangers-on. Institutions that are nominally owned by the people have been taken over by ruling elites-the Communist Party in China, the se curity high com mand in Russia and the royal families in the Arab world. The 99% who do not benefit from these arrangements are getting increas ingly angry with the 1% who do. But unlike their contemporaries in the West they have few ways of showing it. •
Goi ng abroad
The world in their hands State capitalism Looks outward as well as i nward IT IS FITTING that China's national symbol should be an animal that spends 16 hours a day eating bamboo. China is an energy panda that is obsessed by the question of where its next mouthful of bamboo will come from. The Chinese elite sees the world in terms of brutal competition for limited resources. And it has no truck with Western ideas about relying on the mar ket. ("Western countries can feel secure purchasing oil interna tionally because they created the system," says one diplomat. "China did not.") China is utterly convinced that it needs to use all the elements of national power-its companies and banks, its aid agencies and diplomats-to get its rightful share. China's obsession with going out in search of raw materi als has been growing for almost two decades. In 1993 the country became a net importer of oil. In 2003 it interpreted America's in vasion of Iraq as a grab for oil. And in 2010 it became the world's biggest consumer of energy. This obsession has dominated for eign policy and reinforced state capitalism. A country that had been turned inward for millennia has starte d popping up every where, and has found that it can change the rules of the game. An economy that had been focused on domestic growth has en gaged in a flurry of international acquisitions. China has been striking deals across the world, often in dif ficult places that are shunned by the West, in order to lock up sup plies of oil and other raw materials. It has an estimated 10,000 workers in Sudan alone. It has provided Russia with a $25 billion export-backed loan to help Rosneft and Transneft to supply it with 30o,ooo barrels per day of crude, for example, and signed a $1.7 billion deal with Iran to develop parts of the North Azadegan oilfields. China National Petroleum Corporation is one of only two companies to win contracts to develop Iraq's oilfields. And in December Pakistan named the Industrial and Commercial Bank of China to lead a consortium that will finance a $1.2 billion natural-gas pipeline from Iran to Pakistan. State capitalism has been at the heart of all this activity. State companies have funded four-fifths of the foreign direct in vestment. State banks have woven a web of soft loans. And gov ernment bodies such as Eximbank, China's foreign-aid bank, have made no bones about their enthusiasm for tying foreign aid to commercial advantage. One of China's favourite tools is oil for infrastructure. China offers to provide poor countries with schools, hospitals and the like (usually financed by soft loans and built by China's infrastructure giants) in return for a guaran teed supply of oil or some other raw material. Eximbank sup plied a $2 billion low-interest loan to help China's oil companies build infrastructure in Angola. The axis of statism Trotsky always insisted on the impossibility of "socialism in one country". The same logic applies to state capitalism. State capitalist powers inevitably look outward as well as inward. Chi na is the world's biggest exporter as well as its biggest energy consumer. Russia and the Gulf states are energy superpowers. But they are also conscious that they are newcomers in a global market that was created by America and Europe. So they fre quently stick together, striking deals among themselves and forg- ��
The Economist Jan uary 21st 2012
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Voracious
Primary energy demand, billion tonnes of oil equivalent 4
F O R E C A S T
•
Russia
2000
• 09
• 15
•
20
Brazil
•
•
30
35
Source: International Energy Agency
�
ing ever closer ideological links. China and Russia have found it easier to get on with each other as state capitalists than they ever did as communists. Over the past decade they have increased bilateral trade, concluded a range of economic and trade agreements and forged a new polit ical institution in Central Asia, the Shangai Co-operation Organi sation. Energy giants such as Gazprom and Petro China are inter twined in various convoluted ways. China has also strengthened its links with the Middle East. The old Silk Road is being rebuilt. In 2009 the Middle Kingdom became the biggest single importer of oil from the region and the biggest single exporter of manufactured goods there. The two biggest investors in China's Agricultural Bank are the Qatar In vestment Authority ($2.8 billion) and the Kuwait Investment Au thority ($Boom). And China is becoming a popular destination for Middle Eastern businesspeople and tourists: every year the region sends 200,000 visitors to a single Chinese city, Yiwu in central Zhejiang Province, to go shopping. The city does a roaring trade in hijabs, prayer rugs and electronic Korans. More people are also taking the road in the other direction. The u AE is home to 200,000 Chinese, and Dubai boasts one of the world's biggest Chinese malls, Dra gonMart, built in the shape of a dragon, with 4,000 Chinese businesses. After King Abdullah of Saudi Arabia ascended to the throne in 2005 his first vis it abroad was not to America, his coun try's longstanding ally, but to China. Presi dent Hu, for his part, is a frequent traveller to the Middle East. This "axis of state capitalism" is gain ing an ideological edge as the emerging world goes from strength to strength, America pulls in its horns, Europe im plodes and the G20 takes over from the G7. Politicians across the region feel sure they have a formula that can combine economic dynamism with order, taking in the best of capitalism (those sleek modern corporations and clever wealth funds) without unleashing the havoc that devastated Russia in the 1990s and threatened to consume America in 2007-08. Proponents of this ideology revere Lee Kuan Yew as a founding father, see America as a wounded giant and dismiss Europe as self-indulgent and lazy. But they also admire Silicon Valley and Google, MIT and General Ele ctric, Harvard Business School and McKinsey.
The power of the axis is easily exaggerated. The Russians re sent the fact that their former junior partner in the communist enterprise, China, has become so successful. They are also suspi cious about China's activities in Central Asia. China, which has more than 20m Muslims, worries that the Gulf states may export radical Islam as well as oil. Some Africans fret about China's en thusiasm for building roads and railways across Africa, just as the Europeans once did. But Fu Chengyu, the chairman of China National Offshore Oil Corporation, points out that the Chinese are rooting around in Sudan and Angola only because the West ern companies have nabbed the best oilfields. They are adding to the global supply of oil while putting their own people at risk (dozens of Chinese oil workers have been killed or kidnapped). Xenophobia plays a part, but state capitalism is also finding it hard to evangelise. Indeed, many state capitalists are in denial about it. Mr Putin pooh-poohs the whole idea. "If we concen trate on certain resources, we do it only to support the industry until the companies stand firmly," he insists. The Chinese argue that their free-trading credentials are as good as those of any oth er WTO members. State capitalism may not turn into a popular movement, in the way that communism and socialism did, but it nevertheless confronts Western policymakers with some difficult questions. How can you ensure that business deals involving state-backed companies are fair? In 2005 c N o o c's unsolicited bid for Un ocal, one of America's largest oil companies, briefly shifted the American government's attention from the Middle East to Chi na. Politicians thought it was a thinly disguised takeover of an American company by the Chinese government, part of a wider plot to control the world's oil supplies. The House of Representa tives voted 398 to 15 for a non-binding resolution against the pur chase. Six months later politicians were up in arms again when DP World, a company owned by Dubai's government that has ports in almost 30 countries, tried to add six American ones to its portfolio. DP World backed down.
Western worries The tensions that were on display in those dramatic six months continue to operate. Western businesspeople are in creasingly concerned about Chinese trade policies. Two years ago the heads of 19 of America's biggest industry associations wrote to their government to complain about China's "systemat ic efforts" to build its domestic companies "at the expense of us firms and us intellectual property". In July 2010 Peter Loscher, the chief executive of Siemens, and ]iirgen Hambrecht, then chairman of BASF, personally complained to Wen Jiabao, the Chinese prime minister, about the way that Western companies were being forced to hand over intellectual capital in order to
China's ability to make huge strategic investments, even to the point of creating entire new industries, puts private companies at a severe disadvantage
16
gain access to China's markets. The American Chamber of Com merce in China in its 2010 survey reported that a third of its mem ber companies in China felt that they were being held back by discriminatory policies. Western policymakers are worried, too. Charlene Barshef sky, America's trade negotiator at the time when China's entry into the WTO was being considered, fears that the rise of state capitalism may be undermining the post-war trading system. China's ability to make huge strategic investments, even to the point of creating entire new industries, puts private companies The Economist January 21st 2012
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The Long view
An d the win n er is ... For aLL its s uccesses, state capitalism has fatal flaws
� at a severe disadvantage.
Peter Mandelson, a former EU trade commissioner, thinks that "the huge and very real benefits of globalisation are being undermined by the distorting interventions of state capitalism from one direction and by the anxious politics of an increasingly defensive and fearful developed world from the other." The Europ ean Union has hinted that it may block future takeovers of European companies by Chinese state-owned enterprises on the ground that all s oEs are, in fact, part of a single economic entity. And Western policymakers routinely complain that China's re fusal to let its currency appreciate to its "natural" level is in effect subsidising China's domestic industry, penalising American and European companies, destroying American and European j obs and fuelling dangerous global imbalances. It is easy to overstate the case against state capitalism. State capitalists harm mainly their own consumers when they subsi dise exports, and they depress their own country's overall com petitiveness when they pour money into state champions at the exp ense of the rest of the economy. But they have been playing increasingly rough in recent years: witness China's willingness to imprison three Rio Tinto executives for supposedly taking bribes, and Russia's treatment of BP. Learning to live with state capitalism will be a serious challenge for the rest of the world . • The Economist Jan uary 21st 2012
THE RISE OF state capitalism constitutes one of the biggest changes in the world economy in recent years. Twenty years ago state firms were nothing more than parts of the govern ment machine. Ten years ago there was widespread doubt about whether they could succeed. Today they include some of the world's biggest companies, sucking up profits at home and tak ing on the world market with a will. Between 2005 and 2011 four of the world's top ten stockmarket flotations involved Chinese state companies (and collectively raised $64.5 billion). Is state capitalism the wave of the future, or is it simply one in a long line of state-sponsored failures? Some commentators have seized on the riots in Russia in December as evidence that it is already on its way out. Others point to the continuing pro blems with global capitalism, arguing that the state variety is winning the war of ideas. Andy Stern, a former boss of the pow erful Service Employees International Union, argues that Chi na's economic model is superior to America's and quotes Andy Grove, the founder of Intel: "Our fundamental economic belief . . .is that the free market is the best of all economic systems-the freer the better. Our generation has seen the decisive victory of free-market principles over planned economies. So we stick with this belief largely oblivious to emerging evidence that while free markets beat planned economies, there may be room for a modification that is even better." This special report has argued a different case. State capital ism is sufficiently good at mimicking the market to ensure it has plenty of life left in it. It is learning how to manage ideas from the West and impose some discipline on its favoured companies. It is also putting down ever stronger roots. There are state-capitalist banks, billionaires, bureaucrats and even paid-up ideologues (one Chinese analyst, having listed all of the system's inefficien cies, says that he gives it "no more than so years"). But state capitalism nevertheless suffers from deep flaws. How can the state regulate the companies that it also runs? How can it stop itself from throwing good money after bad? How can it remain innovative when innovation requires the freedom to experiment? MIT's Mr Steinfeld argues that state capitalists are learning to play "our game" by listing their shares and engaging in mergers and acquisitions. That, he says, makes them a "self obsolescing" ruling class. But state capitalists are surely playing "our game" in order to strengthen their political positions. The future shape of state capitalism will be determined by two things. The first is rent-seeking on the part of the corporate elite. Management theorists have long agonised about the "prin cipal-agent problem"-the tendency of managers to run compa nies to suit their own interests rather than the interests of their owners or customers. Under state capitalism this problem is as acute as anywhere. Politicians are too distracted by other things to exercise proper oversight. Boards are weak and disorganised. And the company's mission tends to be a confusion of the com mercial and the social. There are plenty of examples of good practice for state capi talists to draw on. Singapore's sovereign-wealth fund, Temasek, is a model of good management. Brazil has pioneered the use of the state as a minority shareholder. Norway has successfully �� 17
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� shielded its sovereign-wealth fund and state oil company from
political interference. But in both China and Russia the principal agent problem is powerfully reinforced by the idea that state owned companies are great sources of j obs and patronage. Secondly, state capitalism suffers from the misfortune that it has taken root in countries with problematic states. China com bines admirable mandarin traditions with a culture of guanxi (connections) and corruption. Russia has the nepotism and cor ruption without the mandarin traditions. Brazil puts all the cards in the hands of insiders from both capital and labour. Transpa rency International, a campaigning group, ranks Brazil 73rd in its corruption index for 2on, with China 75th and Russia an appall ing 143rd. State capitalism often reinforces corruption because it increases the size and range of prizes for the victors. The ruling cliques have not only the government apparatus but also huge corporate resources at their disposal. The People's Bank of China estimates that between the mid-1990s and 2008 some 16,ooo18,ooo Chinese officials and executives at state-owned compa nies made off with a total of $123 billion. The defining battle of the 21st century will be not between capitalism and socialism but between different versions of capi talism. And since state capitalism is likely to be around for some time yet, Western investors, managers and policymakers need to start thinking more seriously about how to deal with it.
Too visible, too strong Investors are currently infatuated with emerging markets because they are growing rapidly at a time when rich markets are stagnating. But for the most part those investors are blind to the risks posed by the excessive power of the state there. Companies are ultimately responsible not to their private shareholders but to the government, which not only owns the majority of the shares but also controls the regulatory and legal system. This creates lots of risks for investors. s oEs typically have po orer cost controls than regular companies. They also routinely pursue social as well as business goals. Investors can probably live with all this because at least it is predictable. More worrying
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is the potential for capricious Offer to readers ness. Politicians can suddenly Reprints of this special report are available. step in and sack the senior man A mini m u m order of five copies i s required. agement or tell companies to Please contact: Jill Kaletha at Foster Printing lower their prices. Tel+00{1) 219 879 9144 e-mail: [email protected] Western managers also find it hard to deal with state Corporate offer controlled firms. They tend to Corporate orders of 100 copies or more are fall into one of two traps. Either available. We also offer a customisation they treat state companies as if service. Please contact us to discuss your requirements. they were exactly the same as Tel +44 {0)20 7576 8148 private ones, and get caught out e-mail: [email protected] when policymakers swap com For more information on how to order special pany bosses around or redefine reports, reprints or any copyright queries industries. Or they treat state you may have, please contact: companies as irredeemably sec The Rights and Syndication Department ond-rate-and may find them 26 Red Lion Square London WC1R 4HQ selves bought out by them or Tel +44 {0)20 7576 8148 having their markets swamped. Fax +44 {0)20 7 5 7 6 8492 In the past Western firms e-mail: [email protected] have been on the offensive; to www.economist.com/rights day they are increasingly ward Future special reports ing off emerging champions. Pakistan February 11th 2012 They used to have their pick of Financial i nnovation February 25th 2012 the best and the brightest peo The nuclear world March 10th 2012 ple when they went into emerg ing markets; now they have to Previous special reports and a list of compete with local champions forthcoming ones can be found online: that can offer not only similar economist.comfspedalreports salaries but the chance to play for the home team. CEOs in particular will have to start paying more attention to politicians in countries with state capitalism. Over the past 30 years bosses there gained greater freedom to run their own affairs. Some of them even be gan to imagine that they were "running a sovereign entity", as In dra Nooyi, the boss of Pepsi-Cola, has put it. But in China and Russia ultimate sovereignty lies with the political class. Western policymakers face even more difficult decisions than businesspeople. They will find their voices diluted as China and other state-capitalist countries play a more active role in multilateral institutions. And the rise of state capitalism in the East may encourage imitation in the West. The European Com mission's directorate for enterprise and industry has mused on the need to create European champions to fight "unfair competi tion" from overseas. Nicolas Sarkozy, the French president, has created a French sovereign-wealth fund. Alexandre de Juniac, as chief of staff to Christine Lagarde, then France's finance minister, ascribed his country's renewed enthusiasm for dirigisme to Chi na's influence. Japan's Ministry of Economy, Trade and Industry in 2010 named the rise of state capitalism as one of the drivers of a newly interventionist industrial strategy. Worse, the rise of state capitalism in the East may encourage a trade war as liberal countries attack subsidies and state-capitalist countries retaliate. But state capitalism's biggest failure is to do with liberty. By turning companies into organs of the government, state capital ism simultaneously concentrates power and corrupts it. It intro duces commercial criteria into political decisions and political decisions into commercial ones. And it removes an essential lay er of scrutiny from central government. Robert Lowe, one of the great Victorian architects of the modern business corporation, described businesses as "little republics" that operate as checks and balances on the power of the big republic of government. When the little republics and the big republic are one and the same, liberty is fatally weakened. • The Economist January
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Also in this section A sad old city in Iran The persecution of Shias Israelis talk to Palestinians .••
•..
and make friends with Azerbaijan
South Africa's dysfunctional schools Nigeria fends off the protesters
For daily a n a lysis a n d debate on the Middle East and Africa, visit Economist.comfworldfmidd le-east-africa
Sanctions and Iran
Beleaguere d but still unbowe d
Despite all the sabre-rattling, neither Iran nor America wants confrontation just yet
Timplemented before the middle of the
HOUGH they are unlikely to be fully
year, the prospect of fierce new sanctions on Iran has already ratcheted up tension between the Islamic republic and the West. On January 23rd the European Union is expected to confirm that it will embargo oil imports from Iran (see our chart), a fifth of lran's overall sales. The Eu's move follows the signing into law by Barack Obama on December 31st of measures, passed almost unanimously by Congress, to stop foreign financial institutions from transacting with Iran's central bank, the main conduit for the country's energy deals. The EU, with France and Britain in the lead, is also looking at other ways of hurting the central bank. Iran has reacted by threatening to close the Strait of Hormuz, the Gulf's chokepoint through which a fifth of the world's oil passes, if the embargo goes ahead. It has also warned Saudi Arabia not to make good on its promise to boost production to offset Iranian oil removed from the world market. The sanctions, which were partly prompted by the most recent report, in November, of the International Atomic Energy Agency (IAEA), the uN's watchdog, are not, however, the only reason for Iran's ire. A car-bomb on January nth killed a chemical engineer in charge of procure-
ment at the Natanz uranium-enrichment plant. He was the fourth Iranian scientist to be killed in the past two years. His death followed several other recent unexplained explosions at factories and military sites, perhaps thanks to a covert campaign by Western intelligence agencies and Israel's Mossad to delay the nuclear programme. Just before the assassination, an Iranian court sentenced to death an Iranian-Amer ican former marine after convicting him of spying for the CIA. Adding to the jumpiness in Tehran and in Washington-are warlike rumblings coming from Israel. Having at first praised the new sanctions, Israel's prime minister, Binyamin Netanyahu, and his deputy, Moshe Yaalon, lamented the failure to impose them immediately. Mr Yaalon pro vocatively accused Mr Obama of dragging his feet for fear of boosting oil prices in an election year. The chances of Israel launching a uni lateral strike on Iran this year may be ris ing. The head of Iran's Atomic Energy Or ganisation, Fereydun Davani-Abbasi, says enrichment of uranium to 20% purity, close to weapons-grade, has begun at For dow, a supposedly impregnable facility that is buried deep in a mountain complex surrounded by anti-aircraft batteries near the holy city of Qom. Israel's defence min-
ister, Ehud Barak, said in November there was less than a year to stop Iran's nuclear plans, because once most of the enrich ment is being carried out at Fordow, Iran will be in "immune space" and the option of a military attack, at least by Israel acting alone, would be off the table. Though many in Israel's defence and security establishment doubt the merits of an attack, the final decision would be tak en by Mr Netanyahu, Mr Yaalon and Mr Barak, all regarded as hawks. Mr Netanya hu may well also believe that in an elec tion year Mr Obama would have to sup port Israel if it took such a step, whereas once safely re-elected (against Mr Netanya hu's preferences) he might not. Iflran is worried that lsrael might strike, so too is the Obama administration. Though Mr Barak said on January 18th that a decision was still "very far off", relations between the two allies over Iran are strained. In a recent telephone conversa tion with Israel's prime minister, Mr Obama is said to have warned strongly ��
I
Who buys what? Iran's crude oil exports, ba rrels per day, m Jan-June 2011
China 0.54 -----,
- European Union Italy --
0. 18
.--- S p ain 0. 1 4
Other EU 0.13
L-
South Korea
0.24 -----'
Ja pa n
0.34
'----- India
Source: US Energy Information Administration
0.33
The Economist J a n ua ry 2 1st 2012
50 Middle East and Africa Iran's isolation
A sad old city S H I RAZ
Grim times in Iran's ancient capital
S shops that started life as a caravanse ERA! MUSHIR is a string of souvenir
R 0
A
N
0 Persepolis
Shiraz
� against an attack. The chairman of the Joint Chiefs of Staff, General Martin Demp sey, is about to visit Israel, ostensibly to share intelligence but also to ram home the message from his boss. America was also keen to distance itself from the murder of the Natanz engineer. Tacitly pointing a finger at Israel, a Penta gon spokesman said: "The United States played no role whatsoever in the killing of this scientist. We have been very clear that we seek to lower the temp erature on ten sions with Iran, and we think that things have calmed down a bit in recent days." Apparently with that in mind, the White House called off a big joint war game with Israel planned for the spring, though 9,000 American troops have already arrived in Israel. But on January 13th, the Pentagon announced that it was stationing 15,000 additional forces in Kuwait. At least two carrier groups will remain on patrol in the region; a third, it is reported, mayjoin. The argument between America and Is rael stems not from differences over whether Iran should be stopped from hav ing a nuclear weapon; Leon Panetta, Amer ica's defence secretary, came close to pro mising to use force if necessary earlier this month. But their perspectives are different. Israeli hawks, such as Mr Barak, consider that the beginning of enrichment at For dow marks the crossing of a red line which may quickly be followed by a "breakout" announcement of the kind North Korea made in 2006 when it tested a primitive nuclear device. American officials think that is improbable, given that Iran would invite an attack when it had no adequate means of deterrence. Rather, they believe Iran's approach is to keep moving every piece forward until it reaches the threshold of a capability to build a number of war heads and the missiles to deliver them. If so, there is still time for economic and dip lomatic pressure to persuade Iran that crossing the threshold is not in its interest. In truth, no one knows how likely that is. Iran has a proud record of resisting out side pressure and has dealt, albeit at some cost, with sanctions of one kind or another for over 30 years. It is also unclear how
rai, a pit-stop for weary travellers and their camels. Looking onto a courtyard filled with orange trees, it is the prettiest part of Shiraz's warren of bazaars. Tour ists from home and abroad should be swarming into this fabled "city of roses and nightingales". In late December, when icy winds sweep across Iran's deserts, Shiraz, in the deep south, is still warm. At the winter solstice, the longest night of the year, people of the city stayed awake eating pomegranates. Some recited Hafez, perhaps the country's most celebrated poet, whose tomb lies not far away. Yet business is bad, says an Afghan shopkeeper in Serai Mushir. His rent has shot up, sales are down, and inflation at 23% is eating away at his margins. Though he has been in Iran for 20 years, the shop keeper says he is thinking of going back to Afghanistan. Even before the effects of the latest round of sanctions can be felt, Shirazi discontent with the government's poli cies is simmering. The economy is plainly in a shambles. People know the regime is consumed with infighting. Across the country, repression has contin ued to grow since the protests following the disputed presidential election of 2009 were squashed. Last year's drought has parched rivers and fields, pushing rural people into the towns. Officially, the population of Shi raz is 1.2m. But locals complain that the real figure has doubled in the past few years, as farmers have abandoned their land. Crime is up, too. Whereas the
much greater pain the new sanctions will inflict on its already distorted economy. Iran will probably still be able to sell most of its oil to China and India at heavily dis counted prices. And Mr Yaalon has a point when he suggests that the appetite in the West for an strict oil embargo may be limit ed. Even if Saudi Arabia is willing to pump a lot more oil and Libyan production is re covering faster than exp ected, inventories remain tight and Asian demand will quick ly eat into whatever spare capacity is left. Societe Generale, a bank, reckons that even if the embargo is phased in slowly, Brent crude could reach as much as $150 a barrel, as twitchy traders fret over the way the market adjusts. That might be enough to send America back into recession and worsen the euro-zone crisis.
streets were safe three years ago, says an elderly Shirazi, nowadays he warns his family to be careful after dark. Unem ployment in the city is hovering at 15%. The officially orchestrated storming of the British embassy in Tehran in Novem ber made matters worse. Shiraz is the gateway to Persepolis, 70km (43 miles) away, the 2,5oo-year-old capital of the Achaemenids, who ruled Persia's gran dest empire under such titans as Cyrus the Great. Persepolis's vast complex of towering pillars and ruins used to be thronged with tourists, most of them Iranians but quite a few of them foreign. Now it lies deserted.
A lonely rose dreaming of Hafez So the new sanctions are likelier to be incremental rather than dramatic in their impact on Iran. But they will add to the country's sense of isolation at a time when it faces other threats, above all the Arab spring and the possible downfall of the As sad regime in Syria, its only solid regional ally. Nor is it clear that Iran itself has decid ed about reaching, let alone crossing, the nuclear threshold. It is trying hard to per suade the IAEA's inspectors to come to Iran later this month in an effort to try and allay some of the agency's concerns about the "possible military dimensions" of its nuc lear programme. Even with Israel champ ing uneasily at the bit, so long as neither Iran nor America is seeking a do-or-die confrontation, the betting, just, is that there will not be one. •
The Economist J a n ua ry
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Shia Islam
A growing sense of bloody isolation CAIRO
Shia Muslims, in Iran and beyond, are feeling increasingly nervous and lonely
E the loss of Hussein, a grandson and VERY year Shia Muslims commemorate
would-be heir to the Prophet Muhammad who was murdered in 680AD. They mark both his martyrdom on Ashura, the tenth day of the Muslim month of Muharram, and the end of the traditional mourning period 40 days later. Modern tragedy has intruded on these rites with dismal regularity in recent times, as Sunni extremists have repeatedly target ed Shia pilgrims. This Ashura, which fell on December 5th, bombs killed some 30 Shias in Iraq and 55 more at a crowded Shia shrine in Afghanistan's capital, Kabul. Bombers struck again in Iraq on January 1oth, killing 19 Shias. Five days later an at tack on a Shia procession in the Pakistani province of Punjab killed 21, and another huge bomb in the Iraqi port city of Basra killed 53. This gory toll has largely been confined to the sectarian-racked swathe of territory between Pakistan and Iraq, with vicious echoes in the small Gulf state of Bahrain, where the minority Sunni government last year bloodily crushed an uprising led by the majority Shia. Another outlying dan ger zone is Yemen, where the large Zaydi Shia community, already in open revolt in the north of the country, faces threats from virulently chauvinist Sunni groups, in cluding al-Qaeda. But the growing Sunni Shia schism, exacerbated by the row over Shia Iran's nuclear ambitions, is now creat ing discomfort for Shias farther afield. A mob led by Sunni fanatics torched Shia property on December 29th in eastern Java in normally placid Indonesia, forcing hundreds of villagers to flee. Local police did nothing to protect the Shias, who are a tiny minority in Indonesia, the most popu lous Muslim country. Their proportion in the Gaza Strip, the slice of Palestine run by Hamas, a branch of the Sunni Muslim Brotherhood, is even smaller. Even so, Ha mas security men wielding clubs stormed a private gathering of some 25 Shias held to mark the end of the 40-day mourning per iod for Hussein's death, sending several to hospital. This was despite Iran's being a notable patron of Gaza's Islamist rulers. Egypt's small Shia community has also felt a chill Sunni wind. On Ashura, Egyp tian police forced hundreds of Shias to abandon a ceremony at the Mosque of Hussein in Cairo, where the Shia martyr's severed head is said to be buried. A govern ment official said that a stop had been put
to their "barbaric rituals" so as to protect them from attack by angered citizens. Worse may be expected in Syria, where a regime dominated by Alawites, an eso teric offshoot of Shia Islam, is bloodily fail ing to suppress an uprising largely led by members of the Sunni maj ority. The mixed city of Horns has already witnessed tit-for tat sectarian violence. If Syria descends into sectarian strife, reverberations will hurt next-door Lebanon. Shias and Sunnis each account for a third of its population, but in recent years the powerful and heavi ly armed Shia party, Hizbullah, has bucked traditional Sunni dominance. Its loss of a powerful backer in Syria could again upset Lebanon's delicate se ctarian balance. Some Shias blame their apparently growing isolation on a global conspiracy. Shia rebels in Yemen recently described the capture of Radaa, a town in the south, by al-Qaeda forces, who declared it an Is lamic emirate, as an American-Saudi plot to foment schism and weaken Islam. Shia websites in Pakistan assert that America and al-Qaeda are collaborating to destroy Iran and Syria. •
51
Bombed in Basra
Israel and Palestine
To ddling to tall<s about tall<s
GAZA A N D J E R U S A L E M
Palestinians and Israelis are talking again-but have yet to decide what about
N sessment of King Abdullah of Jordan O ONE disagreed with the cautious as
that "little baby steps" had been taken when Israelis and Palestinians met several times in Amman, the king's capital, in early January to see if there were grounds to re sume full-scale peace talks that might one day lead to the peaceful coexistence of two states. Even this tentative diplomatic toe dipping was fraught. Big grown-up strides still seem a long way off. The Palestinians have threatened to abandon further talks unless there is real progress by January 26th. They cite an agreement in September, when the Quart et of peacemaking bodies, consisting of the United States, the European Union, the UN and Russia, launched talks about talks in Amman. Both sides were to exchange "comprehensive proposals on territory and security" within three months. The Is raelis dispute the Palestinians' definition of when the Quartet's clock started ticking, arguing that January 26th is a "non-date" and that the current crisis is "artificial". In any case the Palestinians have their own internal problems: they are still argu ing among themselves over whether they should be dragged back to the negotiating table when the Israelis are still building
Jewish settlements on the West Bank, the main chunk of a future Palestinian state. Plans to reconcile the Palestinians' two main factions muddy matters still more. The Palestinians have submitted a pa per suggesting where the border between the two states should run. Israel has re sponded with a document listing 21 issues that it says must be resolved before even a "framework agreement" can be conclud ed. Binyamin Netanyahu, Israel's prime minister, told a parliamentary committee dismissively onJanuary16th that the Pales tinian paper had "not changed a nano metre" from papers submitted before. Mr Netanyahu's officials vaguely "ac cept as a goal" that an agreement on territo ry and se curity should be struck within a year, as the Quartet suggested. But baby steps seem to be the pace that suits him, his coalition partners and hawks in his own Likud party. His foreign minister, Avigdor Lieberman, who leads the far-right Yisrael Beitenu party, and is in a last-ditch battle to avoid indictment for alleged financial she nanigans, shows no sign of leaving the government over the peace talks. As a sweetener to the Palestinians, Israel may free some prisoners it has held since before peace talks began in 1993. Tony Blair, ��
The Economist J a n ua ry 2 1st 2012
52 Middle East and Africa � the Quartet's representative, is asking Isra el to hand over to the Palestinian president, Mahmoud Abbas, the customs duties it currently withholds on goods entering the Gaza Strip, which is ruled by the Islamist Hamas faction still opposing Mr Abbas. Quite apart from his row with the Israe lis over dates before real talks have even re sumed, Mr Abbas is having problems as ever within his own camp. His efforts to re unite both chunks of his disconnected Pal estinian realm, comprising his Palestinian Authority in the West Bank and the far smaller Hamas-ruled Gaza Strip on the coast, look unlikely to bear fruit soon. Last May he signed a deal with the head of Ha mas's politburo, Khaled Meshal, who has been based in Syria, to do away with sepa rate governments and appoint a techno cratic one instead. Not yet a united front But such plans have been stymied by Ha mas's sheriffs on the ground, who see little point in sharing power when the Islamist tide sweeping across the region will-they think-sooner or later engulf Mr Abbas. As for Mr Meshal, having realised to his cha grin that Gaza was no longer his to bargain away, he declared that he would retire after 15 years in the job. But some say he may re consider that decision. To keep Mr Abbas on the defensive, Ha mas's leaders in Gaza have sought to block the j oint programme he negotiated with Mr Meshal. In place of their agreement to suspend violence against Israel and to pro mote peaceful "popular resistance", Ismail Haniyeh, Hamas's prime minister in Gaza, has begun talks with a view to merging Ha mas with Islamic Jihad, another Islamist group with a powerful armed wing in Gaza committed to fighting on. "We want peace, but Israel only understands force,"
Abbas is no babe
Israel and Azerbaijan
O dd but useful allies BAKU
As ever, Israel cultivates friendships with non-Arabs on its regional periphery
I its name. Ever since Azerbaijan's in
T IS almost the love that dare not speak
dependence in 1991, relations between the Jewish state and a Shia Muslim one have grown and flourished. Both fear Iran; both have things the other wants. In a 2009 American diplomatic cable pub lished by WikiLeaks, Ilham Aliev, the Azeri president, was quoted as saying that the relationship was like an iceberg: nine-tenths of it was "below the surface". What is known is that Israel gets a good third of its oil from Azerbaijan, via a pipeline that ends at Ceyhan in Turkey, whence it is shipped to Israel. An Azeri drilling company is hoping to strike big in Israeli waters just off the southern port of Ashkelon. Azerbaijan, now a member of the UN Security Council, generally votes with Arab and Muslim countries when it comes to resolutions on Israel. Israelis say they mind more about what Azerbai jan does than what it says. In the past decade Azeri-Israeli trade has grown fast. But the figures do not spell out the size of one-off sales of Israeli military stuff, which make the statistics
says a Hamas guard outside a resort the group has opened on Gaza's beach front. It was Hamas's capture of an Israeli soldier in 2006 that secured the release of over 1,000 prisoners last year, he noted, not Ab bas's so far fruitless call for non-violence. For now, Mr Haniyeh's Hamas men in Gaza dangle the idea of reconciliation be fore Fatah, promising much but accom plishing almost nothing. Deadlines for ex changing their captives-Mr Abbas's faction holds scores of Hamas men, and vice versa-come and go. So do promises to let each other's newspapers be freely dis tributed. The head of a committee to ar range compensation for the 670 Palestin ians killed and many more wounded in four years of feuding between the factions says the process will take at least three years. And though Mr Haniyeh has prom ised to hand back the keys to Mr Abbas's own house in Gaza, Hamas heavies stand by his front door, refusing to budge. "It's just talk," says one. "I see nothing called reconciliation on the ground," says Ma ryam Saleh, a Hamas member of parlia ment in the West Bank who was a profes sor before she turned to politics. While Hamas's leaders in Gaza shore up their mini-state, Mr Meshal's power base in turbulent Syria is crumbling. Most of his officials have fled elsewhere in the region. The portly Mr Haniyeh is encroach-
bounce around. In 2008 Azerbaijan's recorded exports to Israel (almost all oil) were officially worth $3.6 billion; in 2009 they were $1.2 billion; in 2010, $L7 billion. The lower figures are unlikely to record the full extent of the trade. One of Azerbaijan's largest mobile telephone providers is a joint venture with an Israeli company. Now Israelis are coming in ever greater numbers to invest, some from industries such as defence. In March Israelis and Azeris, in a joint ven ture, began to produce drones. Azerbaijan's leaders fear Islamist influence from Iran, where a quarter of the people are ethnic Azeris, whereas Iran's ayatollahs fear the influence of secular Azerbaijan. Iran has scolded Mr Aliev for his cosiness with Israel. Azeri officials are loth to discuss reports that Israel is helping train Azerbaijan's forces. Turkey, which is close to Azerbaijan, also resents Mr Aliev's warmth to Israel. But when Turkey's envoy to Baku, the Azeri capital, urged Azerbaijan's government to follow the Turkish lead in breaking relations with Israel, he got short shrift.
ing on Mr Meshal's turf, touring the region with a posse of ministers from Gaza, to be hosted by heads of state. With Hamas's centre of gravity shifting back to Gaza via Cairo, Mr Haniyeh may be eyeing Mr Me shal'sjob. But Mr Meshal is not finished yet. He would not be the first Palestinian leader to announce his departure only to continue to run the show for years. In recent inter views he has sounded less Islamist and more of a Palestinian nationalist. Even if deposed as head of Hamas's politburo, he may fancy replacing Mr Abbas as head of the Palestine Liberation Organisation, the umbrella that covers all Palestinian outfits, though it has hitherto excluded Hamas. After months of promising not to nego tiate with Israel unless it stopped building Jewish settlements on the West Bank, Mr Abbas's decision to return to talks without preconditions has annoyed many of his senior colleagues. "Is he speaking for any one else but himself?" asks a fuming mem ber of the PLO's executive committee. Last weekend a cacophony reverberated through Ramallah, the Palestinian seat of government in the West Bank, as protes ters outside the newly fortified walls of his headquarters called on drivers opposed to talking to Israel to hoot. Angry Fatah mem bers have begun plotting elections of their own. •
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Education in South Africa
Still dysfunctional
J O H A N N E S B U RG
Standards still leave a lot to be desired
F sprawling black township outside Jo ORTE HIGH SCHOOL in Soweto, the
hannesburg, was once one of South Afri ca's notoriously ill-equipped and poorly performing schools. Five years ago it had no running water, no functioning library, no computers and no sports ground. De signed for 8oo pupils, it had to cater for 1,300. Only half those who reached the fi nal year matriculated, gaining the most ba sic certificate for finishing school. But thanks to philanthropists "adopting" it,
Forte has turned itself around. Last year it achieved an 8o% pass rate, and half of its matric candidates qualified for university. Among them was Albert Dove, a black student living with his unemployed, dis abled father and poor enough to qualify for free school lunches. He got six distinc tions in his exams, including10o% in physi cal science. Every weekend and through out the holidays he attended extra maths and science classes at a centre in Soweto run by an international charity. Much of his success, he said, is thanks to a school-feeding scheme set up by the Art of Living Foundation, an international outfit. "I have enough food in my stom ach," he explained. "I will not go out and steal from other children or go and gamble in the streets. I will not go out looking for a girlfriend or boyfriend to give me money for food .. .I will not smoke drugs to keep away the stress of having no food at
Protests in Nigeria
Let them have fuel ABUJA
The president loses his nerve and brings back a controversial subsidy
F more wantonly than Nigeria. Suppos EW countries waste public money
edly to help the poor, the government long sold fuel at half the price it pays on international markets. The biggest benefi ciaries were local wholesalers who illegally, but with impunity-sold the subsidised fuel on to neighbouring coun tries at full price, leaving an $8 billion hole in the treasury every year. All this in Africa's biggest oil producer, which must import 85% of its fuel because it has no decent refineries. Abolishing fuel subsidies would seem sensible and worthy of public support. The savings could pay for new roads, hospitals and schools. Smashing the fuel mafia would also help the fight against graft. Thousands of officials are paid off by fuel-sellers. The ringleaders manip ulate elections with the proceeds to keep friendly officials in power. So it was a bold move by President GoodluckJonathan to stop subsidising fuel on January 1st-perhaps even bolder than he had reckoned. Millions of Nigeri ans promptly rose up in revolt, even though they had much to gain in the longer term. Ten people died in nation wide protests and hundreds were in jured. The army had to be called onto the streets. A general strike paralysed the economy. Oil workers threatened to shut down wells-and the government's access to cash. The impact of the subsidy cut on ordinary Nigerians was certainly harsh. Most do not own cars or generators.
Businesses quickly passed on higher fuel prices. Bus fares and food prices almost doubled, reflecting the increase in tran sport costs. Many protesters voiced doubts whether savings would be ploughed back into new infrastructure as promised. Their scepticism is under standable, given the government's gen eral record of wastefulness. In the end the protesters prevailed. After little more than two weeks the president partly reversed himself. He announced a new subsidy that will lower the fuel price per litre from 140 naira ($o.86) to 97 naira, though the move, he claimed, would be temporary. He vowed to persist with deregulation of the oil sector. The trade unions suspended their strikes. Protesters have gone home for the moment. The president has bought him self some time and may still win his battle with the fuel mafia. Anti-corrup tion investigators have carried out new raids. But less than a year into his second term, hopes that Mr Jonathan will spur an economic revival and push through an array of reforms are dimming. Unless he finds ways of compensat ing citizens for higher prices, he may never be able to cut wasteful subsidies fully. He needs to make the bureaucracy more effective, so that it can credibly claim to invest the money saved. Or he has to give all Nigerians access to bank accounts, so they can transfer cash di rectly without the money being stolen. Both are far off.
home." He wants to study nanotechnol ogy but must first find funds. A university science course costs around 30,000 rand ($3,740) a year, excluding board and keep. Low school standards and university fees that are too high for the poor majority help explain why South Africa, the conti nent's biggest and most advanced econ omy, has so low a rate of university atten dance. Only one in six gets that far, a much lower proportion than in other middle-in come countries. A third drop out within a year. With a few notable exceptions, uni versity standards in South Africa are pretty low. Employers often complain that uni versities are churning out graduates who are largely unemployable. Three million South Africans aged 18-24, more than half the total, are outside education, training or employment. Seven in ten have no qualifications at all. Even among those with matric, only 17% are like ly to get a job within a year of leaving school, according to Ad corp, a recruitment agency. After five years, 6o% will still be jobless. Officially, 25% of South Africans are unemployed; the real figure is probably nearer 40%. Yet there are more than 8oo,ooo vacancies crying out for suitable applicants in the private sector alone, even as 6oo,ooo university graduates sit twid dling their thumbs at home. The government claims things are im proving since last year's pass rate went up. But the proportion who pass has fluctuat ed wildly over the years, and often de pends on how many of the weaker pupils are prevented from sitting the exam. Be sides, the pass mark for many matric sub jects is a mere 30%. Teachers in black state schools work an average of 3.5 hours a day, compared with 6.5 hours in the former white state schools known as "Model c " . A fifth of teachers are absent on Fridays, rising to a third at the end of the month. The education minister herself admits that 8o% of schools are still "dysfunctional". •
Also in this section 55 Satire in South Korea 55 Urbanising China 56 Parental abduction in Japan 57 Change in Myanmar 58 Banyan: Pakistan's game of chicken
For dai ly a n a lysis and debate o n Asia, visit Economist.comfasia Economist.comfblogsfbanyan
Taiwan's elections
It's all right, Ma
TAIPEI
Taiwanese democracy catches on-in mainland China
Telections that Taiwan held on January HE presidential and parliamentary
14th were unusual. No party was engulfed in scandal, as was the ruling party at the time in 2008. No candidate was shot at, as the incumbent was four years before that. China issued no dire warnings, as it did in 2000. Nor did it reinforce such warnings by lobbing missiles into the seas around Taiwan, as it did in 1996. Indeed, perhaps most striking this time round was the reaction the polls aroused in China. There, some saw President Ma Ying-jeou's reelection in a peacefully contested race as evidence that democracy might one day have a chance in China too. Taiwan's elections might have created a new source of instability in Asia that neither America nor China was keen to face. America is in a presidential election year and China, too, will soon undergo a sweeping change of its leaders. Officials from both countries had hinted strongly at the outcome in Taiwan that they preferred: another four years of Mr Ma. He can be relied upon not to goad an untested new leadership in Beijing into an alarming display of military posturing of the kind it put on the mid-1990s, on the occasion of the island's first democratic election for the presidency. In the event, Mr Ma won with nearly 52% of the vote, and his Kuomintang
(KMT) held the legislature. It was a relief to both China and America. At the same time the composure of the opposition Democratic Progressive Party (DPP) was also reassuring. Its candidate, Tsai Ing-wen, came a solid second, with nearly 46% of the vote. The DPP accepted defeat gracefully, unlike the KMT in 2004, when it took to the streets and courts to contest victory by the DPP incumbent, Chen Shui-bian. Ms Tsai, a bureaucrat turned politician, had hoped to become the island's first woman president. She re signed the chairmanship of the DPP after her defeat. Yet she deserves credit for turn ing round the fortunes of a party that was thrown into disarray by Mr Ma's victory in 2008, and by the shock of Mr Chen's later conviction and prison sentence for gross corruption. Mr Ma's re-election suggests that many voters shared the fears of Chinese and American officials that Ms Tsai might re vive Mr Chen's provocative approach in dealing with the mainland. This involved vigorously asserting Taiwan's separate ness and resisting any initiatives that re motely smacked of "one China" embrac ing both sides of the Taiwan Strait. Yet strong support for Ms Tsai (who happens to be far less of a China-provoker than Mr Chen was) also suggested that some Tai-
wanese are uneasy about the rapid pace of the rapprochement with the mainland un der Mr Ma. His share of the vote fell, from 58% four years ago, and his party has a re duced majority in the legislature. It sug gests Mr Ma will now have to move more cautiously in his dealings with China, par ticularly in any area that touches on ques tions of sovereignty-such as a peace ac cord, much talked about, in which Taiwan and China would pledge not to resolve their differences by force. Gone is the speculation common in the early days of Mr Ma's presidency that this year might produce a breakthrough in cross-strait relations. After a decade at the helm, China's president, Hu Jintao, will step down as Communist Party chief later this year (in a process involving not a hint of democracy). Some had hoped he and Mr Ma would wish to leave their mark on history with the first ever cross-strait sum mit. But Mr Hu, it is now clear, is far more caught up with problems at home, includ ing ensuring economic growth and social stability as leaders jockey for positions in the new line-up. Certainly, Mr Ma lacks do mestic support for such a meeting, and he has made it clear that China must address him as president if ever there were to be a summit. As ever, China's media, in their re ports on the elections, found it hard to de scribe the elections as presidential, except sometimes in quotation marks. Yet if a survey conducted by a main land internet portal, Sina.com, is any guide, Mr Ma enjoys strong support on the mainland too. Though the Communist ��
Award: James Astill, our former South Asia correspondent, who is now energy and environment editor, has won a Ramnath Goenka Award for foreign n ews coverage of India
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� Party has a n abhorrence of multiparty de mocracy, mainland websites gave exten sive coverage to Taiwan's elections, even offering live video feeds of the vote-count ing. (The tightly controlled print media were more circumspect in their reporting.) Of more than 26,ooo responses to a Sina.com poll asking readers who they would prefer to win, nearly 55% chose Mr Ma, whereas more than a quarter sup ported a China-friendly rival, James Soong (who took less than 3% of the vote in Tai wan). Nearly 20% chose the China-sceptic Ms Tsai. All this in a country which may not even vote in television talent shows. Li Fan of the World and China Institute, a small Beijing organisation, says that these mainland expressions of support for Ms Tsai were a mark of dissatisfaction with the Communist Party and indicated a de sire for opposition politics at home. Mr Li led a rare delegation of mainland academ ics to observe the Taiwan elections. His five companions were all first-time visitors to the island and were amazed by its politics. "They never thought Taiwan was so free and democratic", Mr Li enthuses. "It had a very powerful effect on them." He says the polls give the lie to the Communist Party's notion that democracy begets chaos. What's wrong with peaceful evolution? In the minds of the party's critics in China, Taiwan has greatly evolved in recent years. Mainland officials used once to deter overt expressions of sympathy for Taiwan by la belling those who showed any rapport as KMT agents or people out to split the moth erland. But now that the island has man aged a peaceable shift from thuggish dicta torship to democracy, Taiwan is much more often cited as a model these days. Several prominent Chinese dissidents-in exile gathered in Taipei for the elections, singing the praises of the island's politics. One of them, Wang Dan, who was a leader of the Tiananmen Square protests in 1989, set up a "school for democracy" in Taipei last year. One of China's considered efforts in re cent years to bolster support for Mr Ma and build a pro-China constituency on the is land has been to allow Chinese tourists (most of them big-spending) to visit Tai wan. That may now be having the unin tended effect of encouraging the spread of democratic ideas from Taiwan to the main land. These were the first presidential and legislative elections to be conducted under the gaze of big numbers of mainland tour ists (almost 1.3m came to Taiwan in 2011). Last June the two sides began allowing Chinese tourists to visit on their own rath er than as part of tour groups, a move that helped some curious mainlanders to fly in to watch the elections. When they eased travel restrictions, political tourism was probably not what the mainland authori ties had in mind. •
Satire in South Korea
Lampooning the p ols
SEOUL
A hitherto off -limits target proves irresistible
P of North Korea has long been a staple
OKING fun at the Kim family dynasty
for satirists (those outside the gulag nation, that is): think of the depiction of the late Kim Jong 11 in the comedy "Team America", or just Google a website devoted to his son, "kim j ong-un looking at things". Yet now South Korea, south of the demilitarised zone, is the new venue for an unlikely boom in satire.
Though democratic for quarter of a century, South Korea's Confucian culture is top-down and deferential. Public criticism of the powerful, especially sarcasm, has abiding power to shock. Excessively strict defamation laws do not help-you can be found guilty even if you prove your criticism to be true. Yet one plucky rebel is changing everything through his podcasts. Kim Ou-joon��
Urbanising China
A nation of city slickers B EI J I N G
A first in Chinese history: city-dwellers outnumber the rural population
F ety have been shaped over millennia OR a nation whose culture and so ci
by its rice-, millet- and wheat-farming traditions, and whose ruling Communist Party rose to power in 1949 by mobilising a put-upon peasantry and encircling the cities, China has just passed a remarkable milestone. By the end of 2011, according to the N ational Bureau of Statistics, more than half of China's 1.35 billion people were living in cities. Demographers had seen this moment coming. The 2010 census showed the differential between town and country to be within a mere few tenths of a p ercent age point. And yet it is still a remarkable turnaround. In 1980 fewer than a fifth of Chinese lived in cities, a smaller urban proportion than in India or Indonesia. Over the next ten years the government remained wary of free movement, even as it made its peace with free enterprise. Touting a policy of "leaving the land but not the villages, entering the factories but not cities", it sought industrialisation without urbanisation, only to discover that it could not have one without the other. Only in the past 15 years has China urbanised quickly by the standards of its peers (see chart). Even now its ratio of city-dwellers is, if anything, low for an economy at its stage of development. A country with its income per head (about $8.400, adjusted for purchasing power) might be expected to house almost three fifths of its people in cities, according to a back-of-the-envelope calculation. Ameri ca reached the so% mark before 1920. Britain passed it in the mid-19th century.
Go further back, however, and Chi na's cities dazzled the world. Historians describe large urban centres, protected by high walls, as early as 3, 700 years ago. It is likely that the 12th-century Song capital of Kaifeng in northern China was then the world's most populous city. Marco Polo, who visited China in the 13th cen tury, claimed that Hangzhou, in Zhejiang in eastern China, was "the most splendid city in the world", with 13,000 bridges. (Later estimates put the more likely num ber at 347-not the first case of hyperbole in Polo's "11 Milione"). China is not alone in its march to wards urbanisation, but it is keen to avoid some of the pitfalls encountered by other urbanising places such as India, Brazil and Africa. Chief among these is the slide of megacities into megaslums. It helps that China's urban influx has not only been into existing cities, but also into newly built ones.
I
Bright lights Population
living
in urban areas, % oftotal
1950 60 70 80 90 2000 10 20 30 40 50 Source: U N Population Division
The Economist J a n ua ry 2 1st 2012
56 Asia
8�
\ � '---.. [) 1 ' • .
� founded "Naneun Ggomsuda" (very roughly: "I'm a sneaky trickster") last April, with the express purpose of making fun of gakha ("His Highness"), the conservative president, Lee Myung-bak. Mr Kim claims to have 1om listeners-if true, it is among the world's most popular podcasts. "Naggomsu", the podcast's abbrevia tion, offers a mix of raucous humour and investigative muckraking. Mr Kim likens the combination to "sugaring the pill". The pill can be powerful: the pod cast broke the story of how the office of one parliamen tarian, then a member of ruling Grand Na tional Party (GNP), allegedly ordered a hacking attack on the website of the Na tional Election Commission in order to in fluence the outcome of the Seoul mayoral election in October. The scandal may greatly damage the GNP's prospects in Na tional Assembly elections in April. Mr Kim believes that Naggomsu be came an "underground" success thanks to the lack of "overground" media freedom. America's Freedom House describes the South Korean press as only "partly free", citing "an increase in official censorship" and "government attempts to influence news and information content". With tele vision and print journalists unable to hold those in power properly to account, there is a demand for alternatives. Now, though, the influence of "Nag gomsu" and its kind is spreading to main stream humour. They made television comedy start to look boring and stale, says a female fan in her 20s. A Korean version of "Saturday Night Live", an American cur rent-affairs comedy programme, began in December. "Gag Concert", a long-running sketch show known for slapstick and safe topics has started to get laughs out of politi cal themes. In November a former GNP member, Kang Yong-seok, sued one "Gag Concert" comedian for "disrespecting the National Assembly". This was in response to re marks that those wanting to become politi cians should grease the necessary palms, and then "make just one visit to a tradition-
al market, shake hands with a grandma and eat a bowl of soup there, even though you normally don't." Rather than running scared, the show's writers came back with an entire episode lampooning Mr Kang's lawsuit. The assemblyman backed down, but one of Kim Ou-joon's comrades has not been so lucky with the law. Last month a frequent "Naggomsu" host, Jeong Bong-ju, was given a 12-month prison sentence for spreading false information about Presi dent Lee, alleging past involvement in a fraud scheme. In a sign of changing times, "Nag gomsu" itself is now the target of satire. A television station, MBC, produced a send-up of the podcast, calling it "Naneun Hasuda" ("I am sewage"). "We parody the mainstream, and now the mainstream par odies us", says Mr Kim matter-of-factly. He will not sue, he says, but keep his focus strictly on His Highness. •
Parental abduction in Japan
Child-snatchers
TOKYO
A dark side to family life inJapan
Tguan living in America, got the gift he
HIS Christmas Moises Garcia, a Nicara
had spent almost four years and $350,000 fighting for: the return of his nine-year-old daughter. In 2008 Karina was whisked away to Japan by her Japanese mother. He set about fighting in the Japanese courts for the right to see her. During that period, he met her only three times. Their longest meeting lasted for only two hours. Then he had a stroke of luck. Last April Karina's mother travelled to Hawaii to re new her green card. She was arrested at the airport and charged with violating Kar ina's custody agreement. As part of a plea
bargain, the mother relinquished Karina, who became the first child seized by a Jap anese parent to be returned to America via the courts. (Feel sorry for Karina, in the middle of this tug-of-love.) Because of such cases, America is one of many countries that has pressed Japan to honour its promise to join the Hague Convention on the Civil Aspects of Inter national Child Abduction. Japan proposes to do so this year. The convention sets rules for the prompt return to their normal coun try of residence of children under 16 who have been abducted by one of their par ents. The State Department says Japan has about 100 such cases involving children of Americans. There are scores from other countries, too. But for one category of parents-those living in Japan without access to their chil dren-the Hague convention changes nothing. When parents separate, Japan's legal system does not recognise the j oint custody of children common in other juris dictions. Instead, children are put into the custody of a single parent after divorce. The family courts usually grant custody to the parent, most often the mother, who at that particular moment is in possession of the child-even if the parent has abducted him. The courts rarely enforce the stingy visitation rights of the "left-behind" par ent. And so many fathers, in particular, vanish altogether from their children's lives. Every year as many as 150,000 di vorced parents in Japan lose contact with their children, according to estimates gleaned from official data. Some do so of their own accord, but most have no say in the matter. One such father, an ex-deputy mayor, describes the system as a conjugal version of the prisoner's dilemma. He says that when a marriage starts to break down, the unspoken question is: who will seize the child first, the mum or the dad? In his case, she did. For two years he has had no con tact with his four-year-old daughter-even his presents are returned unopened-and all with the blessing of the family court. When he reminded the judge that the civil code had been changed to encourage visi tation rights, the judge silenced him. Satsuki Eda, who as justice minister last year pushed through the change in the civ il code, says he hopes it will lead to more generous visitation rights. It may, he also hopes, one day lead to a serious consider ation of joint custody. But, he cautions, judges are conservative, finding it "very difficult to change their minds". And so, in a cruel twist, 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 ab ductions each year at home. "Many people in my situation commit suicide," the es tranged father says. "I can understand the feeling." •
The Economist J a n ua ry
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Change in Myanmar
Follow my lead
SINGAPORE
The government moves, and gets its rewards
A LULL in Myanmar followed the excite.1""\. ment of s ecretary of state Hillary Clin-
ton's historic visit to the country in early December, the first by a senior American official in half a century. Perhaps, some even wondered, this was the point at which the reform process initiated by Myanmar's president, Thein Sein, might come unstuck. Yet from the evidence of the past week, things are on track. On January 13th the government undertook the biggest yet in a series of releases of political prisoners: 302 according to the authorities, 287 according to the Assistance Association for Political Prisoners (Burma), a monitoring group in Thailand. Either way, it was a sizeable number and included many of the democratic opposition's most prominent figures. Some had spent two decades in jail for their part in the first student uprisings against the military government in 1988. Several, including Nilar Thein, Min Ko Naing and Htay Kywe, were leaders of the "88 Generation movement". But student revolutionaries were not the only people set free. One surprise was the release from house arrest of Khin Nyunt, the former military junta's intelligence chief, and prime minister until he was ousted in 2004. All in all, the government's intentions to move from a military dictatorship to greater pluralism appear sincere. The release of political prisoners has always been a foremost condition set by the United States before considering restoring full diplomatic relations. These were downgraded in 1988 and then all but bro ken off in the early 1990s as punishment for the government's brutal crackdowns on the democratic opposition. America has for some months pledged that releases of political prisoners will be rewarded by carefully calibrated measures to end Myanmar's isolation, something the gov ernment appears to crave. Sure enough, right after the prisoner release, America duly announced it had restored full dip lomatic ties. It was, a senior American dip lomat says, "a concrete response to a con crete sign of reform on the Burmese side." Other countries have been moving too. On January 14th Norway announced that it would end its policy of discouraging in vestment in Myanmar. Australia is lifting fi nancial and travel restrictions on certain Burmese citizens. More significantly still, France's foreign minister, Alain Juppe, said that the European Union will respond "positively" to the latest developments.
The EU is currently reviewing its sanctions against Myanmar and seems likely to relax them over the next few months. Mr Juppe is the latest in a string of for eign dignitaries to visit Myanmar in the past few months, another sign of the dip lomatic thaw. William Hague, Britain's for eign secretary, preceded Mr Juppe by only a few days. These visitors are now given in terviews with Mr Thein Sein, and all come away impressed by the seriousness of the government's attempts to change the country, even if there is still a long way to go. Even one of the regime's fiercest critics, Mitch McConnell, the Republican leader in the United States Senate, praised Mr Thein Sein as a "genuine reformer" after his own visit to the country this week. All these worthies meet the de facto leader of the opposition too, Aung San Suu Kyi. That boosts the domestic standing of an already wildly popular figure, key to the country's political development. Only a year ago Miss Suu Kyi, who has spent most of the past two decades under house ar rest, was not even allowed to be men tioned in the government-controlled me dia. Today, her face smiles on magazine covers sold in the streets of the capital, Van gon. The president knows that the Western investment and recognition that he badly wants hang almost entirely on her say-so. Indeed, the next big test of the regime's will for reform comes with by-elections for parliament in early April. Miss Suu Kyi's
What a difference a year makes
National League for Democracy, hitherto banned, has been legalised and will con test 40-odd seats. Ms Suu Kyi herself has just declared her candidacy for a seat on the edge of Yangon. Should these elections be deemed credible, and Miss Suu Kyi take up her seat in parliament, more interna tional rewards for the regime will certainly follow. Yet there is much, much more goodwill that the government needs to show, in cluding over political prisoners. Their re maining numbers, despite the latest re lease, are no lower than before the "Saffron revolution" and subsequent crackdown in 2007-08. Meanwhile, the army, which ran Burma from 1962 till last year, remains a force largely unto itself, as a look at Myan mar's tangled ethnic conflicts around the peripheries of the country suggests. These struggles have been a hugely destabilising factor in the country's history. Here, too, is cause for some optimism. On January 13th the government signed a ceasefire agree ment with the Karen National Union. The Karen have been fighting the government ever since the country won independence from the British in 1948, making the conflict the world's longest-running civil war. It would thus be real progress if the Karen ceasefire led to a durable peace. Everyone acknowledges that if Myanmar really is to recover and prosper again, then these little wars will have to be brought to an end. Yet, as if to illustrate just how hard this will be, fighting has worsened in Kachin state in the north, a result of an army offen sive against the Kachin Independence Army (KIA) which has displaced so,ooo people, some fleeing into China. Talks are apparently taking place in China between the KIA and the Burmese government. Even when there are hopeful signs spring ing up everywhere, a peaceful Myanmar can never be taken for granted. •
58 Asia
Banyan
The Economist J a n ua ry 2 1st 2012
I
A game of chicken
Squeezed between the army and the courts, Pakistan's civilian government may yet survive
I heart scare and incessant vilification in the press, Asif Ali Zar N RECENT months, despite coup threats, economic crisis, a
dari, Pakistan's president, has never appeared in public without one constant companion: a stubborn, face-splitting grin. He seems not to have much to smile about. The coalition led by his Pakistan People's Party (PPP) is just over a year away from the end of its five-year term. But you could get long odds in Islamabad for a bet on its getting there. Like any civilian government in Pal
top brass, soon after Osama bin Laden had been located and killed a stone's-throw from an elite military academy in the Pald stani town of Abbottabad. Purporting to reflect the views of the highest levels of the Pakistani government, it asked for American help in reining in the army, humiliated by the bin Laden episode and possibly contemplating a coup. The government denies any role in "memogate". But rather than use the opportunity to pro fess its loyalty to its civilian masters, the army has used the scan dal to unsettle yet more a government it now sees as intolerably treacherous as well as irredeemably corrupt. However, the army is busy fighting an Islamist insurgency in the north-west, does not want responsibility for Pakistan's sickly economy, and recalls how unpopular it was towards the end of Mr Musharraf's eight-year rule. Moreover, after the Arab spring, renewed military dictatorship in Pakistan would look decidedly bad. Nor is it obvious how, constitutionally, to install an unelect ed "technocratic" caretaker government that might give military rule a civilian glow. So the army has reverted to the usual Plan B, the "soft coup": the hope that the courts or parliament will some how oust the PPP, and that a more malleable civilian government will emerge. Concentrating minds is the (indirect) election to the Senate scheduled for the beginning of March. The PPP will gain a majority in the upper house, enabling it to block legislation for years to come. The court's action against Mr Gilani brings these tensions to a head. If it orders his arrest, the police, who answer to the govern ment, might not obey. If the court then asks the army to detain him, its action might look indistinguishable from a hard coup. Earlier this week Mr Gilani had called a parliamentary vote that he won easily, in support of "democracy"-in effect a vote of con fidence. He seems almost to be daring the army to take him on. For its part, the army seems to be challenging the PPP to take the initiative and even perhaps fire the army chief, General Ash faq Kayani. But the PPP has decided that if it must lose power, it must be thrown out and be the victim. "Politics is a game of nerves," says Nayyar Bokhari, a senator and senior PPP member. So far that nerve has held remarkably well, as Mr Zardari has at every turn outsmarted his enemies in the opposition, the army and the courts. The tracks of whose tears? That is in part because they seem muddled. The army wants Mr Zardari out, but not to be replaced by the opposition leader, Na waz Sharif, who is these days a fierce critic of the generals. For his part, Mr Sharif does not want to see democracy itself derailed. But this week he voted against the "pro-democracy" resolution. Waiting for the election due next year might create further mo mentum behind the campaign of lmran Khan, a cricketer-turned politician who is suddenly wildly popular in quarters viewed by Mr Sharif as his power base. So he would like the election brought forward. When the ele ction is held, it will probably result in another fractured coalition, with the army's influence as strong or stron ger than now. The PPP is right to warn that democracy is at stake in the recent shenanigans. But it has done democracy a huge dis service during four years when its members lined their pockets, while displaying utter indifference to the misery faced by many Pakistanis. This winter households are suffering shortages of electricity, gas and even water, and food inflation is running at an annual rate of some 20%. Mr Zardari's grin looks out of place. •
59
Corporate anonymity 60
Ultimate privilege
60
Also in this section Old age, low carbon Drug prohibition: consensus cracks
Finding out who owns a company can be tricky. So is changing the law
Tly owns it is a longstanding privilege in HAT a company can conceal who real
many countries. This is not just convenient for the shareholders. It makes money for the authorities that register such firms and for the lawyers who handle the details. But it incenses crimefighters and sleaze busters. A World Bank report last year, "The Puppet Masters", investigated 150 big corruption cases. Almost all involved the misuse of corporate vehicles, such as com panies and trusts, to the tune of $so billion. The Obama Administration's action plan for open government calls for "meaning ful" information about beneficial owner ship to be recorded at the time of incorpo ration. Britain's Financial Services Authority says concealed ownership is a big feature of money-laundering. The improvements that the World Bank and other official bodies want are modest: corporate registries should make up-to date details of a company's name, address and directors publicly available. They should keep track of its real beneficial ownership and share that data with law enforcement officials when needed. Yet change of any kind is painfully slow. In America anonymously owned compa nies have featured prominently in recent scandals about campaign financing and health-care fraud. Despite that, a bill by
Senator Carl Levin to require American companies to declare their beneficial own ership (if only to officials) has stalled in the Senate's finance committee. Some suspect that pressure from states that thrive on pro viding anonymity, such as Delaware, helps keep the bill in limbo. For those wanting more radical change, such as the public disclosure of beneficial ownership, the picture is even gloomier. The Financial Action Task Force (FA TF), the world's main anti-money-laundering body, is revamping a set of 40 recommen dations to tighten rules on everything from tax dodging to terrorist financing. But reaching agreement on changes to owner ship rules was particularly tricky and pro gress has been modest. Anthea Lawson of Global Witness, a campaigning group, says that the result is "carte blanche for tax evaders, organised crime and the corrupt to carry on business as usual." Some dispute that any real change is needed. Jurisdictions such as the British Virgin Islands may keep ownership infor mation out of the public gaze, but insist they co-operate readily with requests from law-enforcement bodies. Companies that buy mineral rights say that anonymous front companies are a vital part of their strategy when haggling with landowners. Countries with a common-law tradition,
such as Britain, flinch at the idea of a cen tral register of trusts, which a real reform would necessitate. The government wants to cut regulation, not increase it. Britain also still allows "bearer shares": certifi cates that give control of a company to whoever has the paper in their hands at a particular moment. Other countries find such loopholes scandalous. Not myjob A second problem is about who in practice should tighten the rules. Relying on law enforcement has only limited success be cause police are too busy, and budgets too stretched, to follow paper trails that may involve scores of companies and trusts in dozens of jurisdictions. By the end, the miscreants have long vanished. Corporate registries say they cannot take on more du ties: their j ob is collecting documents, not checking them. Banks want someone else to do the work. A spokesman for the British Bankers' Association complains that his members "are placed under obligations but less thought is given to where banks can find authoritative information to abide by those obligations". One idea is to ask the customer, and to turn down any who cannot explain themselves. Even that would be an improvement-but how can banks check what clients say is true? ��
60 �
The Economist J a n ua ry 2 1st 2012
International The results of the FA TF talks will be published next month. Officials insist that it will now place greater expectations on members. One shift is towards identifying real rather than merely legal ownership (with nominee shareholders and directors, a company may take instructions from a shadowy third party). All those involved in due diligence will be expected to take a "risk-based" approach and "reasonable" measures (translation: more common sense, less box-ticking). Signatory states will come under closer scrutiny on issues such as keeping timely, accurate, accessible basic information (such as company ad dresses). And they will be obliged to have some penalties for non-compliance. The wheels will grind on: FA TF will evaluate progress (more rigorously, it says) and name and shame laggards. The Euro pean Union will shortly start work on a new anti-money-laundering directive, its fourth and toughest to date. But for the time being, self-interest has trumped ef forts to clean up company law. •
Demography and climate change
How to cut carbon emissions .
.
Don't be middle-aged
C tween countries. That is well known, ARBON emissions vary hugely be
as is the finding that rich people emit more than poor ones. But a newly revised paper• by Emilio Zagheni of the Max Planck Insti tute in Rostocl<, Germany also shows how carbon footprints vary by age-and the worrying implications of this. Average spending patterns vary over a lifetime. Consumption as a fraction of household spending typically peaks when people are in their 20s. Old people drive cars less than do their children and grand children. Clothes spending peaks in (most) people's 40s and declines thereafter. These choices have environmental results, be cause some kinds of economic activity are more heavily polluting than others. Mr Zagheni took nine types of con sumption-including electricity use, driv ing cars, buying clothes and food-and looked at how much Americans of each age group spend on them. He then calcu lated the C02 emissions implicit in the con sumption (the "carbon footprint") to give a profile of carbon emissions by age. He found that Americans' emissions per head rise sharply until they reach their early 20s. The increase continues more slowly until people are in their mid 6os, then tails off (see chart). The difference in the amount of carbon each cohort produces is large. In
Dissent about prohibition
In narco veritas G U A T E M A LA CITY
Bravery comes with retirement
R dents who support radical drug-law
America. Last year George Papandreou, then prime minister of Greece, became the only sitting European leader to ad vocate legalising cannabis. Given the weight of opinion in rich countries such as America, caution is understandable. "If someone wants to destroy their own neurones, that can be their own decision," says Mauricio Lopez Bonilla, interior minister of Guatemala, a stepping stone between Andean coca fields and American nostrils. But legal isation "is not politically backable .. .it would have a political and economic cost for us." This month Peru replaced its drugs chief, Ricardo Soberon, who had halted coca-bush spraying (funded by America) to assess its effectiveness. The new woman toes the line. Sometimes, radical suggestions have preceded a career at the top. As a lowly parliamentarian, David Cameron was part of a committee that recommended that the government begin a discussion within the UN on "the possibility of legalisation and regulation" of drugs. As prime minister, he keeps quiet. In opposi tion his deputy, Nick Clegg, declared: "the so-called war on drugs is failing." Yet on a visit to Mexico last year he had only praise for the "courageous" battle, which has produced a murder rate ovens times Britain's. Doubtless he will be forthright in his memoirs.
their early 20s, Americans produce less than ten tonnes of C02 a year. At the peak, in their early 6os, they produce almost 15 tonnes. (America's own most recent esti mates from the Carbon Dioxide Informa tion Analysis Centre in Tennessee put aver age emissions rather higher, at nearly 18 tonnes per person in 2008.) Carbon emissions ebb as people enter
old age. Because most rich countries are ageing, demography should therefore re duce atmospheric pollution. And it will eventually. But the reduction does not be gin until people are in their mid-6os and for the next decade or so, the number of people in the most polluting age group (6o to 64) will rise even more than the number of less-polluting geriatrics. In America in 2020 there will be 2.4m more people aged 75-79 than at present; but there will be 4-4m more 6o- to 64 -year-olds. The growth of heavily polluting age groups will be still more marked in youn ger countries which are beginning to reap the economic benefits that come from an increase in the relative size of the working age population. Members of this cohort will produce more pollution until they re tire, meaning that the climate-change benefits of ageing populations will not kick in until 2050 at the earliest. •
ETIRED policemen, judges and presi
reform still greatly outnumber those who pipe up while still in the j ob. But calls for a rethink are increasingly com ing from incumbents too. Last year Bolivia's left-wing government briefly withdrew from the uN's Single Conven tion on Narcotic Drugs, the 1961 treaty underpinning prohibition. It returned after negotiating an opt-out for coca, a traditional mild stimulant (unlike co caine, no more harmful than caffeine) protected by the country's constitution. More hawkish leaders are also think ing twice. Felipe Calderon, Mexico's conservative president, said in August: "if you [America) are determined and resigned to consume drugs, then seek market alternatives . . . or establish clear points of access other than the border with Mexico. This position can no longer go on." Soon after, Juan Manuel Santos, the centre-right president of Colombia, said he would welcome legalisation if it cut criminals' profits. European leaders so far lack these cojones. Though the Netherlands toler ates cannabis sales to locals in designat ed coffee shops and Portugal has decri minalised the consumption of all drugs, neither has legalised supply, meaning that consumers' cash still goes to the mobs who behead, boil and skin in Latin
Over the hiLL An average American's C02 emissi o n s * 2003, !annes
15 12
0
10
20
30
40
50
60
70
Age (years) Source: Emilio Zagheni
*Estimate
*The Leverage of Demographic Dynamics on Carbon Dioxide Emissions: Does Age Structure Matter? By Emi lio Zagheni. Demography (2011) pp 371-399.
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62
64
64 65 65
66 66 67
Also in this section Demography and business in Israel Gloomy corporate America Don't fear Asian technology Dazzling televisions, dismal profits Aircraft: rent or buy? Opening a business in Brazil Cheeky tequila-makers Schum peter: The shackled boss
For daily a n a lysis a n d debate on business a n d our weekly "Money talks" p o dcast, visit Economist.comfbusiness-finance
Israeli technology companies
What next for the start-up nation?
T E L AVIV
Even in Israel, it is hard to turn young companies into adults
Theard. In a stone hangar in the old port HE youngmust shout if they want to be
of Jaffa, 30 entrepreneurs have five minutes each to present their start-up companies to a panel of digital luminaries and an audience that includes potential investors. Not everyone in the room is ready to shut up and listen, so the hop efuls must battle against the din. Feng-GUI explains how; by simulating human vision, it can tell advertisers and designers which areas of a web page are most likely to grab people's attention. Copyv promises to send large files quickly and securely. With Fooducate, "a dietician in your pocket", on your smartphone, you can scan bar codes in the sup ermarket and find out what's really going into your trolley. Israel's legions of young technology firms clamour for attention and money. Rapid-pitch events like this one, at DLD Tel Aviv, a two-day conference in November, are common. More than 300 firms applied for a slot at DLD; 100 turned up; the lucky 30 were chosen by raffle. Yossi Vardi, a technology entrepreneur who has invest ed in 75 start-ups since 1996, says that he re ceives between three and eight approach es every day. Dan Senor and Saul Singer called Israel "The Start-Up Nation" in a book of that name in 2009. The label has stuck because it fits. Everybody and his brother-in-law seems to be starting a company-with old schoolmates or army colleagues, in a spare room or the parental home. Starting a busi ness is easier than ever, thanks to advances
in information technology. Budding de signers of smartphone apps can rent space when they need it on a remote server rath er than buying huge amounts of comput ing power. "The internet has democratised the right to innovate," says Mr Vardi. Israelis innovate because they have to. The land is arid, so they excel at water and agricultural technology. They have little oil, so they furrow their brows to find alter natives. They are surrounded by enemies, so their military technology is superb and creates lucrative spin-offs, especially in communications. The relationships forged during military service foster frenetic net working in civilian life. A flood of immi grants in the 1990s gave national brain power a mighty boost (see box on the next page). The results are the envy of almost everyone outside Silicon Valley. Small country, big dreams But even in Israel turning tech start-ups into big companies is difficult. For all the comparisons with Silicon Valley, Israel has not begotten a Hewlett-Packard, an Intel or a Google. Its best companies are often bought by American giants while still in their infancy. The biggest home-grown technology company is Teva, a drugmaker which is listed on NASDAQ, an American tech-oriented stockmarket, with a market capitalisation of $43 billion. In informa tion technology the biggest is Check Point, a security specialist founded by veterans of Unit 82oo, an elite army-intelligence group. Also on NASDAQ, on which Israel
has more companies than any foreign country bar China, it is valued at $11 bil lion-no minnow, but no whale. Very young firms have a good deal of support, which is getting stronger. Acceler ators, in which entrepreneurs can shape their ideas and meet advisers and inves tors, are springing up: this week, for exam ple, Up West Labs, which intends to bring five to ten Israeli start-ups to Silicon Valley for ten-week stints, began its first pro gramme. As well as meeting helpful peo ple, the hopeful entrepreneurs receive $2o,ooo in seed money. "There's a plethora of opportunities at a very early stage to raise $2o,ooo or $10o,ooo to get a minimum viable product out there," says Liat Aaronson, the execu tive director of the Zell Entrepreneurship Program, a scheme for final-year under graduates at me Herzliya near Tel Aviv. The difficult bit is turning small firms into bigger ones. One commonly cited problem is a lack of early-stage venture capital: sums of $1m-2m or so. Ms Aaronson agrees that this step is "trickier", though some firms emerging from the Zell programme have attracted such amounts. People on the course founded the Gifts Proj ect, acquired by eBay in September, which allows peo ple to club together to buy presents online for their friends, and Wibiya, a web-design company that was bought by Conduit, a biggish Israeli firm, for $45m in July. Alum ni set up LabPixies, a developer of web and smartphone apps that was spirited away by Go ogle for $25m in April 2010. Israel attracts far more venture capital per person than any other country-$170 in 2010 to America's $75. Yet there does not seem to be enough early-stage money to go around. One reason is that there are simply an awful lot of young companies fighting for a share of the pot. Another is that venture-capital firms in Israel, just as in other countries, have had a ��
62
The Economist J a n ua ry 2 1st 2012
Business Demography and business in Israel
Less cash, and more of it foreign Capital raised by Israeli high-tech companies, $bn
• Foreign funds and other i nvestors - Israeli venture-capital funds
2.5 2.0 1.5 1.0 0.5
-� .._, __ ___ _L_
2002 03 04 05 06 07 08 09 10 1 1 * Source: Israel Venture Capital Research Centre
0
'Jan 1st-Sept 30th
� lean few years. That could be changing: in vestment is climbing back towards its pre crisis peak (see chart). But some funds based in Israel, several of which were created with public money in the 1990s, are still having difficulty rais ing money and are hesitant about deploy ing what they do have. They are likelier than big international brands to deal in smaller amounts. According to the Israel Venture Capital Research Centre, Israeli funds now account for only a quarter of the amount raised by the country's high tech companies, down from two-fifths a few years ago. Whether the brand is Israeli or foreign, says Adam Fisher of Bessemer Venture Partners, an international group, the money comes from abroad. Building a business requires more than money and technology. Companies need customers, and in a country of 7.6m people there are not very many. So Israeli firms are often global virtually from the start. For ex ample, BillGuard, which alerts its users to errors and fraud on their credit and debit cards, has an office in New York, staffed by Yaron Samid, its chief executive and one of its founders, and the head of business de velopment and sales, and keeps a 1s·strong product-development team in Herzliya. Now that young Israeli companies are applying their technical brilliance to con sumer products as much as to designing semiconductors or developing computer security software, broader skills matter more. In a blog post last]uly, Mr Fisher ex horted them to think about their entire business model, including product design and marketing, from the outset. Some start ups, he wrote, had made this mental leap, but the "tech crutch", a model of focusing on technology alone and then selling to foreign multinationals, was "increasingly unsustainable" in the face of competition from China, South Korea and Taiwan. Building businesses also requires peo ple who are willing to be, say, the soth em ployee in someone else's firm. But in a na tion of start-ups a lot of people want to be their own bosses. Talent risks being thinly spread. Mr Samid's theory is that after
The promised land needs people T E L AVIV
Why Israeli firms face a skills shortage
Tannounced that it had poached a new HIS month Teva, an Israeli drug firm,
boss, Jeremy Levin, from Bristol-Myers Squibb, an American rival. Mr Levin is exactly the kind of immigrant Israel needs. He swotted at Oxford and Cam bridge and has run companies in New York. He has lived in six countries and has contacts in dozens. And he loves Israel. "The opportunity to live and work in Israel", he said, "is compelling." The dynamism of Israeli business owes much to immigration. In the de cade after the Soviet Union collapsed, 1m immigrants flocked to Israel. This huge influx of energy and talent helped kick start Israel's start-up boom. Diaspora ties help, too. Israeli entre preneurs nearly all know people in other countries. Many divide their time be tween home and abroad. Their connec tions keep the latest ideas from Palo Alto and Hong Kong flowing into Tel Aviv, and help Israeli start-ups find new markets and new recruits. But Israel's demographic advantage is fading. The Soviet Union will not col lapse again. "We're not going to get an other million Russians," sighs an official in Tel Aviv. Immigration has collapsed from 200,000 in 1990 to a mere 17,000 in 2010. Living standards are higher in America, and the neighbours less scary. The fastest-growing population groups in Israel are those least plugged in to the high-tech economy: Israeli Arabs, who lag educationally, and haredim (ultra-orthodox ]ews), whom the govern ment pays to study the Torah. Two-thirds
their stint in the army many young Israelis have had enough of being told what to do. He reckons that three-quarters of the mem bers of TechAviv, a network of entrepre neurs that he set up, are start-ups with few er than ten employees. And making a business into something not merely big but enormous means resist ing bigger companies' blandishments of a few million dollars, or even a few hundred million. Given a certain payoff for selling and an uncertain future going it alone, it is not surprising that many people take the money. Several companies have rejected offers of hundreds of millions of dollars only to fail a few years later. So leaving the task of building a company to someone else may not be such a bad idea. Mr Vardi certainly thinks so. "We are de veloping intellectual property, not just companies," he says. He reels off a list of
of working-age haredi men don't work. They do procreate, however. In 1960 only 1S% of Israeli schoolkids attended Arab or haredi schools. Now it's about so%, and if current trends continue it will be 78% by 2040, according to the Taub Centre, an Israeli think-tank. If tomorrow's haredim are as workshy as today's, the start-up nation is doomed. But trends that can't continue, won't, says Glenn Yago of the Milken Institute, a global think-tank. The haredim are highly literate and perfectly capable of working. Some day, they will have to.
Apparently it's called a job application American tech giants, from Intel to Go ogle, with operations in Israel into which they have folded local firms. Several have been in Israel for decades. It is these multina tionals, he says, that create "the 30th, 40th and sooth" j obs in Israeli start-ups. Intel employs more than 7,soo people in the country; HP too has several thousand staff; IBM has more than 2,000. This month Ap ple made its first Israeli acquisition, An obit, a maker of parts for flash-memory drives, for a reported $390m. It is said to be setting up a research centre too. Israel is not alone in agonising over the sale of its home-grown companies. In Brit ain, the sale of Autonomy, a software com pany, to HP for $11 billion last year caused a brief national lament. Some Israelis may wish their crops grew taller in the field be fore the harvest. Most countries would set tle for sowing half as much seed. •
64
Business Business in America
Glass half empty NEW YORK
Why businesspeople are so gloomy about America
P American
ROFITS may be at a record high, but businessfolk are feeling glum. Some moan that their pipeline-post poning president, Barack Obama, doesn't understand how business works. Others fret that America itself is becoming dys functional. Much of this pessimism is un called for, but it matters nonetheless. A survey published on January 18th of fers unsettling detail. Fully 71% of the busi nesspeople polled expected America's competitiveness to decline over the next three years. (National competitiveness is a slippery concept: countries do not com pete in the same way that firms do. But the businessfolk in question answered some clearer questions, too.) Some 45% said that American firms will find it harder to com pete in the global economy. A startling 64% said that American firms will find it harder to pay high wages and benefits. The survey is from Harvard Business School, which in October persuaded near ly 10,000 of its 78,ooo alumni to complete a questionnaire. Two-thirds were based in America; the remainder were spread across 121 countries. Some 91% had worked during the past year (over half in manufac turing, finance or professional services). This being Harvard, more than a quarter described themselves as a chief executive, chairman, founder, owner or something equally exalted. Intriguingly, the Harvard alumni were gloomy about where America is headed, rather than how it is now. Some 57% felt that today the business environment in America is somewhat or much better than the global average; only 15% said it was worse. But when asked to compare its pros pects with those of other industrialised economies, only 9% felt that America was pulling ahead; some 21% said it was falling behind. A striking 66% expected America to lose ground to Brazil, India and China; only 8% thought it would pull away from them. Those in globally competitive sec tors were gloomiest; those who ran hotels or utilities were more cheerful. The Harvard alumni identified several areas in which America has an edge: its universities, its spirit of enterprise and in novation, its business clusters, its system of property rights, its capital markets and even the quality of its business managers (no comment). Its lead in some of these ar eas is increasing, they reckoned. America's most glaring weaknesses, they felt, were its political system (this was
The Economist J a n ua ry 2 1st 2012 the number-one complaint by far), its schools, its insanely complex tax code, its macroeconomic policies, its regulations and its legal system. Often the gripe was not just that the rules are bad but that they are unpredictable. Each respondent was asked to make one suggestion to the gov ernment. Top of the list? Simplify the tax code, and reform immigration policies to make it easier to import talent. Surveys like this matter because the pessimism they reveal is reflected in the decisions bosses make. In the year before the survey, one respondent in six had been personally involved in a decision about whether to do something in America or
another country. Some had to choose whether or not to shift an operation off shore. Others, whether to bring one back to America. Others had to decide where to locate a new operation. Overall, abroad defeated America by two to one. These decisions were not all about moving drudge work to countries with low wages. Many involved highly skilled tasks such as research and development. In the cases involving potential offshoring, firms opted to remain in America only 16% of the time. Still, there were 70 examples of firms moving activities to America from abroad. And offshoring brings benefits as well as problems (see next article). •
Research and development
Brain gain
HON G KONG
Why America is wrong to fear Asian innovation
"
wE MUST re-examine long-held as-
sumptions about the global domi nance of. . .American science and technol ogy." Those dark words come from Subra Suresh, director of America's National Sci ence Foundation (NSF), an official body. The NSF has just released its biennial re port on global investment in science, engi neering and technology. It gives warning that America is losing ground fast to Asian rivals, espe cially China. The ten largest economies in Asia now spend roughly $400 billion a year on re search and development (R&D)-as much as America, and well ahead of Europ e's $300 billion. China's investment leapt 28%
Innovation can be risky
in a year, propelling it past Japan to be come the world's second-biggest spender. "Troubling trends," declares one of the re port's overseers. Hang on a minute. Merely counting pennies is no way to measure national pro wess. Research spending is an input, not an output. Many a clever gizmo produced by well-endowed Japanese corporate labs has turned out to be worthless. Useful innovation means fresh think ing that creates value. Booz & Co, a Consul tancy, has found that firms that spend little on R&D do indeed fare poorly by this mea sure. But those that spend a fortune do not, on average, outperform their more parsi monious peers. The NSF boffins fret that America's share of global R&D spending is falling. In the decade to 2009, it tumbled from 38% to 31%, whereas Asia's rose from 24% to 35%. But science is not a zero-sum game. One reason why spending in Asia has risen is that American firms nearly dou bled their R&D investments there in the de cade to 2008, to $7.5 billion. GE recently an nounced a $soom expansion of its R&D facilities in China. Such investments give American firms access to a wider pool of brains, many of them fizzing with ideas. Products developed in or for emerging markets are making their way to devel oped ones. Coca Cola's Pulpy is now a bil lion-dollar global brand, but it was first a smash in China. Text4Baby, an American campaign to send medical advice to preg nant mothers via text messages, was in spired by the work of Voxiva, an American firm, in Peru and Rwanda. Foreign innova tion may threaten American firms; but it can also make them more competitive. •
The Economist J a n ua ry
Business
2 1 st 2 0 1 2
Television-making
Cracking up TOKYO
Flat screens are everywhere, but no one earns money making them
R tailor who makes a loss on each piece EMEMBER the old joke about the dim
of clothing but hopes to make it up in vol ume? That describes the market for flat panel screens for televisions. None of the companies that produce liquid crystal dis play (LCD) panels-Samsung and LG Dis play from South Korea, Japan's Sharp and Panasonic, their Taiwanese rivals-makes money from it. Between 2004 and 2010 the industry suffered cumulative economic losses of $13 billion, calculates Alberto Moel of Sanford C. Bernstein, a broker. It is not because people hate their pro ducts. The world's couch potatoes spent $115 billion on 220m flat-panel televisions last year. Many more displays-some 2.7 billion screens worth $no billion-went into smartphones, tablets, gaming gadgets and the like, according to DisplaySearch, which measures such things. Yet profits for s creenmakers are nowhere to be seen. There are several reasons for this. First, today's products are tough to differentiate between: all are good, cheap and do the same thing. Second, many suppliers ex panded capacity in recent years, creating a glut. Third, hard times in rich countries mean that fewer people will splurge on new televisions even if they are cheap. The price of LCD panels fell by 8o% be tween 2004 and 2008, while the manufac turing costs declined by so% (see chart). So margins dwindled to approximately noth ing. Some suppliers had no choice but to sell their panels at a loss. Clever accounting hid the damage for a while. Panel-makers with their own televi sion brands, such as Samsung and Sharp, covered their panel losses with profits from the finished article. Yet slow sales in 2011 mean that even televisions may fall
I
High definition, Low prices Cost of LCD panels per m1, $'000
6
2001 02 03 04 05 06 07 08 09 10 1 1 Source: Sanford C . Bernstein
into the red. For firms that only supply screens, such as Chimei Innolux and AU Optronics, the pain may be as long and ex cruciating as an Oliver Stone film. No one has a clue what to do. Firms have tried to raise the value of the sets themselves, by increasing the screen size and improving the image quality, to no avail. They have added interactive features such as Google TV or Sony's online ser vices, but sofa spuds snub them. LCDS are hurting the world's biggest consumer-electronics firms. Sony may lose money on its television businesses in 2011 for its eighth consecutive year. In No vember it halved a previous sales forecast to 20m televisions. This might be a good thing: Sony loses $8o on every set it sells. Panasonic expects its television unit to be unprofitable for its fourth year running and is consolidating factories, shuttering op erations and sacking people. Even Sam sung, the biggest producer, has posted three quarters of losses on panel manufac turing this financial year. Sharp has con verted two factories to make small LCD panels for smartphones and iPads. Smaller panels remain profitable, for now. Televisions are becoming like air tickets or long-distance phone calls. Everyone loves them. But because so many firms of fer them, hardly any can turn a profit. To make matters worse, new Chinese fac tories may come onstream in 2012, de pressing prices even further. •
Aircraft Leasing
Buy or rent?
The steady rise of airlines with no passengers
Tness that if it flies or floats, you should HERE is a saying in the transport busi
rent it (there are also much ruder versions of this epigram). Nevertheless, airlines have traditionally bought their planes, even if many purchases were arranged as "finance leases", with the instalments dressed up as rent payments so as to make them tax-deductible. However, airlines are turning increas ingly to "operating" leases, in which they really are renting the planes, for a few years at a time, with a leasing company bearing the risk of any slump in their second-hand values. Over a third of the world's airline fleet is now rented and the proportion is likely to keep growing. Paul Sheridan of Ascend, an aviation consultancy, reckons that of the world's top four owners of air liners, two are lessors: GECAS, with 1,732 planes, and ILFC, with 1,031, soar miles above Delta (8oo) and American Airlines
65
(775). A chunk of the aircraftmakers' bulg ing order books is from leasing firms bet ting that demand for rented planes will keep rising. Alafco, a Kuwaiti lessor, splashed out $4.6 billion (at list prices) on so Airbus A320neos in November. One of these big "airlines with no pas sengers", RBS Aviation, was sold this week by Royal Bank of Scotland, a state-rescued British bank. A consortium led by Sumi tomo Mitsui of Japan paid a handsome $7.3 billion, a sign of Asian banks' eagerness to move into aircraft finance as struggling Western institutions retreat. China Devel opment Bank bid unsuccessfully for RBS Aviation and may now seek another leas ing firm to buy. Bank of China bought a Singaporean lessor just before the finan cial crisis and it is now in the world's top ten. ILFC is part of AIG, a bailed-out Amer ican insurer, which is seeking to sell it. Prospects for the leasing business are strong, says Philip Baggaley of Standard & Poor's, a credit-rating agency. Airlines lack cash to finance their big plans for fleet re newal, and they cannot borrow cheaply to buy new planes. Deals in which airlines sell part of their existing fleet to a lessor and rent it back are becoming more com mon: Air France-KLM wants to do this with planes worth a total of €700m ($897m). RBS Aviation's boss, Peter Barrett, notes that aviation is becoming more like the ho tel business: one type of firm specialises in owning the assets, while another operates them. But there is an important difference: a hotel owner cannot easily seize his pre mises back from a hotelier who skips the rent, whereas leasing firms can and often do take back their planes. That makes the aircraft-leasing business less risky. This flexibility cuts both ways: carriers that go bankrupt can tear up leases and hand planes back, as American Airlines' parent, AMR, is doing with some jets. He lane Becker of Dahlman Rose, an invest ment bank, says leasing is widely misun derstood to be all about tax breaks: in fact a ��
66
The Economist J a n ua ry 2 1st 2012
Business
� big part of the business is judging which aircraft will maintain their value and man aging the risks of owning them. If renting planes makes sense for air lines, why buy at all? Nat Pieper, who over sees Delta's fleet planning, agrees that rent ing may make sense for small, young airlines that lack capital, for larger airlines trying out a new line of business for which they need different planes, or when manu facturers' order books are full and the only way to get a plane is to rent it. However, he argues that big airlines are better off buying planes and keeping them for their full lifespan of 30 years or so. Like houses, then, buying is cheaper than rent ing in the long term. So perhaps the growth and profitability of the aircraft-leasing business is a reflection of how short-term the airline business has become. •
Opening a business in Brazil
Tequila
Storm in a shot glass M EXICO CITY
Can a succulent be claimed as a trademark?
T IKE champagne, tequila may be called L tequila only if it comes from a specific
region. Distillers in five of Mexico's 31 states have the exclusive right to produce the famous firewater. Bottlers elsewhere must use alternative names, though their product is distilled in the same way from the sap of the agave, a spiky desert succu lent often wrongly referred to as a cactus. Demand for tequila is growing fast. Americans now drink more of the stuff than Mexicans-a head-throbbing 12om litres a year. Producers outside the official tequila region are cashing in. The "agave liquor" they sell is cheaper than real tequila and tastes identical, at least to the
Why mal<e it simple? SAO P A U LO
Setting up shop has just got easier. But not much
B business.
RAZIL is not an easy place to start a The World Bank ranks it 12oth out of 183 countries-worse than Bur kina Faso or Nigeria. Take one small exam ple. Until recently, you needed at least two partners to form a limited-liability com pany. Sole traders had to find a "1% so cio"-an employee, friend or family mem ber willing to lend his name to the articles of association, or a shell company set up solely to hold a tiny share. Things may have just got a little easier. A new law, which supposedly came into effect on January 9th, allows a lone busi ness-owner to set up an Empresa Individ ual de Responsabilidade Limitada (Eireli for short): a single-holder limited-liability firm. The main requirement is capital of 62,200 reais ($35,250). This is a big deal. Alas, it may not hap pen as planned. In December the federal body that oversees state business registries told them to turn away firms trying to reg ister Eirelis, as well as foreigners without permanent right of residence. No reason was given. Later, lawyers were briefed that the law's aim was to let Brazilian sole trad ers protect their personal goods against lawsuits or b ankruptcy-not to make life easier for big business or foreigners. Since the restrictions have no basis in the law, challenges are inevitable. Husam Ab baud of Establish Brazil, a company-for mation specialist, is thinking of Brazilian style direct action: simply trying to register an Eireli for a firm or a foreigner, and seeing what happens. "We won't be trying just
Floral and oaky, with a hint of sunscreen once, but many times," he says cheerfully. "In Brazil, it always depends who's on the desk on the day." A few speedy locals have already set up Eirelis. "It was quick and easy, because I didn't have to hunt for a partner," says Taise Litholdo, an architect. Sebastiao Lino da Silva, an accountant in Sao Paulo, is helping a medical-research firm, which re cently lost a partner, to convert into an Ei reli. The remaining owner would other wise have to find a new partner or close. J oao Marcelo Pacheco of Pinheiro Neta Ad vogados, one of Brazil's largest law firms, says that some wealthy clients will use Ei relis to make their lives simpler. All this amounts to a tweak, not a revo lution. By January 18th only 14 Eirelis had been registered with Sao Paulo's board of trade, Brazil's biggest. "The truth is Eirelis are not really suitable for most small busi nesses," says Mr Abboud. Few hot-dog vendors and hairdressers have enough spare cash to satisfy the capital require ment, he points out. That is an argument for scrapping the capital requirement. The Socialist People's
barbarian gringo palate. Traditional tequileros hate to see others crashing what they see as their party. So a proposal sponsored by the National Chamber of the Tequila In dustry would ban distillers outside the five-state boundary from using the word "agave" to describe their drinks. The proposal has won the support of Mexi co's intellectual-property agency, IMP I. Agave-lovers think this a bit unrea sonable. "Agave" is the name of a plant, not a product. It is as if the Champagne region were to try to ban others from using the word "grape" or the butchers of Parma were to claim the word "ham". A letter from 343 experts, from biologists to sociologists, expressed "forthright oppo sition" to the proposal. Others, however, sought similar favours. On January 5th 150 makers of mezcal (another agave spirit) from the state of Michoacan marched on the offices of IMPI to demand that the pro tected zone include their farms. The tequileros' proposal may fail. Mexico's competition authority has issued a non-binding opinion against it, and the government's regulatory com mission seems unconvinced. If they can't use the law to crush competitors, tequile ros will have to make money the old fashioned way, by making better tequila.
Party, an opposition group, has asked the Supreme Court to rule it unconstitutional for discriminating against micro-traders. Even if foreigners are allowed to set up Eirelis, breaking into Brazil will remain tough. The biggest hurdle-finding a per manent resident willing to hold power of attorney for foreign owners-will remain. Establish Brazil and its rivals will do this for foreign clients, but only until a local man ager has been appointed, or an expatriate has arrived on a permanent business visa. The snag is that acting for a foreign firm leaves agents vulnerable to Brazil's capri cious tax authorities and labour courts, which tend to ignore limited liability and pursue individual owners. "They want to be able to freeze someone's bank account if problems arise," explains Stephen O'Sul livan of Mattos Filho Advogados, another big Sao Paulo law firm. "And if they're the only people in the country, they'll go after the local managers, or even the lawyers." Unsurprisingly, Mattos Filho is willing to fulfil this role only for old and valued cli ents. Eirelis may eventually make it easier to set up shop in Brazil. But only a little. •
The Economist J a n ua ry
Business
2 1 st 2 0 1 2
I
Schump eter The shacl
Corporate bosses are much less powerful than they used to be
E wakes up on the island of Lilliput to find that he has been tied
XHAUSTED after a shipwreck, the hero of "Gulliver's Travels"
down by lots of "slender ligatures". Gulliver is far stronger than his tiny captors; but by working together the Lilliputians subdue the giant. The bosses who will gather in Davos on January 25th-29th are more like Gulliver than they care to imagine. They may feel big, as they hobnob with politicians and stride from one soiree to anoth er (in sensible shoes, to avoid slipping on the Swiss resort's icy pavements). And pundits will fret, as they always do, that Davos Men are carving up the world. But when those bosses return to work they will discover that the tiny ligatures that non-Davosites have attached to them bind ever more tightly. Two decades ago bosses were relatively unbound. American chief executives struck heroic poses on the covers of Forbes and Fortune and appointed pliable cronies to their boards. Europ eans such as Percy Barnevik, the boss of ASEA Brown Boveri, a Swed ish-Swiss conglomerate, imported the American cult of the CEO to the old continent. But since then a succession of catastrophes most notably the implosion of Enron in 2001 and the financial cri sis in 2007-08-have empowered the critics of over-mighty bosses. In 2010 two legal academics, Marcel Kahan and Edward Rock, published a seminal article on "Embattled CEOs". Since then they have become ever more embattled. One sign is that bosses don't last long these days. Among the world's 2,500 biggest public companies, the average job tenure for departing CEOs has fallen from 8.1 years in 2000 to 6.6 years today, according to Booz & Company, a consultancy. The fall would have been steeper but for the generosity of China's state companies. In 2010 CEO turnover worldwide was 11.6%, but in China it was half that. Booz also notes that shareholders give bosses very little time to prove themselves: Leo Apotheker lasted for seven months as the head of SAP (a software firm) and ten months as head of Hewlett-Packard (a computer giant). Another sign that the Lilliputians are winning is that fewer chief executives now chair their own boards (the corporate equivalent of a schoolboy marking his own exam papers). In Booz's global sample the proportion of incoming CEOS who dou bled as chairmen fell from 48% in 2002 to less than 12% in 2009.
Even America is growing wary of imperial bosses: according to the Corporate Library, a pressure group, the proportion of CEOS of s&P sao firms who mark their own exams fell from 78% in 2002 to 59% in 2010. Bosses are still paid handsomely; but this is partly a reaction to rising job inse curity. And in much of the world CEO pay is rising more slowly than it did in the 1990s. In America it may even be declining. Moreover, the Lilliputians are forcing politicians to tie more strings. In 2010 America's Congress passed a say-on-pay law that gives shareholders a right to hold a (non-binding) vote on pay. David Cameron, Britain's prime minister, has suggested giving shareholders a binding vote on pay. The rise of institutional investors (notably mutual funds) has changed the old equation whereby dispersed shareholders con fronted concentrated managers. The proportion of stock in America's publicly listed companies that is held by institutions increased from 19% in1970 to so% in 2008. And the scandals of the 2ooos have reignited shareholder activism. To assess the bosses who work for them, shareholders have p owerful new tools. For example, outfits such as RiskMetrics of fer advice on proxy battles. Shareholders also have powerful new allies. Hedge funds intervene aggressively in corporate deci sion-making, browbeating such giants as McDonald's, Time War ner and Deutsche Borse. At the same time boards of directors have grown more de manding. Gone are the days when a boss could put his golfing buddies on the board. ("A big glob of nothing" was how one ob server described boards in the 1960s.) Today the vast maj ority of board members are outsiders. This has led to a huge improve ment in their quality. Korn Ferry, a consultancy, notes that the 95 new directors who won seats on the boards of its sample of America's 100 biggest companies are remarkably rich in interna tional experience: 21% hold foreign passports and 12% have worked in Brazil, Russia, India or China. It has also increased their willingness to act as stern monitors rather than chummy advis ers. In his excellent new book "Winning Investors Over", Baruch Lev of New York University's Stern School of Business writes that in this new world "the lonely CEO now often faces a 'team of rivals', sometimes adversaries." A proposal for modesty All this is affecting bosses' behaviour. The latest buzz phrases in the c-suite are "humble leadership", "servant leadership" and "bottom-up leadership". But is it actually improving corporate p erformance? The academic literature suggests that it is. John Core and his colleagues have shown that companies with strong shareholder rights have higher operating profits than those with weak rights. Craig Doidge and his colleagues have shown that companies with stronger boards can raise capital more cheaply. However, some CEOS are raising objections to the new re gime. How can they focus on long-term growth, they ask, if they are constantly second-guessed by a team of rivals? Some are jumping ship for private companies. Anthony Thompson, for merly in charge of Asda's "George" brand of clothes, left to join Fat Face, a private clothing company, rej oicing that: "I no longer have to slavishly adhere to corporate nonsense and overbearing governance." Gulliver eventually persuaded his captors to untie him. CEOs will undoubtedly try to do likewise. • Economist.comfblogsfschumpeter
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The future is black
NAG P U R
Power i s essential for India's long-term growth. But electricity i s unlikely t o flow fast enough
SIndia and you will hit Nagpur. Some 20
TAB a finger at the middle of a map of
miles (32 kilometres) north-west of the city is a sloping tunnel bored into the rock. Ride two miles down into the gloom, hanging from a wire, and after a torch-lit hike past underground streams and conveyor belts you arrive at a black wall. Sweating men are rigging it with tubes of explosives and wire detonators. Soon they will blast it apart, and down should tumble tonnes of India's most important commodity: coal. In coal India has something as abun dant as people. As more Indians enj oy the trappings of middle-class life and the coun try industrialises, demand for coal-fired electricity will continue to rise smartly, roughly in line with economic growth. In dia may not have much oil or gas to call its own but it has the world's fifth-largest coal reserves. And it has successfully raised a mountain of the other raw material need ed to turn carbon into sparks: capital. Some $130 billion has been ploughed into the power industry in the past five years. Of that, $6o billion or so has come from the private sector-probably the largest-ever private-sector investment India has seen. Possessing coal and capital is no guar antee that India's energy boiler will work
properly, however. It also involves multi ple states, government ministries, regula tors, mandarins, politicians, tycoons, envi ronmentalists, villagers, activists, crooks and bandits. There are the usual gripes of an emerging economy: blackouts (during peak hours the system delivers 10% less electricity than customers want) and an in adequate grid that does not reach some 300m people (although it has improved a lot in recent years). There is also a risk that India cannot de liver the long-term increase in electricity generation that its economy needs to fulfil its potential. On January 18th a group of in fluential businessmen gathered in Delhi to bend the prime minister's ear on this very matter. The problem is partly one of design. Coal is dug up by a state-monopolist that has failed to boost output significantly in recent years, unlike China (see chart 1 on next page), and so cannot keep up with de mand. Power is distributed to homes and firms by publicly owned grid companies that are often bankrupt, their tariffs kept too low by local politicians. Trapped in the middle are the firms that run power sta tions. In desperation they are importing pricier foreign coal, but the grid companies
cannot afford the power it produces. With too little coal and wobbly customers, the private firms that have built new power stations are in financial trouble. Another wave of private investment looks unlikely. In India, though, no one expects perfect design. The economy sits somewhere be tween the old command-and-control ap proach and the new ways of markets and private capital. What is worrying is that In dia's talent for improvisation-a collective ability to muddle through-has deserted it when it comes to providing electricity. The problem has been clear for ages. A circuitous blame game is taking place. Min istries squabble but no one knocks heads together. If you trawl round the offices of industry bosses the livid letters they bran dish trace their incandescent correspon dence with each other. Power, so vital for growth, is India's biggest bottleneck. The danger is that it becomes a metaphor for the whole economy: many fear that the muddle-through approach of the past two decades of boom has diminishing returns. One dam thing after another It wasn't always all about coal. Jawaharlal Nehru, the country's first prime minister after independence, was obsessed with hydroelectric dams, calling them the "tem ples of modern India". lt would have been good for India's environment, and the world's, had many more temples been raised. The fad for hydro trickled away and it now provides only 14% of India's power compared with up to a half in the 1960s. That seems unlikely to change-India is too chaotic and free a place to manage the ��
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2 1 st 2 0 1 2
� feats of national machismo that allowed China to build the Three Gorges dam. Al though new projects are planned in places such as Kashmir and neighbouring Bhu tan, harnessing Himalayan rivers to power all of India is for now a dream, not a policy. The subcontinent has plenty of sun and wind, and states including Gujarat and Tamil Nadu are keen to encourage invest ments in renewable energy. These are like ly to be niche sources of power, thanks to problems getting land and their high cost. As for nuclear power, India's attitude has long been hyperbolic on paper and ambivalent in practice, despite striking a ci vilian nuclear deal with America in 2005. Foreign companies are put off by the pros pect of unlimited liability in the event of an accident. Nuclear plants face opposi tion from hostile state governments and protesters. Events in Japan have not helped. "By the time people forgot Cherno byl, along came Fukushima," says one in dustry bigwig. The result is that, as in China, fossil fuels will dominate the energy mix (see chart 2). Carbon emissions will rise in tandem, by about two-and-a-half times between 2010 and 2030 according to McKinsey, a consul tancy. The growth of India's power indus try-assuming it is built and largely fired by fossil fuels-would contribute about a tenth of the total global rise in emissions over the period. Most Indians do not feel too guilty, arguing that dirtier rich coun tries, not poor ones, should show restraint. India's emissions will remain far below those from America and China both in ab solute terms and per head. Fossil hunting India has some oil and gas, mainly off shore and in Rajasthan, although produc tion has been faltering. It lags China in de veloping pipelines from energy-rich Central Asia. Coal, then, is key. India's is not of a high quality-it contains too much ash-but there is lots of it. The British start ed swinging picks in earnest in the mid-19th century, to meet the demand of a burgeoning railway system, and under-
I
D
Can you dig it? Coal production, tonnes, b n - China - Australia
- United States South Africa
- India 3.5 3 .0 2.5 2.0 1.5 1.0
II· · ' · · · · ' '''' ' ' ' '' ' '' ' ' ' 1981 85
90
95
2000
'='
05
Source: BP Statistical Review of World Energy
10
0.5 0
I
Relying on the sooty stuff India's i n stalled generating capacity, gigawatts • coal
Hydro • Gas • Nuclear
Others
350 300 250 200 150 100 50 2005
07
09
11
13
15
17
0
Years ending March Source: Credit Suisse
took geological surveys in Bengal. Today east India remains coal's heartland and control of the sooty stuff lies with one of the most important companies that most people have never heard of: Coal India. It is a mighty odd beast. Its blood is of the public sector, with modest buildings, 375,000 staff, an empire of largely open cast mines and company towns, and even its own song. Its managers are proud scien tists and engineers. And prices are fixed by the state, at far below international levels. Yet its brain has some capitalist cells. After privatisation in 2010, a tenth of its shares are listed (the rest are owned by the state) making it India's third-most-valu able firm, worth $44 billion. It makes a huge return on equity of over 35%, has $n billion of unused net cash and reinvests only a fifth of its gross cashflow. It even has a financial gnat on its hide in the form of TCI, a London-based activist hedge fund fame d for its stagy belligerence. What is beyond doubt, though, is that Coal India is not digging fast enough (see chart 3 on next page). Output has been flat for the past two years-a dire result. India's ratio of production to reserves is middling by global standards and is well below Chi na's. Assuming production picks up and grows in line with the long-term average, a vast shortfall in production will still stunt growth in power generation. From his office in Kolkata, outside which street vendors boil vats of soup on coal stoves, the firm's outgoing chairman, N.C.Jha, says that Coal India is being made a scapegoat. The lag in production partly reflects one-off factors, such as bad weath er, but is mainly the result of a deliberate clampdown by the central government on new permits for buying and clearing land, and an explosion of red tape. "Give me land, and I will give you coal," says Mr Jha. This complaint is reasonable. At Gon degaon, a vast opencast mine in the Nag pur field, engineers need more space to dump the earth and rock that is dug up with coal. A map shows the pit hemmed in by villages and scrub land. Acquiring the land, compensating the villagers and mak ing sure they shift poses a challenge harder
E n e rgy i n India
69
than geology, says the company. "We do not have a magic wand in our hand to in crease production," says D.C. Garg, boss of the Coal India unit responsible for the area. In east India the firm faces another pro blem: most reserves are in remote areas where Maoist guerrillas operate. Yet for all the hurdles it faces, many say Coal India is part of the problem. A senior government official says it is riddled with trade unionism and gangs who steal coal something the private sector would re solve by sending in "the toughest son of a bitch" they could find. The boss of one smallish state-owned electricity generator details how local Coal India employees collude with middlemen to steal his fuel. He says that its local chief is "hugely com promised" by corruption. And no one really knows what Coal In dia's mission is, thanks to its hybrid status. Should it maximise profits and the divi dend it pays to a cash-strapped govern ment, despite the fact it is a near-monopoly and unregulated? Or is its job to deliver cheap fuel for the nation and accept lower returns by investing more on new mines? Let's burn Australia instead Private generating firms are not waiting to find out the answer to this identity crisis. Instead they have assumed that the state will not deliver enough and are prepared to import vast amounts of coal to fire their plants, either by acquiring it from whole salers or by buying foreign coal mines. Some $7 billion has been spent in the past six years on pits in Australia, Indonesia and Africa. Gautam Adani, a Gujarat based tycoon, is building a private net work of mines abroad that feeds ports and power stations in India. Amish Shah of Credit Suisse reckons that by the year to March 2017 domestic coal production will meet only 73% of de mand, leaving a gap of some 230m tonnes, almost five times the level of 2012. Include other industries that use coal, such as steel, and some analysts calculate that India's to tal imports by 2017 could reach some 300m tonnes. That is on a par with the current ex ports of Australia, or those of Indonesia, South Africa and Canada combined. Even if India could improve its ports and already stretched railways, and adapt its power plants to burn alien coal, can it af ford to import so much? Coal prices have soared in recent years (the benchmark price is some so% above its average in 2009), partly due to Chinese demand. In donesia has imposed new rules that ham per foreign mine owners from exporting coal at below market rates. So, adjusted for quality, foreign coal is perhaps four times pricier than the local stuff. The cost of shopping abroad could be as much as $20 billion by 2017-on% of to day's GDP. That would swell India's overall annual energy-import bill. Include coal used for ��
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� purposes other than power, liquefied nat ural gas and oil and it could rise by $65 bil lion or so by 2017, compared with the year to March 2011, according to Sanjeev Prasad of Kotak, a broker. That would put a huge strain on the balance of payments. Even if India can afford to import all this coal, the next question is whether it can persuade its population to fork out for the electricity it produces.
II
India's coal hole 1998=100
400 350 300 250 200 FORECAST Coal India production*
Torture boards Electricity meters are installed in unex pected places. Power in Dharavi, a giant Mumbai slum, is now largely tolled, with meters nestling next to curing factories piled with goat skins and people melting down used plastic cutlery. But the city, where power is distributed mainly by two private firms, is an exception: almost everywhere else state electricity boards operate the grid, usually badly. They typi cally lose about a third of the power they buy through theft or inefficient kit, and one executive reckons that up to another third is delivered legally to rural customers who pay subsidised prices or get it free. The re sult is that a small proportion of customers fo ot the bills. Although tariffs are notionally set by regulators, local politicians often hold sway and keep them low to win votes. The legislation that governs power is reason able but unenforced. The electricity boards haemorrhage cash as a result. They lost $11 billion, excluding any subsidies, in the 12 months to March 2010-the last year for which reliable figures are available. The consequences are twofold. First, there is not enough money to upgrade the network: up to $200 billion of capital in vestment is required. And second, if the cost of the power rises because of the ex pense of imported coal, these outfits are neither strong enough to absorb the finan cial hit themselves nor capable of easily passing it through by raising prices to cus tomers. That means it is their suppliers, the generating companies, that get squashed. "I can see if someone is sleeping on the job," boasts Arup Roy Choudhury, the chairman of NTPC, the country's biggest electricity generator. In the floor above his office in Delhi a c CTV studio allows him to spy on his empire. He can zoom in on a giant construction site in Mouda, near those mines in Nagpur, where in March a new plant will fire up, fuelled by coal pro duced by Coal India. NTPC is likely to get the coal it needs partly because it is state owned and big. Another power firm in the same state with a new plant coming on line in March expects to get only half the fuel originally promised by Coal India. Private-se ctor firms with plants coming on line often as sume they will be last in the queue for do mestic fuel. If they substitute imported coal for domestic coal they worry that they
1998
2005
10
15 17
150 100 50
Years ending March Sources: Credit Suisse; Coal India; Central Electricity Regulatory Commission
*assuming flat production in 2011/12 and a growth rate of 4.5% thereafter
may not be allowed to pass on the costs and that if they are, the electricity boards won't be able to pay. Generation should be a success story. After a false start in the 1990s, during which even Enron was briefly and disas trously tempted in, mainly local firms, in cluding Tata Sons and Reliance Group, have piled in once more. Special rules were created to fast-track "ultra-mega pow er plants", among the largest in the world, with their own captive coal supply and ex emptions from some red tape. Total capital investment (including NTPC) has been per haps $60 billion in the past five years. Yet now share prices have slump ed and the central bank has been forced to reassure fi nancial markets that a wave of defaults in the sector will not hurt the banks, which have about 7% of their loans to the power industry, mainly to generation firms. The true cost to the country is not a few bad debts but a reduction in long-term in vestment plans as confidence wanes.
In need of untangling
2 1st 2012
Across the industry "projects are taking a hit, due to a lack of fuel among other things," says J.P. Chalasani, the chief execu tive of Reliance Power, a generation firm. For the economy to expand at 8-9% it will need to add large amounts of generation, consistently. "We are nowhere near that unless immediate action is taken. At some point all this will hit our GDP growth." In theory there are two solutions to the looming power problem. One is to priva tise the electricity boards, end Coal India's de facto monopoly or break it up, create new regulators and give teeth to existing ones, and then hope that market forces raise standards, tariffs and production. The other is to resort to command-and-control, with a single authority breaking heads. Either of these approaches might be better than today's squabbling and passiv ity. Unfortunately, neither is likely. Privati sation is too politically sensitive, as is al lowing private firms, let alone foreigners, to run riot over India's coal beds. And the mesh of states, law courts, ministries and coalition politics means iron fists come out only in a crisis. Watch while we juggle That leaves an alternative approach of ad ministrative fiat and improvisation. It hasn't worked so far but there are some grounds for hope. A recent court ruling has prodded many electricity boards to raise tariffs. Crafty ways are being cooked up to allow private miners to do the digging while Coal India retains its notional title to the coal, and to grant permission for more "captive" mines where a private generator digs up its own fuel. Banks seem to have been given the nod by the central bank to ease the terms of their loans to power firms without book ing losses. Government officials talk of spreading the cost of imported coal across all firms, so it is not borne by a few, and dream of open access where a power sta tion could bypass the state grid operators and plug into customers directly. It is a safe bet that India's skills of im provisation will recover-helped by stern words from the prime minister. The lights will not go out anywhere for long enough to annoy voters unduly, and by historical standards there will be decent improve ments in the reach and availability of elec tricity. Companies which need reliable power supplies, including India's technol ogy giants, will carry on building their own generators just to be sure. Those states that can guarantee power supply, such as Gujarat, will attract the majority of energy intensive investment, such as car factories. If the test is avoiding a national catas trophe, India's power sector will pass it. But if it is delivering the infrastructure that can allow the economy to grow at close to a double-digit pace and industrialise rapid ly, India is failing. •
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Also in this section Buttonwood: Corporate irrationality
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Another Vienna Initiative
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Squeezing Greece's creditors Capital flight from China? Free exchange: Deleveraging
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For dai ly a n a lysis and debate on economics, visit Economist.comfeconomics
American banks
Losing altitude
N EW Y O R K
Lenders can cheer for their own survival, and not much else
y THE time JPMorgan Chase finished B reporting its fourth-quarter results on
January 14th, any optimism about a lovely, if surprising, sign-off to a difficult year had been squashed. Its return on equity was just over 11%, and if that is how the institution widely thought to be the best managed and best balanced of the big American banks performed, the only question was how poorly the rest would fare. If there was a positive spin on the final quarter of 2011, and the overall year, it was that things were worse three years ago. No big bank, for example, went bust or seems on the verge of doing so. Bank of America, notable for its vast potential to make both profits and losses, has seen its share price rise substantially off its lows so far this year, a consequence either of the innate
I
benefits of scale or, as some mutter, a hesi tation on the part of regulators to bury it in yet more mortgage-related litigation. For all that, bank returns on equity are still too low to justify lenders' existence. The big winner in the quarter was Wells Fargo, which benefited as much from what it did not have-a big investment-banking arm-as what it did: a vast retail operation now capturing economies of scale from its crisis-enabled acquisition of Wachovia. But even its return on equity was a modest 12%, a number praised as heroic but only within the context of a bleak period in the history of bank returns (see left-hand chart). Pre-provision, pre-tax income is one of the cleanest measures of banks' health: according to Oliver Wyman, a consultancy, this gauge of the industry's earnings was
down at mid-1990s levels as a percentage of assets in the third quarter of last year (see middle chart). The fourth quarter, like the three pre ceding ones, was particularly hard on in vestment banks. At Goldman Sachs, a re puted money machine, return on equity was under 6%. Even that number, which was better than most analysts predicted, was boosted by an unexp ected reduction in two costs, compensation and taxes; the recipients of both will doubtless be eager to get back to higher payouts. Also included in Goldman's results was an entirely new line item: a billion-dollar cost for losses in "relationship lending". That suggests Goldman's efforts to expand from underwriting and trading, the one night stands of finance, to more commer cial-bank-like activities have begun to gen erate commercial-bank-like problems such as an ongoing exposure to the under lying business of customers. Optimists still see chinks of light. Credit expanded, marginally. There is also a sus picion circulating around Wall Street that, with 2011 already written off as a disaster, the fourth quarter provided an opportuni ty to throw in all sorts of expenses. Em- ��
Fed up US commerdal ban ks' return on equity
US ban ks' pre-tax pre-provision net income
Profit
%
As % of assets
$bn
200
3.0
16
150
2.5
12
2.0
8
§
1.5 4 0 ''"" 11 It !I ll"''tt"'' d I! ''•!! 1!!1'1 "' '11"' p It
1950
60
70
80
90
2000
Sources: Bloomberg; Federal Reserve; FDIC; KBW Research; Oliver Wyman; The Economist
11
0
50
0.5
4 1990
95
2000
05
1011*
0
50
+
1.0
+
100
100 150 2002 03
04
05
06
07
08
09
10
11
*03 2011 IUS-domiciled banking and financial i nstitutions !Residual earnings of each Federal Reserve Bank paid to the Treasury §Provisional estimate ''Trailing 12-month profit as of Jan uary 12th 2012
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� ployees
have, after all, already been prepped for lousy bonuses. A chorus of bank bashers, from President Barack Obama down, would find more to dispar age about success than failure. And any costs taken upfront presumably enhance the prospects for a more favourable 2012. These sorts of "kitchen-sink" costs are almost impossible for outsiders to track. But some fourth-quarter expense items were certainly suggestive. In Citigroup's disclosure statement, for example, there is a $1 billion "investment" to meet regula tory requirements. All banks face a stagger ing amount of additional cost for regula-
Buttonwood
tory compliance tied to the application of the 2010 Dodd-Frank act in America as well as moves taken by other countries. But most lenders appear to have put this into ongoing expenses. Taking costs upfront is particularly im portant at the moment because how well American banks do in the near future seems to depend almost entirely on their ability to minimise spending. JPMorgan Chase has been one of the very few lend ers to expand employee numbers, and was questioned for doing so. Cost controls and redundancies are the order of the day be cause revenue growth continues to be
wretched. Goldman's net revenues in 2011 were down 9% for investment banking; down 4% for financial advisory; and down 14% in underwriting. And all of these num bers were far worse in the fourth quarter, with investment banking down 43% year on year, financial advisory down 2S% and underwriting more than halving. Despite this grim environment, none of the banks announced shifts in strategy or approach, other than doing more with less. This suggests that most believe cur rent conditions are temporary, or that insti tutions are floundering, or a bit of both. In an effort to sound positive some of the ��
I
How executives spend their company's cash
I might be irrational-piling into dotcom T IS easy to accept that small investors
stocks in late 1999, for example, or buying half-built Miami condominiums in 2006. But corporate executives are supposed to be "in the know". That, after all, is why there are such stringent laws against in sider dealing. Take share buy-backs. Investors often see a decision by a company to buy back its own shares as a positive indicator. If the executives think the shares are a bar gain, everyone else should. But are executives any good at market timing? Not according to the calculations of Andrew Lapthorne, a quantitative strategist at Societe Generale. In January 2oo8, just as the stockmarket was starting one of its worst years in history, compa nies in the s&P sao were using almost 40% of their cashflow to buy back their own shares. By March 2009 equities were finding a bottom, but the proportion of cashflow used to buy back shares had dropped to 19.6%. An even lower proportion, s.9%, was being used to purchase shares as 2010 dawned. That turned out to be a pretty good year, with the s&P sao gaining u.8%. Executives had recovered their nerve by the start of last year, spending 19% of their cashflow on buy-backs. But 2011 proved to be a flat year for equities. It seems likely that executives are be ing influenced by the market rather than the other way round. A rising share price makes managers more optimistic, and en courages them to think the trend will con tinue. Since a buy-back tends to boost earnings per share (EPS), a virtuous circle can be created. Investors notice the in crease in EPS and push the shares up ac cordingly. The danger is that this is the in vestment equivalent of a sugar rush and that the EPS improvement cannot be sus-
tained. At the first sign of disappointment, the share price will plunge. This pattern of behaviour may relate to an old problem: that cash tends to burn a hole in managers' pockets. A 2003 paper• by Robert Arnott and Clifford Asness found that companies which paid a low proportion of their profits in the form of dividends displayed slower subsequent profits growth than those with a higher payout ratio. The temptation was for exec utives to use spare cash to go on an acquisi tion spree. This empire-building was usu ally a bad idea for shareholders but could be used to justify higher salaries for man agers. In similar fashion, modern manag ers are motivated by share options and buy-back programmes are designed to prop up the share price. What might be a more rational use of a company's cashflow? One possibility would be the injection of cash into their pension funds. According to Mercer, a Con sultancy, American pension funds had a deficit of $484 billion at the end of last year (up from $31s billion at end-2010), a fund ing ratio of just 7S%. But executives seem to be counting on
an equity-market rally to dig them out of the hole. Mr Lapthorne finds that compa nies are expecting a return of 10%, after costs, from the equities in their pension fund portfolios. That is quite an extraordinary expecta tion, given current market conditions. Over the long run equity returns com prise the current dividend yield plus divi dend growth. Since the dividend yield on the s&P sao is just 2.s%, that requires divi dends to grow at 7-S% a year, faster than any plausible forecast for economic growth. A rapid increase in profits might be possible if the starting point was suffi ciently low, but American profit margins are at their highest level since the mid-196os. The evidence suggests that companies themselves don't really believe such rosy forecasts. A Duke University poll of chief financial officers shows they have an av erage forecast for equity returns over the next ten years of 6.3%. So why do their companies allow such predictions for pension returns to stand? The answer is that if they used more realistic numbers, they would have to contribute more mon ey to make up for the shortfall. And that would dent their profits and thus their share prices. So this apparent piece of my opia might be quite rational after all. The pension-fund problem is not in surmountable. Closing the deficit over ten years would require additional contri butions of around $so billion a year; total corporate profits are around $1.7 trillion a year. Unfortunately, it seems as if execu tives have no incentive to tackle the issue. They are simply hoping it will go away.
*"Surprise! Higher Dividends = Higher Earnings Growth", Financial Analysts Journal, Jan/ Feb 2003
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Finance and economics
2 1 st 2 0 1 2
� American banks, notably Citigroup, point ed to the embattled state of many Euro pean competitors and suggested they could grab market share. Perhaps. But giv en sluggish growth, copious regulations and wretched morale, American lenders face a war of attrition rather than the pros pect of swift victories. There is one financial institution in America, however, that has found a way to make money in classic, risk-be-damned fashion. The Federal Reserve announced provisional profits for 2011 of $77 billion (see right-hand chart on prior page). The comparison is inexact, of course, but the Fed has "outperformed" the rest of Ameri ca's financial industry put together for four years running. That might be a triumph in a state-controlled economy. In America, it is another cause for concern. •
Greece's debt-holders
Volunteers wante d Greece's creditors would all have to take a massive hit to right its finances
A CATCHY new phrase has been added 1""\. t o the Orwellian lexicon of Euro
speak, where terms such as "stability and growth" actually mean the opposite. This is "private-sector involvement" (PSI), which is code for imposing losses on Greece's private creditors. The International Monetary Fund's most recent review of the Greek economy, in December, gives an indication of the scale of the pain that these creditors need to take. Even if almost all of Greece's priv ate creditors agreed to write off half of what they are owed, its debt would still be about 120% of GDP by 2020. More likely, participation in any write-off would be lower than that, leaving debt above 145% of
GDP in 2020. That implies another debt re structuring would be needed after this one. And since Greece's economic news has been worse than expected of late, even these numbers are optimistic. Talks between Greece and its private creditors were still under way when The Economist went to press, but the risks of a disorderly default are mounting. Europe's earlier refusal to countenance default gave some lucky bondholders a year in which they could get repaid in full with loans granted by official creditors. The European Central Bank (ECB) is now thought to be Greece's biggest bondholder. Since official creditors are excluded from PSI, the remaining private creditors must suffer ever greater losses. Fund man agers involved in the talks say that the re duction in the net present value of the bonds may be much higher than that sug gested by a so% reduction in their face val ue: the true figure could be closer to 70%. Losses of that scale do not sit well with anyone. Only 70-80% of bondholders were willing to participate in an earlier and much more generous "voluntary" ex change that was agree d upon in July and later abandoned. The odds against a wide spread voluntary exchange have also worsened because hedge funds have bought Greek debt from European banks in recent months. These funds are less sus ceptible to pressure to accept an unfavour able deal than banks are. For recalcitrant bondholders, resisting a deal can pay off in two possible ways. First, if Greece continues with a "voluntary" deal that allows 30% or more of bondhold ers to reject the exchange, then holdouts can get repaid in full for bonds they bought at a huge discount. Second, if Greece uni laterally imposes losses, bondholders who have bought credit-default swaps (coss), a form of insurance against default, would get paid. The prospect of triggering coss spooks many. There are some large headline num bers involved: contracts covering $71 bil lion in Greek government bonds have been written. Yet most of those who have sold insurance also hold offsetting con tracts, leaving a net exposure of just $3 bil lion. That seems manageable, even if risk tends to pop up where least expected. A Greek default would also risk contagion: the IMF is trying to raise up to another $soo billion in lending firepower to cush ion against euro-zone woes. Bondholders without cos protection could also have more to gain from a default than a "voluntary" deal since a coercive one might have to include bonds held by the ECB to be legally enforceable. Includ ing the ECB's bonds would spread the pain more widely. It would also make a mean ingful difference to Greece's debt burden. For PSI to work, it may need to involve the public sector, too. •
Austrian banks
Vienna 2.0 B E RLIN
A familiar problem for central Europe
E enough capital to reach a 9% core UROPEAN banks have to raise
Tier-1 ratio by June 30th. But they are also under pressure to keep providing credit. That puts west European banks with units in central Europe in a quandary: whether to pull back on lending there to concentrate on home markets. A withdrawal of this sort would hit the region hard. Credit growth in central Europe depends largely on three Austri an banks-Raiffeisen Bank International, Erste Bank and Bank Austria, owned by Italy's UniCredit-and a handful of other west European banks (see chart). A bevy of multilateral bigwigs descended on Vienna on January 16th to urge against "excessive and disorderly" deleveraging by lenders to the region. This week's meeting was dubbed "Vienna 2.0" after the Vienna Initiative of 2009, which helped maintain foreign banks' exposures to central Europe. Yet the landscape has changed since then. The model of the diversified banking conglomerate makes less sense in a world where national regulators are trying to prevent outflows of capital and liquidity. UniCredit, perhaps the most diversified bank in Europe, is less able to move resources between Italy, Germany (where it owns HVB) and Austria. Yolks bank, an Austrian mutual which spread itself too thin over nine central European countries, is selling its subsidiaries (ex cept for its Romanian operation) to Sberbank of Russia. The euro-zone crisis makes a differ ence, too. Austrian banks' exposure to this volatile region was one of the factors behind the downgrade of Austria's AAA rating by Standard & Poor's on January 13th. The banks are bracing themselves for a similar downgrade in the next few weeks. The price of being neighbourly is higher than it was.
I
Alpine retreat Total assets, €bn
Central and eastern Europe, % share in group revenues*
June 30th 2011
0
25
50
UniCredit Erste Raiffeisen Bank International KBC Societe Genera le Intesa Sanpaolo
Source: UniCredit
-�
75
100 1 2 5
llil [W [g) [ill llil 12
• First half 2011
73
74
The Economist J a n ua ry 2 1st 2012
Finance and economics China's economy
Two twists in the dragon's tail
Trade statistics
iPadded The trade gap between America and China is much exaggerated
HONG KONG
China's consumption ratio is no longer falling. Its reserves are no longer rising
D than
ATA points sometimes change faster debating points. It is conven tional wisdom that China's export-led growth squeezes consumers at home and competitors abroad, even as it adds inexo rably to the country's huge foreign-ex change reserves. But figures released this month complicate these arguments. China still runs a sizeable trade surplus. But its net exports fell in 2011 (in absolute terms) for only the third time since 2000, subtracting o.s percentage points from its growth. Thanks to home-grown spending, China's economy still managed to expand by 9.2% in 2011, remaining surprisingly strong even in the fourth quarter. This growth owed an unusual amount to con sumption (both public and private), which contributed over half for the first time since 2001. As a consequence, the share of consumption in China's GDP edged up in 2011 after falling for ten years in a row. The mainstay of China's growth re mains investment, on which its economy remains worryingly dependent. Indeed, when China's critics are not bashing it for overexporting, they bash it for overinvest ment in property. Its housing boom is, however, slowing markedly. China this week reported that the price of new homes fell in 52 out of 70 cities across the country in December, compared with the month before. Households are struggling to obtain mortgages; developers are find ing it almost impossible to obtain a loan. The drying up of foreign funds is particu larly dramatic, points out North Square Blue Oak, a research firm based in London and Beijing. Foreign capital fell by 65% in December, compared with a year earlier. The flight of foreigners from property partly explains another unusual twist in the China story. Its foreign-exchange re serves fell in the fourth quarter for the first time since the height of the Asian financial crisis in 19 98. The drop was small, from $3.2 trillion to $3-18 trillion, but also a little mys terious. China still exports more than it im ports, and attracts more foreign direct in vestment than it undertakes. These two sources of foreign exchange must, then, have been offset by an unidentified drain. The worry is that China's capital con trols have sprung a leak. "Hot money", at tracted by the country's growth, may be flowing out as the property market falters. Some even speculate that China's rich may begin to smuggle their new-found wealth out of the country en masse.
A MERICA'S trade deficit with China hit ./"\.
another record last year. Estimated at almost $300 billion, it made up over 40% of America's total deficit. Yet official data grossly overstate us imports from China. Take the iPad, which America imports from China even though it is entirely designed and owned by Apple, an American company. iPads are assembled in Chinese factories owned by Foxconn, a Taiwanese firm, largely from parts pro duced outside China. According to a study by the Personal Computing In dustry Centre (http:/ /pcic.mer age.uci.edu), each iPad sold in America adds $275, the total production cost, to America's trade deficit with China, yet the value of the actual work performed in China accounts for only $10. Using these numbers, The Economist estimates that iPads accounted for around $4 bil lion of America's reported trade deficit with China in 2011; but if China's exports were measured on a value-added basis, the deficit was only $1som. The chart shows a geographical break down of the retail price of an iPad. The main rewards go to American share holders and workers. Apple's profit amounts to about 30% of the sales price. Product design, software development and marketing are based in America. Add in the profits and wages of American suppliers, and distribution and retail costs, and America retains about half the total value of an iPad sold there. The next biggest gainers are South Korean firms like Samsung and LG, which provide the display and mem-
These fears are overblown, for now. Some of the drop probably reflects a change in the value of China's euro hold ings. Some does represent the departure of short-term money, but an ebb and flow of hot money is not unusual. Moreover, some kinds of hot money are more scalding than others, says Stephen Green of Standard Chartered. At one end of the thermometer, an exporter might delay the conversion of his legitimate foreign-exchange earnings. In other, warmer cases, an importer might illegally overstate the size of his purchases, so as to remit more money out of the coun try. Capitalists eager to take their money
Touchy subject Distribution of value for a n Apple iPad 201o, % of total
Profits:
Costs:
Apple
30 ----..,
Other
us
Non Chinese labour 5
l__ Cost of Taiwanese Other 6 ------' Source:
materials
31
Distribution & retail 15
Personal Computing Industry Centre
ory chips, whose profits account for 7% of an iPad's value. The main financial bene fit to China is wages paid to workers for assembling the product and for manufac turing some inputs-equivalent to only 2% of the retail price. China's small contribution to total costs suggests that a yuan appreciation would have little impact on its exports. A 20% rise in the yuan would add less than 1% to the import price of an iPad. For imports such as clothing and toys the Chinese value added is much higher. But electrical machinery and equipment, with more complex cross-border supply chains, make up one -----quarter of China's exports to America. Pascal Lamy, the head of the World Trade Organisation, has suggested that if trade statistics reflected true domestic content, America's deficit with China might b e more than halved.
out also have other cards to play. Mr Green estimates that last year about $185 billion might have passed from mainland China through the VIP rooms of Macau's casinos. Victor Shih of Northwestern University reckons that China's richest 1% hold $2 tril lion-s trillion in liquid wealth and proper ty. If they were ever to smuggle that money out, the outflow would dent even China's reserves. That would be a disaster for Chi na's economic management, putting heavy downward pressure on the yuan. At least China's critics could no longer trot out another familiar accusation-that it under values the exchange rate. •
The Economist J a n ua ry
Finance and economics
2 1 st 2 0 1 2
Free exchange
The hangover
America is recovering from the debt bust faster than European countries. Why?
ALMOST half a decade after the onset of the rich world's credit 1"'\. bust, depressing evidence of its after-effects is visible in everything from feeble output figures to swollen jobless rolls. But for a truly grim picture, read a new report on deleveraging by the McKinsey Global Institute. It points out that in many rich countries the process of debt reduction hasn't even started. America has begun to pare its debt burden, although the drop is small compared with the build-up in 2000-08 (see chart). But many European countries are more, not less, in hock than they were in 2008. There the hangover could last another decade or more. These transatlantic differences stem from the trajectory of private debt. Government borrowing soared everywhere after 2008 as government deficits ballooned. But in America the swelling of the public balance-sheet has mirrored a shrinking of priv ate ones. Every category of private debt-financial, corporate and household-has fallen as a share of GDP since 2008. The financial sector's debt is now at its 2000 level. Corporate indebtedness, never very high, has shrunk. So, more importantly, has house hold debt. America's ratio of household debt to income is down by 15 percentage points from its peak in 2008, after rising by over 30 percentage points in the eight preceding years. McKinsey reck ons America's households are between a third and halfway through their debt-reduction process. They think the household debt hangover could end by mid-2013. In Europe private debt has fallen much less and in some cases even risen. In Britain the financial sector's debts have grown since 2008. In Spain corporate debt, far higher as a share of GDP than in most rich countries, has barely budged. But the biggest difference is among households. Even countries which saw the biggest surges in household debt during the bubble era, such as Britain and Spain, have scarcely seen a dent since 2008. McKin sey's analysts reckon it will take British households up to a de cade to work off their debt burdens. It's not that American households have been more frugal or disciplined. Household debt has fallen largely thanks to defaults, particularly on mortgages. America had a bigger housing bust; in some states non-recourse lending rules make default easier (peo ple can walk away from home loans without fear of losing other assets). Some two-thirds of America's $6oo billion decline in household debt is due to defaults. With another $250 billion of mortgages in the process of foreclosure, further reduction is likely.
I
The clim b is easier than the descent Total debt % of GOP
Change, % ofGDP
us
- Japan - France
Britain
Spain Germany
600 __,
"' (,/.
� _ _ _ ,_
450
300
J.......l...1-l.....L .J.,......L.,
2000 02
04
06
08
11
Sources: McKinsey Global Institute
150 1-
Ja a _ _ p �· - · · France
2000-08
200802 1 1
36.5
38.9
88.8
35.4
145.2
S ai _ � �· - · · . . Britain Canada
25.6
··········· --····
177.2
20.3
38.5
17 . 0
• • • • • • • • u • • • • •• •
rt L 67 8 . _ ? X . . . • • . . • . . . . . . . . . _ _: . . . . . . . . . . 1.�_ _5 �- .. .
.G.:��-��Y .. .
......
South Korea U nited States
. . . . . �:�. . . . . . . . . . . -�-'-� · ···· -15.5 91.4
75.2
-16.1 *To 01 2011
Interactive: Explore our guide to global debt at Economist.comfdebtguide2012
Europe's post-bubble economies, in contrast, have seen smaller drops in house prices, lower mortgage costs thanks to variable interest-rate mortgages, and gentler treatment from banks. The Bank of England suggests that aroundu% of British mortgages re ceive some kind of forbearance. Fewer people are turfed out of their homes, but the millstone of debt weighs for longer. America's private-sector debt reduction has also taken place against the backdrop of loose fiscal policy. Although state and to cal governments have been cutting back, the federal government has (at least until now) put off most fiscal tightening. In Europe, however, the sovereign-debt crisis means governments have been forced, or chosen, to undertake swingeing budget cuts long before the private sector's deleveraging is done. Note the Nordics
That stands in stark contrast to most successful bouts of debt re duction. The McKinsey report pores over two episodes that it considers most relevant for today: the experiences of Sweden and Finland following their banking busts in the early 1990s. Debt reduction took place in two stages. In stage one, the private sector reduces its debts; the economy is weak and public debt soars. In stage two, growth recovers and the longer-term process of reducing government debt begins. In both these cases growth was buoyed by booming exports, a boon that seems unlikely this time. But it is telling that Sweden did not begin its budget-cutting until the economy had recovered; and that when Finland tried an early bout of austerity, this worsened its recession. The McKinsey analysts carefully avoid suggesting this means Europe's austerity is misguided. Circumstances today are differ ent, they argue: European governments began with higher debt and deficits, leaving them with less room for manoeuvre. But the message is clear: America is closer to Sweden's successful tem plate than Europe is. Debt reduction is very difficult without eco nomic growth, and the scale of Europe's austerity makes it hard to see where that growth will come from. That's all the more true because Europe's governments have been remarkably timid, compared with the Nordics, in exploiting another avenue to growth-structural reform. The report under scores just how dramatically Sweden and Finland overhauled their economies in the wake of their debt crises. Banks were na tionalised and restructured; whole sectors, such as retailing, were deregulated. Thanks to a slew of efficiency-enhancing reforms, productivity soared and investment boomed. Nothing so bold has been attempted this time. America has not managed much in the way of growth-enhancing structural reforms and has a long to-do list, from improving worker training to reining in health-care costs. But it is in Europe where the poten tial gains from structural reforms are greatest and where the poli cy focus has nonetheless been overwhelmingly on austerity. That may change. With much of the euro zone in recession, structural reforms are getting higher billing. Spain's new govern ment began with an extra dollop of austerity; it now wants to ac celerate the freeing of its rigid labour rules. Italy's prime minister, Mario Monti, first raised taxes and cut spending; now he is about to take on the unions. Angela Merkel, the German chancellor, is saying that Europe's leaders need to focus on growth. But a shift in the policy mix will not stop many European countries' debt burdens from spiralling yet higher. Depressing, indeed. • Economist.comfblogsjfreeexchange
75
76
Property
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77
Property
The Economist J a n ua ry
21st 2012
79 79
80
Also in this section Eradicating polio Forensic failures Solar energy and sunflowers
For dai ly a n a lysis a n d debate on science a n d technology, visit Economist.comfscience
Exercise and Longevity
Worth all the sweat
Just why exercise is so good for people is, at last, being understood
0 NE sure giveaway of quack medicine
is the claim that a product can treat any ailment. There are, sadly, no panaceas. But some things come close, and exercise is one of them. As doctors never tire of re minding people, exercise protects against a host of illnesses, from heart attacks and de mentia to diabetes and infection. How it does so, however, remains sur prisingly mysterious. But a paper just pub lished in Nature by Beth Levine of the Uni versity of Texas Southwestern Medical Centre and her colleagues sheds some light on the matter. Dr Levine and her team were testing a theory that exercise works its magic, at least in part, by promoting autophagy. This process, whose name is derived from the Greek for "self-eating", is a mechanism by which surplus, worn-out or malformed proteins and other cellular components are broken up for scrap and recycled. To carry out the test, Dr Levine turned to those stalwarts of medical research, ge netically modified mice. Her first batch of rodents were tweaked so that their auto phagosomes-structures that form around components which have been marked for recycling-glowed green. After these mice had spent half an hour on a treadmill, she found that the number of autophago somes in their muscles had increased, and it went on increasing until they had been
running for 8o minutes. To find out what, if anything, this exer cise-boosted autophagy was doing for mice, the team engineered a second strain that was unable to respond this way. Exer cise, in other words, failed to stimulate their recycling mechanism. When this sec ond group of modified mice were tested alongside ordinary ones, they showed less endurance and had less ability to take up sugar from their bloodstreams. There were longer-term effects, too. In mice, as in people, regular exercise helps prevent diabetes. But when the team fed their second group of modified mice a diet designed to induce diabetes, they found that exercise gave no protection at all. Dr Levine and her team reckon their re sults suggest that manipulating autophagy may offer a new approach to treating dia betes. And their research is also suggestive in other ways. Autophagy is a hot topic in medicine, as biologists have come to real ise that it helps protect the body from all kinds of ailments. The virtues of recycling Autophagy is an ancient mechanism, shared by all eukaryotic organisms (those which, unlike bacteria, keep their DNA in a membrane-bound nucleus within their cells). lt probably arose as an adaptation to scarcity of nutrients. Critters that can recy-
de parts of themselves for fuel are better able to cope with lean times than those that cannot. But over the past couple of de cades, autophagy has also been shown to be involved in things as diverse as fighting bacterial infections and slowing the onset of neurological conditions like Alz heimer's and Huntington's diseases. Most intriguingly of all, it seems that it can slow the process of ageing. Biologists have known for decades that feeding ani mals near-starvation diets can boost their lifespans dramatically. Dr Levine was a member of the team which showed that an increased level of autophagy, brought on by the stress of living in a constant state of near-starvation, was the mechanism re sponsible for this life extension. The theory is that what are being dis posed of in particular are worn-out mito chondria. These structures are a cell's pow er-packs. They are where glucose and oxygen react together to release energy. Such reactions, though, often create da maging oxygen-rich molecules called free radicals, which are thought to be one of the driving forces of ageing. Getting rid of wonky mitochondria would reduce free radical production and might thus slow down ageing. A few anti-ageing zealots already sub sist on near-starvation diets, but Dr Lev ine's results suggest a similar effect might be gained in a much more agreeable way, via vigorous exercise. The team's next step is to test whether boosted autophagy can indeed explain the life-extending effects of exercise. That will take a while. Even in ani mals as short-lived as mice, she points out, studying ageing is a long-winded process. But she is sufficiently confident about the outcome that she has, in the meantime, bought herself a treadmill. •
The Economist J a n ua ry
Science and technology
2 1 st 2 0 1 2
Polio
Forensic science
A Rotary engine
Ignorance is bliss
N EW Y O R K
Forensic scientists know too much about the cases they investigate
Can a businessmen's club eradicate polio from the world?
A S ALL fans of crime fiction know, DNA is 1""\.. t he gold standard of forensic science.
I diagnosed in India. That is not enough to
T IS a year since the last case of polio was
pronounce the country polio-free-three clear years are the conventional period re quired for that to happen. But it is a good start. And if India really is clear, then what was once a global scourge will now be en demic to a mere three countries: Afghani stan, Nigeria and Pakistan. The number of people infected, meanwhile, has dropped from 350,000 i n 1988 to 650 last year. All this is in large part thanks to the ef forts of Rotary International. In 1985, after a successful pilot study in the Philippines, this businessmen's club cum global chari ty announced a plan to eradicate polio by vaccinating every child under five at risk of catching it. The estimate then was that it would cost $12om. Some $Boom of Rotary money later (plus a lot from other sources), the virus is still out there, but its remaining hidey-holes tell their own story: where civ il disorder is rife, medicine is hard. On January 17th Rotary announced it had raise d yet another $2oom. The Bill & Melinda Gates Foundation will contribute a further $405m, and the pressure will thus be kept up. John Germ, one of Rotary's trustees, thinks that if all goes well 2016 might be the first year when no new cases are reported. That would, though, mean spending more than $1 billion a year be tween now and then. The inspiration for Rotary's campaign against polio came from the eradication of smallpox. Like polio, smallpox was a viral disease for which effective, easily adminis tered vaccines existed. And crucially, like polio, smallpox had only one animal host: Homo sapiens. In principle, then, extermi nation should be possible. The practice, however, has turned out rather different. First, unlike smallpox, polio viruses can survive for long periods outside a host-for instance in sewage. Second, when the cam paign began in earnest there were three main varieties of polio, each of which re quired a specially tailored vaccine. Focus ing effort on one of these strains often led to the resurgence of another. Third, besides the inevitable difficulties of working in places that have poor medical infrastruc ture, the campaign ran into some specific human problems. The most notorious of these was the rumour, spread in 2003 by certain religious leaders in Nigeria, that the vaccine would sterilise girls and was part of an American plot to rid the world of Muslims. This helps explain why polio
79
Or is it? Itiel Dror, a cognitive psychologist at University College, London, thinks this doctrine of infallibility needs to be ques tioned. His problem is not with the tech nology itself, but with the way it is de ployed. For he has gathered evidence that DNA examiners' interpretations of their re sults are, at least in complex cases, open to subj ectivity and bias. When America's National Academy of Sciences produced a report on the state of forensic science in 2009, it criticised many of the methods then in use. Citing earlier research by Dr Dror, the report's authors stated, for example, that fingerprint exam iners' claims of zero error rates were scien tifically implausible. DNA, however, was spared their criticism. Now Dr Dror and Greg Hampikian, a forensic biologist at Boise State University in Idaho, have pub lished a study in Science & Justice that sug gests all is not shipshape in the domain of the double helix either.
Goodbye to all that persists in Nigeria. That polio can actually be eradicated is suggested by the elimination, in 1999, of one of the three strains. Whether the re sources needed to do so might be better spent elsewhere, though, is a matter of de bate. Some would prefer to see a shift to policies that improve overall health, in cluding investing in decent sanitation and clean water. The response to that is that if you re move the specific pressure on polio it will simply bounce back. Moreover, in practice, a synthesis between the two positions is emerging. According to Mr Germ there is already a debate within Rotary about what to do next. Providing clean water and improving maternal and child health are popular options. One thing everyone wants to avoid, though, is what happened after smallpox was eliminated. Then, the infrastructure of health workers and clinics that had been created to detect and fight the disease was allowed to evaporate. Had it been used in stead to focus on polio, that illness, too, might have been vanquished by now. •
Do Not Adulate Dr Dror's and Dr Hampikian's experiment presented data from a real case to 17 DNA examiners working in an accredited gov ernment laboratory in North America. The case involved a gang rape in the state of Georgia, in which one of the rapists testi fied against three other suspects in ex change for a lighter sentence, as part of a plea bargain. All three denied involve ment, but the two D NA examiners in the original case both found that they could not exclude one of the three from having been involved, based on an analysis of swabs taken from the victim. As is almost always true in forensic-sci ence laboratories, these examiners knew what the case was about. And their find- �� The Richard Casement internship We invite app lications for the 2012 Richard Casement internship. We are looking for a would-be journalist to spend th ree months of the summer worki ng on the newspaper in London, writi n g about science and tech nology. Our aim is more to discover writi ng talent i n a science student o r scientist t h a n scientific aptitude in a budding journalist. Applicants should write a letter introducing themselves and an original article of about 600 words that they thin k would be suitable for publication i n the Science a n d Tech nology secti o n . They should be prepared to come for an interview in London o r New York, at their own expense. A small sti pend will be paid to the successful candidate. Applicati o n s must reach us by February 3rd. These sho uld be sent to: [email protected]
80
The Economist J a n ua ry 2 1st 2012
Science and technology
� ings were crucial to the outcome because
in Georgia, as in many other states, a plea bargain cannot be accepted without cor roborating evidence. However, of the 17 ex aminers Dr Dror and Dr Hampikian ap proached-who, unlike the original two, knew nothing about the context of the crime-only one thought that the same sus pect could not be excluded. Twelve others excluded him, and four abstained. Though they cannot prove it, Dr Dror and Dr Hampikian suspect the difference in contextual information given to the ex aminers was the cause of the different re sults. The original pair may have sublimi nally interpreted ambiguous information in a way helpful to the prosecution, even though they did not consciously realise what they were doing. And DNA data are ambiguous more of ten than is generally realised. Dr Dror thinks that in about 25% of cases, tiny sam ples or the mixing of material from more than one person can lead to such ambigu ity. Moreover, such is DNA's reputation that, when faced with claims that the mol ecule puts a defendant in a place where a
crime has been committed, that defendant will often agree to a plea-bargain he might otherwise not have accepted. This one example does not prove the existence of a systematic problem. But it does point to a sloppy approach to science. According to Norah Rudin, a forensic-DN A consultant i n Mountain View, California, forensic scientists are beginning to accept that cognitive bias exists, but there is still a lot of resistance to the idea, because exam iners take the criticism personally and feel they are being accused of doing bad sci ence. According to Dr Rudin, the attitude that cognitive bias can somehow be willed away, by education, training or good inten tions, is still pervasive. Medical researchers, by contrast, take great care to make drug trials "blind", so that neither the patient nor the administer ing doctor knows who is receiving the drug being tested, and who is getting a control drug or placebo. When someone's free dom-and, in an American context, possi bly his life, as well-is at stake, it surely be hoves forensic-science laboratories to take precautions that are equally strong. •
Solar energy
Flower power
In matters of clever design, nature has often got there first
S room. They need either vast arrays of OLAR-POWER stations take up a lot of
photovoltaic panels, which convert sunlight directly into electricity, or of mirrors, which direct it towards a boiler, in order to raise steam and drive a generator. The space these arrays occupy could often be used for other purposes. Two researchers from the Massachu setts Institute of Technology have now de vised a better and more compact way of laying out arrays of mirrors. Slightly to their chagrin, however, and somehow ap propriately, they found when they had done the calculations that sunflowers had got there first. Alexander Mitsos and Corey Noone started with the observation that existing concentrated solar-power plants, as those which drive boilers are known, usually have their mirrors arranged in a way that resembles the seating in a cinema. The mir rors are placed in concentric semicircles facing a tower, on top of which the boiler and the turbine sit. That arrangement, however, sometimes results in the mirrors shading each other as the sun's position in the sky changes, even though the mirrors are usually attached to robotic arms that track the sun as it moves.
According to their report in Solar Ener gy, Dr Mitsos and Mr Noone found that they could do better. They divided each of the mirrors in a real power plant, PSlO, in southern Spain into about 100 pieces. (Or, rather, they divided a computer represen
A virtuous spiral
tation of each mirror.) They then plugged each of those pieces into a computer mod el that calculated all of the energy losses by noting points where mirrors were not opti mally oriented to the sun and places where they hindered one another by blocking in coming or reflected rays. It then rejigged them into a better arrangement. Fermat's conjecture Previous efforts have been directed mainly at stopping the mirrors shading each other, which tends to mean spreading them out. Dr Mitsos and Mr Noone also wanted to save space. In trying to do so they stum bled on an unusual arrangement that had the desired effect. When they showed this layout to a third researcher, Manuel Torril hon of Aachen University in Germany, he recognised the spiral patterns within it, and this prompted the trio to test a design specifically modelled on nature. That design was a pattern known as a Fermat spiral, in which each element is set at a constant angle of 137° to the previous one. It is most familiar as the arrangement of the florets that make up a sunflower head. When the three researchers pro grammed their model to arrange PS1o's mirrors in front of the tower in a segment from such a spiral, they both improved the efficiency of the collection process and saved space. The improvement in efficien cy was, admittedly, quite small (about half a percent), but the space saving was signif icant-almost 16%. If solar power is to make up much of the world's electricity output in future, as supporters of alternative energy hope it will, a lot of land will be needed for the power stations. Reducing that requirement by a sixth, as this discovery promises, would be a big gain. It would also show that if you look hard enough, there really is nothing new under the sun. •
81
82 82
Also in this section Philip Larkin's poetry In praise of French parents
83
Alexander Macleod's short stories
84
Antony Sher in "Travelling Light"
83
Ralph Fiennes's "Coriolanus"
Prospera, our o n li n e blog on books, arts a n d culture, appears every day. For analysis a n d debate, visit Economist.comfculture
The American presidency
Party of two
The challenges of peeling open a political marriage
I New York Times, spent 40 minutes in the N 2009 Jodi Kantor, a reporter for the
Oval Office with Barack and Michelle Obama. The topic was their marriage. It was bound to be awkward. At one point she asked how it is possible to have an equal marriage when one partner is the president. Their answer, she would later write, suggested some "subtle tension". After that article was published, Ms Kantor mulled. She had been trying to un derstand how Mr Obama's presidency had affected their relationship. But that, she realised, was only part of the story. "The more difficult question was the re verse one," Ms Kantor writes now. Even if it is not an equal marriage, it is a marriage of equals. Certainly their union has informed his presidency. "The Obamas" addresses the question from both sides. The book has been re ceived with curiosity, partly because of a tetchy reaction from the White House. Mrs Obama herself responded in a televised interview: "That's been an image that peo ple have tried to paint of me since ... the day Barack announced [his candidacy], that I'm some angry black woman." It is easy to understand Mrs Obama's frustration. Every presidential couple is under pressure, if only because the job of being president is so demanding. The spouse has no official chores or salary, but
The Obamas: A Mission, a Marriage. By Jodi Kantor. Little, Brown; 368 pages; $29. 99. Allen Lane; £14.99 she is the partner, and she has access to the power. In the modern context, as women have entered the workforce and asserted greater rights, several first ladies have made ambitious use of the role. At times, Eleanor Roosevelt seemed practically the president; Hillary Clinton would go on to campaign for the job herself. The contem porary First Ladies who adopt a more de mure profile have drawn less criticism, but all of them have taken up various causes; some, like Jackie Kennedy, are now seen as having been canny backstage operators. For the Obamas, the scrutiny has been esp ecially intense. They are singular indi viduals, controversial in some quarters, and they head the first black First Family. Ms Kantor's book is quite clear about how annoying this must be, and there is noth ing scurrilous about her work. She inter viewed more than 200 people, including most of the principal players. None of the scenes she describes has been seriously disputed, although she can be prone to over-interpretation. "He hated posing for pictures with strangers in restaurants, but she did not let him off the hook," writes Ms Kantor. '"Do your job,' she would say. The
instruction carried a whiff of revenge: this is what you wanted. Smile! " The portrait is largely sympathetic. There are some sore spots in the marriage, but that is normal, and the Obamas have said as much. "Our society has not neces sarily equipped us to sustain relation ships," Mr Obama said in a speech at his sister's wedding in 2003. The candour is unusual, but perhaps not surprising. Dur ing the 20 years the Obamas have been married, millions of Americans have taken a critical look at the institution. Since Mr Obama became president, he and his wife have become more insular, which was inevitable. Several dozen staff work on their schedules; the family ducks behind screens when tour groups come through the White House. For Mrs Obama, there have been moments of feeling pow erless. Her husband's election meant that she would be forced to have some role in his administration. It was assumed, per haps unfairly, that she would be more like Mrs Clinton than Laura Bush. The truth is Mrs Obama is neither. She was keen to take up a cause, and has be come an advocate against child obe sity and for military families, but she is more sceptical of politics than her husband. It would be politics, though, that helped her find her feet. By 2010 her approval ratings exceeded her husband's, and his West Wing staff realised that Mrs Obama could be an asset in that year's elections. As Ms Kantor points out, there is some irony in this; her numbers had soared because she was seen as a devoted wife and mother. I n any case, popularity can only take you so far. The First Lady campaigned and the Democrats got a drubbing anyway. Mrs Obama's greatest influence on her hus band's presidency will be through her ��
82
The Economist J a n ua ry 2 1st 2012
Books and arts
� influence on him, which is considerable. At his sister's wedding Mr Obama went on to say that the key to marriage is finding a partner "who sees you as you deserve to be seen." That implies criticism as well as support. There are scenes when Mrs Obama is a little hard on her husband, but over the years she has clearly been a brac ing influence. One way to summarise their relationship is that he is the dreamer, and she is the pragmatist. That may be a little simplistic; he comes across as the chillier of the two, and she is an idealist, if not a romantic. But her discipline has helped advance his dreams. The vision is shared. Problems for the presidency, though not the marriage, seem to arise when the vision is blurred. Both Obamas see him as a special American, Ms Kantor writes, and a different kind of president. The result is that they sometimes take personal offence at political setbacks, which may be coun terproductive; neither Obama seems to have much appetite for domestic politics. Halfway through the book, there is a poignant episode in Oslo. On a trip to re ceive the Nobel peace prize, both Obamas were touched by the Norwegians, who were calm, well-read and admiring. Amer ican voters have their own virtues, though, and both Obamas should keep that in mind in this election year. They are stuck with them, for better or for worse. •
Philip Larkin
Library book
The Complete Poems of Philip Larkin. Edited b y Archie B u r n ett. Faber a n d Faber;
464 pages; £40
P dozen poems alone. Even while he was
HILIP LARKIN'S fame could rest on a
still alive, the poet and lifelong librarian at Hull University in the north of England was considered by many to be one of the finest writers of his generation. With his love of jazz, beautiful women and the grey palettes of post-war Britain, his witty, acer bic verse was a fine counterpoint to the more sentimental stuff produced by the London-born poet laureate, Sir John Betje man. Eminently quotable, Larkin's poetry caught a spirit of middle-class disaffection and quiet rebellion. He became known for the short, aphoristic sayings contained within the four slim volumes of poetry he published in his lifetime, such as the asser tion that "Sexual intercourse began/In nineteen sixty-three". His poems were pithy and to the point; short, but often demanding to be reread. This is one reason why the voluminous size of "The Complete Poems" is startling.
Its editor, Archie Burnett, has carefully col lected all of the poems Larkin ever wrote. Included in the volume are the four pub lished collections and Larkin's previously published juvenilia, but also all that remained unpublished or unfinished, from sketches found in Larkin's archive to poems included in letters to friends. Mr Burnett presents a very different pic ture of Larkin from the one by which he came to be known; one that is far more lit erary, and occasionally far more amusing. A reader can now trace Larkin's develop ment from his allusive Oxford University Labour Club Bulletin efforts "about trees and the sky and the seasons" to his more mature, better-known works. It may be common knowledge that his greatest poem, "The Whitsun Weddings", took three painstaking years to complete, but it is less well known that during those years Larkin was writing constantly, and contin ually discarding his efforts. The advantage of such a comprehen sive volume is the possibility of tracing the development of a writer's voice. It is possi ble to hear in his poem, "On Being Twenty six" the tone of world-weariness an older Larkin would make into an art form, look ing back on "the slag/Of burnt-out child hood" with his familiar tone of regret laced with misanthropy: "Life, you aren't a god, you're a bloody old sod." He disliked mod ern poetry, or the vogue for experimenta tion; even aged 18 he despaired of the lack of wit in contemporary literature: "Noth ing like comedy/Can ever be admitted as poetry." Women continued to remain a mystery to him, even after he left universi ty, and mostly lost the stammer he had had since childhood. Now, instead of dreaming of "The idea of a kiss", he merely knew his limits: "A bosomy English rose/And her friend in specs I could talk to." However, despite Mr Burnett's efforts, the contrast between Larkin's published poetry and his unfinished efforts remains. Frequently scatological, often crudely mi sogynistic, some of Larkin's unpublished work makes for uneasy reading. Sketches of poems which rhyme Jung with dung or James Joyce's "Ulysses" with faeces seem intended as private j okes, and they add little to the volume. Larkin himself was aware of this, entitling one series "Dances in Doggerel". There is a reason why Larkin, normally so particular in his use of words, deemed them unworthy for publication. Instead, his finest poems remain his best-loved: ones about his mother over hearing him playing blues records on the gramophone, or of feeling, once a guest
has left, "the instantaneous grief of being alone". They take place on trains or in an empty church, where the atheist Larkin takes off "My cycle-clips in awkward rever ence", and capture life as Larkin saw it, expressing "A hunger in himself to be more serious". But it speaks of their great ness that these short poems, despite being swamp ed by so many of his other efforts, still manage to stand out. •
French parents
Non, non and non
French Chi ldren Don't Throw Food: Parenting Secrets From Paris. By Pa m ela Druckerma n . Doubleday; 268 pages; £15. To be published in America in February as "Bringing Up Bebe: One American Mother Discovers the Wisdom of French Parenting" by Penguin Press;
$25. 95
I often viewed from America and Britain
N DIPLOMATIC affairs the French are
with exasperation, as arrogant, unreliable and underhand. When it comes to family matters, however, there seems to be a fresh burst of admiration for all things Gallic. Ever since "French Women Don't Get Fat" by Mireille Guiliano, a Frenchwoman, became a bestseller in America a few years ago, a new genre has emerged devoted to the failings that French women don't pos sess. Now attention has turned to the impossibly well-mannered offspring of these impossibly chic women, with "French Children Don't Throw Food". ��
Clarification In our review of "Julian Assange: The
Un authorised Auto biography" ("Leaker's leak", October 1st 2011), we said that Swedish prosecutors wished to question Mr Assange "in two cases of rape". In fact, M r Assange is accused of one offence of rape, two offen ces of sexual m o lestation a n d one offence of u n lawful coercion. We are happy to make this clear.
Someone else's jam my dodger
The Economist J a n ua ry �
Books and arts
2 1 st 2 0 1 2
Like many foreigners living in France, Pamela Druckerman, an American writer and mother of three, found herself strug gling to control her toddler in a posh restaurant while small French children around her sat still, ate with cutlery and left their parents to chat calmly to each other. Her Paris flat was overtaken by toys and tricycles; theirs were tidy with no traces of childhood. Her children ate a mono-diet of white pasta; theirs tucked into hearts of palm and tomato salad followed by turkey au basilic with rice in a Proven�al cream sauce-and this at the local, state-run creche. Dumbstruck, she set out to discover why. With a dollop of research and a big helping of anecdotes gleaned from friends, Ms Druckerman identifies two elements to French parenting that set it apart from what she calls the "Anglophone" version. One is that the French teach their children to be patient. Babies are not picked up at the first snuffle from their cots; children are expected to wait until parents have finished a conversation before getting their attention. This, she concludes, stems from a less child-centred approach, in which the adult's needs remain at least as important as those of the child. Parenting is just one part of a French mother's life, alongside stilettos and a briefcase, not the high investment, all-consuming project it has become to over-anxious parents in New York or London. The other element is that French par ents impose a strict cadre, or framework, on their children. While her English-speak ing friends tiptoe around their infants' sen sitivities-"do you think that was nice, dar ling, to throw sand into Ruby's face?"-their French counterparts are unapologetic about saying non, or �a suffit (that's enough). Ms Druckerman argues that this framework allows them to give their chil dren more space. She finds herself stunned to watch parents in New York fretfully fol lowing their toddlers around the appara tus in a fenced playground; French moth ers just sit on a bench and let them get on with it. It all sounds too good to be true. And in a way it is. Ms Druckerman's France is a particularly narrow slice of bourgeois Paris. Try enforcing the greeting, "Bonjour Madame", in the tough banlieue housing estates that ring the city. She also under plays the more troubling counterpart to tough French parenting: tough French teaching, that overstresses failure and under-rewards success. But a self-depre cating tone rescues the book from taking itself too seriously. It does not promise to make a pint-size terror restaurant-friendly. But it does help to explain all those disdainful looks from French diners the moment an English-speaking family walks through the door of the brasserie with toddlers in tow. •
Short stories
Of moose and men Light Lifti ng. By Alexander Macleod. Jonathan Cape;
224 pages; £15. 99.
To be
published in America in April by Biblioasis;
$19.95
A ises them with glimpses of flesh and
GOOD novel woos its readers, tantal
gradually lures them into a world from which they later emerge changed. Short stories, by contrast, rely on instant attrac tion and immediate gratification. If they are good they leave one hungry for the next encounter. More often, though, they leave the reader slightly jarred, looking for greater fulfilment. Alexander MacLeod does not. His bril liant debut collection, "Light Lifting", is en grossing, thrilling and ultimately satisfy ing; each story has the weight of a novel. The young Canadian writer is already winning plaudits in his own country. He can expect acclaim far b eyond. These seven stories grip partly because they are long enough to immerse the read er totally. A good storyteller knows far more about his characters and settings than he shares with his audience. Mr Mac Leod passes this test: though he plunges the reader into fully formed worlds, he leaves out just the right amount. But it is the beautiful writing that really carries this book. The choice of words is spare, simple and unaffected, and the rhythm is perfect: despite the sadness that overlays many pieces, they flow with the comforting lull of a bedtime story. The first story, "Miracle Mile", is the best. It mesmerises from its opening: "This was the day after Mike Tyson bit off Evan-
83
der Holyfield's ear." Narrated by a compet itive runner, it captures the minutiae of pre-race nerves-the "hiss" of a coach's hy draulic door ; the temperature "just inching its way over toward cool"-as well as the "miraculous desperation" that is winning. These are unflinching tales not of hero ism, so much, but of survival. The most experimental piece, "Wonder about Parents", snatches scenes from different homes. One family launches a crusade against headlice the "size of a poppy seed", raking out hair night after night, "kids scratched raw". Another drives cross country through a snowstorm with their sick four-month-old daughter; the Christ mas tree in the hospital bears a sign: "These gifts are empty boxes. Please refrain from opening." Other stories capture the consequences of a single moment when the ordinary tips into the extraordinary: in the title story a secondary schooler gets embroiled in a bar brawl on the last day of a summer job; in "Adult Beginner 1", after a woman nearly drowns in the ocean, fear becomes "a bio logical fact" in her life. Much fiction is narrated by outsiders, but in Mr MacLeod's imagination being an outlier depends on the context. In "The Loop", for example, a cycle courier stands out as an able-bodied, right-minded youth among the fat, elderly and invalid people to whom he delivers medication. Not every story in "Light Lifting" is perfect. A couple could be tighter; the male characters are better formed than the female ones. But these are small niggles in a stunning work. Mr MacLeod's next contribution will be eagerly anticipated. •
New film
The world at war
Ralph Fiennes brings Shakespeare's "Coriolanus" up to date
F beret and combat gear emerging from ROM the first sight of the hero in blue
behind a wall of riot shields, Ralph Fiennes's film of "Coriolanus" is a riveting update of a lesser known Shakespearean tragedy. The action has been moved from ancient Rome to a modern republic at war, revealing the play as a contemporary battle drama and political thriller. Mr Fiennes, who is known for chilly roles such as the Nazi commandant in "Schindler's List" and Lord Voldemort in the Harry Potter films, stars in his directo rial debut as Caius Martius, a Roman general whose victories earn him the name of Coriolanus. His martial valour (and patrician snobbery) are less appreci- ��
84
Books and arts
� ated in the battlefield of politics, when he
runs for consul at the urging of his mother, Volumnia (splendidly played, with steely ambition couched in soft tones, by Vanessa Redgrave in a military greatcoat). Banished after a clash with the people's tribunes and a fickle mob, Coriolanus defects to the enemy camp, to his guerrilla rival, Aufidius, whom he admires, and prepares to sack Rome. The film is set in "a place calling itself Rome", but its derelict apartment blocks and bread riots could be any modern multiethnic city. It was shot, in wintry blu ish hues, in the Serbian capital, Belgrade, using Serbian forces and tanks. The cine matographer, Barry Ackroyd, who also shot the Iraq war film, "The Hurt Locker", gives the urban combat scenes a brutal, fast-paced realism. The battles are relayed as breaking news on television screens and messengers' words in the play are at times voiced by newsreaders. The emphasis on modern campaign politics also proves illuminating, with the rabble-rousing tribunes conspiring against Coriolanus in the Senate amid cigarette smoke and division bells. But for his con tempt for the rebellious commoners ("Bid them wash their faces, And keep their teeth clean"), Coriolanus's refusal to press the flesh and parade his war wounds to win votes might suggest a refreshing integ rity. His dilemma about whether to remain true to himself or adopt more pragmatic paths to power is one that modern politi cians should ponder. Productions of the play have often favoured one political class or another. Here, the plea from Corio lanus's mentor, Menenius (played by a Scottish actor, Brian Cox), "On both sides more respect", is the most cogent voice and, timely, given the American primaries. The war veteran struggling to adjust, amid the apparent ingratitude of the citi zens in whose name he fought, is a familiar figure from Vietnam to Afghanistan. As the spurned hero, Mr Fiennes stomps off in his army boots, sleeps rough and plots revenge. The film stresses how societies at war nurture perverse values and dubious heroes. Menenius crows to Coriolanus's young son about his father's wounds, "every gash was an enemy's grave". The adaptation by John Logan (the screenwriter of "Gladiator") prunes Shakespeare's text but leaves the poetry in tact. What raises the film above many rein terpretations is the conversational ease with which the lines are spoken. Even when Jon Snow, an iconic British televi sion newsreader appearing in a studio cameo, speaks in iambic pentameter it ap pears startlingly natural. The play itself, though, remains problematic; the arrogant hero fails to engage the audience's sympa thies and his susceptibility to his mother's scolding makes him ultimately a "boy of tears". This, despite Mr Fiennes's efforts. •
The Economist J a n ua ry 2 1st 2012 New theatre: "Travelling Light"
The screen at the end of the world Antony Sher plays the part of a lifetime
J
ACOB BINDEL, the timber merchant in Nicholas Wright's "Travelling Light" at the Lyttelton theatre, is the second of three Jewish roles that Sir Antony Sher has signed up for in less than a year-after decades of parts from other worlds than that of his forefathers. First he was Phillip Gellburg in last autumn's production of Arthur Miller's "Broken Glass" at Lon don's Tricycle theatre, a repressed busi nessman in 1938 New York who tries to ignore the violent pogroms taking place in Germany. And later this summer he will reanimate Sigmund Freud in Terry Johnson's "Hysteria" in Bath. Of the three roles, Jacob Bindel may well prove the most memorable. It could make the South African-born actor as unforgettable to London audiences as Chaim Topol was as Tevye in "Fiddler on the Roof" half a century ago. Mr Wright has set his new play in a remote village in eastern Europe at the dawn of the 2oth century. Motl Mendl (a fluid and captivating Damien Molony) has returned after a long absence to his uncle's photography studio, where he is entranced by the flickering shadows of a motion picture. Jacob enters, intent on having a photograph taken of his wife and their only son before the boy is called upon to don the uniform of the tsar. At least, that is his plan until he decides to have the family farewell filmed as a motion picture and succumbs to the allure of the movies. Orphaned and illiterate, the ebullient self-made businessman explains why:
Fi lm-maker on the hoof
"Me, I don't know words. Words for me are like stone wall around God's world. So I am stranger to God's world . . . Then I see your motion picture, and the door to paradise open for me. I see big light, big sun, big sky! Because no words! No words but all of fe elings! Love, happi ness, sadness, tears. I see them clear." Inspired by Anna, Mod's clever and captivating assistant (Lauren O'Neil), the young director begins making films with Jacob as the world's first movie producer. Mr Wright's paean to the earliest days of film-making-a homage to the birth of Hollywood with its Sam Goldwyns and its Louis B. Mayers-is funny and gener ous. The warmth of the shtetl feeds the creativity of these nascent cinephiles. Together the two men go back to the flood, discovering the power of stories, dramatic montage, captivated audiences and the thrill of the casting couch. Earthy, wheedling and endlessly instinctive, Sir Antony's Jacob is at the heart of it all, whether he is trying to meddle in the directing or keep his wife and daughter out of the film and cast Anna, instead, as the leading lady ("When I look at that girl. . .I like 18 again. I like tree in springtime with hot sap like kettle rise into every branch. You hear my meaning?") Or even when he tries sur reptitiously to rent out his cow to the studio. In fact, Sir Antony is so powerful ly Jacob Bindel that it becomes a pro blem. The second act takes place in Holly wood 30 years later. Jacob barely appears. The audience feels bereft.
85
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American University of Sharjah (UAE) Gratefully acknowledges its friends and benefactors whose generos•ty has made possible the establishment of the following permanently endowed positions at the university:
The Riad T. Sad i k Chair of Civil E n g i nee r i n g T h e K h a l af Ahmed AI H a btoor C h a i r o f I nternational Relations The Petrofac Resea rch Cha i r in Renewa ble E nergy The B a n k of S h a rj a h Cha i r in Fi n a nce a nd B u s i n ess Ad m i n istrati o n T h e S h e i k h S a u d B i n K h a l i d B i n K h a l i d AI-Qass i m i Cha i r i n Fa m i ly Busi ness The Dana Gas Cha i r in Chemica l E n g i neeri n g T h e C h a l h o u b G r o u p Professo rsh i p i n Luxury B ra nd Management Founded in 1997 by H.H. Sh ikh Dr. Sultan Bin Mohammad AI-Qassimi. Ruler of Sharjah and Member of th Supr m Council of the United Arab Emirates, American University of Sharjah is a comprehensive, Independent. non-profit coeducational university based on American models of higher education. A highly lect111e university, AUS provides access to highly motivated stud nts from all countries and has established academac standards comp rabl to those found at the best un111ers ties around the world Th university h s achieved remarkable growth and academic distinctaon during its short history. The campus provides a spectacular setting of imposing architecture and beautiful landscaping in th heart of the city of Sharjah, a cosmopolitan seat of leaming and culture Wathin their respective disciplines, these endowed postlons will enrich trem ndously th programs of th univ rsity. AUS is pi ased to than those who h contribu ed so g nerously to h I ping us fulfall our mis ion of excellence In teaching. research, and service. Inquiries may be directed to Dr Thomas
J. Hochstettler at prOIIOstOaus.edu.
The Economist J a n ua ry
21st 2012
87
Co u rses
T H E Y HAV E M O R E I N CO M M O N T H A N YO U T H I N K . Yes i t 's c o m p l i c a ted . . . t he relattonshtp between smart phones and rare eart h . Global supply and demand of t h ts cntical commodity represe n t s c o m p l e x econom i c . pol t t l c a l a n d soc t a l c h a l l e nges. T R I U M G l o b a l E x e c u t i v e M BA, a wo r l d - c l ass
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The Economist J a n ua ry 21st 2012
EXECUTIVE EDUCATION
88
Co u rses D o ct o r of B u s i n e ss Ad m i n i s t r a t i o n by C r i t i c a l Ac t i o n Lea r n i n g
The University o f L•verpool ls o n e o f the few un •versrt•es offenng a 100% onhne DBA delivered by Critical Action Learning and Action Research.
M a k e a d i ffe r e n ce .
Ap pointments U n ited Nations Development Programme
The International Development Group (I DG) o f
Global
MWH
seeks qualified candidates for a senior program manager position i n
Indonesia, a growing market for o u r renewable energy, project finance and
transaction services. In the spring IDG anticipates fielding a multi-disciplinary team to implement a multi-year, $ 1 5+ m i l lion project to support development of renewable energy projects. Eligible candidates should have 1 5 years' of experience; advanced degree(s) in engineering or finance; experience in project development in Asia, preferably in Indonesia; knowledge of renewable energy technologies and ma rket; and, proven abil ity to oversee multicultural, technically diverse teams.
MCC, MCA or USAID
Experience dealing with gender, social and environmental i m pact is preferred while experience with
is highly desirable. Qualified individuals are
"Indonesia PM candidate".
encouraged to apply to [email protected] with the subject l i n e
In addition, IDG holds several indefinite quantity contracts with major US donor agencies to provide infrastructure pol icy, engineering, economic and transaction advisory services around the globe. IDG is currently seeking qualified candidates to staff a
number of upcoming
macroeconomics,
positions requiring cross-cutting expertise in
infrastructure
finance,
public-private
partnerships,
institutional strengthening of government min istries focused on energy,
lD..CLis
transport, and water, environmental assessment. In order to staff economic
expanding its conS!Jitant database to
development and infrastructure projects in Africa, the Middle East, and Asia,
include experts in economics, finance, public
private partnerships, energy, capacity building and transportation. IDG also seeks experienced program managers for our Washington, DC home office. For these positions, 1 0+ years' experience and international experience, advanced
USAID, MCC, World Bank
degree(s), language skills, and international experience are preferred and knowledge of
and other donor agencies, social i m pact. gender a n d
commun ity development is strongly desired. Qualified individuals a r e encouraged t o apply t o [email protected].
MWH, a global leader 1n Infrastructure, leads the world 1n results-onented program management, techmcal engmeenng, and construction servtces
The Umted Nat1ons Development Programme (UNOP) partners With people at all levels of soctety to help bUild nat•ons that Ccln Withstand cris•s. and drive and sustain the ind of growth that improves the quahty of hfe for everyone. On the ground 1n more than 1 77 coun nes and erntories, we offer global perspective and local insight to help empower hves and bu1ld res1lien na 1ons.
As required by he UN Charter, UNDP IS comm1tted to the
htghest standards of 1ntegnty among rts personnel as well as transparency and accoun ability in
Management for Development
rts programmes and management
UNDP IS recrurt1ng for the Director of its Ethics Offke. The Office's mandate mcludes: clanfyang and communicating UN standilrds of conduct provid•ng ethics training and learn1ng opportumties for perwnnel; offenng gu1dance to management on bus1ness conduct and conftdential advice to staff on preventmg personal confhru of 1n erest. adm1n1stenng the f1nancial disclosure programme, and protectmg staH against retaliauon for report1ng m1sconduct.
The successful cand1date will have an advanced university degree hlmanitJes (e.g ph1�/ehieS), public or business administration. in law, relevant social sciences (e.g. cnmtnal justKe), relevant
corporate eth1cs, or related f1elds Alw requ1red is a minimum 15 years of international profess1onal and progress•�e wor expenence en pubhc and/or priVate 1nst1tu 10ns on human resources management systems 1n values & ethics or conduct & d1scipline, ethics and complian<e programmes, codes of conduct or ethicS, accountab1hty & compliance frameworks, management of nancial diSClosure polioes and/or whistleblower pro ectiOtl policies. He or she must be fluent m English and profictent in French or SpaniSh.
For morp mformdr'o" dnd ro 1ubm1r dn ·•PPI'<ar,on, go ro
http://jobs.undp.org
The Economist J a n ua ry
21st 2012
89
Ap pointments
J Make a differeric�\•Jn\iliiJnl "'" '\. - � �� . . . . .
Lega l Adviser
c. £ 5 1 , 000pa + benefits
Pal l M a l l , london SW1
We promote mou . advance d loprn nt nd celebrate rv r!>lty. We re the Commonwealth - an �ooauon of S4 mt>mbef counwes who share the sec:unty and sust lila I d lopmeot common lu o pe
Our
OiVMO pr<Mdes adviCe nd te
ral Advisory SP.Mc
Economrc and le<Jal Sect1011 oper
leg.1
paltlculclfly
W01krng 1ndepl'n
dlr
rnvestment nd the
hrrutatJOn of manume boondanl!!>.
tl 01 In a multr·drsctphne programme team. you
provide poltcy and le<Jal· advice to govl'rnml'n s and regronal 01 dniSclllon\ wuh a I� on manume bound nes and the law of the sea Trav lhng over
frequ ntly. you will help to prepare extendl'd conll nental shelf submr �srons nd d v lop relevant natrOOdl le<jrsf tron as
fir t d. r nd post graduate quahh tions 1n La or n equ lly aoc d I al qualtfr«llton, you must have s tafrsed f01 several y ars rn mantrme boundarres ancfJClf pubhc lnternat.Jonal law. Wrth
You must
a le to operate eHern¥tly '" nauonal of " Common lth country
Kit furth
The doSI
Post No : 60474 Salary - Co mpetitive and c o mmensurate with expenence and reco rd of achievement
ploit too of p uoleum .:11\d msne�al r�c� fcJOht uon nd
reguld ron of 101 •r
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dat 1s Frrday, 24 Febluary
www. thecommonwea lth.org
(X 5 )
PROFESSORS H I PS
e and �Sistan(P on mvestment nd rela ed matt�!�.
and economrc
Nottingham Bus ness School ( N BS) at Nottingham Trent U niversity has been a p oneerlng force throughout Its history, Integrating research and education t n order to help transform business and publ c organ satlons through knowledge and people. The School has an env able reputation as one of the UK's top business schools for business and has recently moved to the state of the art Newton-Arkwrlght facility In the centre of Nottingham. N BS has grown Its academy to and
9
170
Readers. The School hosts
staff with
5
21
Full Professors
academ c divisions and 11
number of International specialist centres and research units including the Betting Research Unit, Political Forecasting Untt, International Centre for Public Serv ce Management, International Centre for HR Innovat on, Centre for Business Performance and Lean Leadership, and the Economic Strategy Research Bureau. With plans for further expansion, the school Is building upon Its
S strategic appointments at Professorial level. Applications are reputation in research, teaching and corporate engagement with
U H I V I "
Position:
I T Y
O P
Redlands
Department: Appointment Rank: Beginning: Application Deadline:
Chair of Global Business
Business Admin istration and Accounting, College of Arts and Sciences Tenure Track Associate Professor or Professor September 1, 2 0 1 2 The committee will begin reading files o n January 2 7 , 201 2 . The position will remain open until filled
The Department of Business Administration and Accounting, in the College of Arts and Sciences, seeks a tenu re-track faculty colleague to support its nationally recognized undergraduate Global Business degree program, as the Chair of Global Business, at the rank of Associate Professor or Professor. This is a new position. The program focuses on developing writing, management, foreign language and decision-making skills necessary for a graduate to excel in a highly competitive global environment MINIMUM QUALIFICATIONS: Candidates should possess an MA, MBA or Ph.D. in a relevant field(s). Extensive business experience in residential overseas environments preferred. Successful
candidates will be expected to teach five class sedions each year, including the department capstone in Business Policy and Strategy and other international courses. Additionally, the Chair will develop organizational connections for student internships, guest speakers and case study opportunities Applicants should send a letter addressing their professional accomplishments, which includes their perspectives on effective business management in cross cultural settings and which addresses demonstrated success with teaching or mentoring. In compliance with The Americans with Disability Act if selected for the interview process and accommodations are needed please call 909/748-8040. Additionally, applicants should send a professional writing sample and a major speech, (if available), a resume and three letters of reference to Professor Jack Osborn, Chair Global Management Search, Department of Business and Accounting, University of Redlands, 1 200 E. Colton Ave., Redlands, Ca, 92373-0999, Or via email to: [email protected]. Originals will be required of finalists.
To Apply:
SUBMISSION OF A RESUME OR APPLICATION INDICATES AGREEMENT THAT THE UNIVERSITY MAY VERIFY ANY AND ALL INFORMATION CONTAI N E D THEREIN.
The University of Redlands is an Equal Opportunity Employer and members of underrepresented groups are encouraged to apply
Readers are reco m m e nded to make appropriate enquiries and take appropriate advice before sending money, incurring any expense or entering into a binding commitment in relation to an advertisement. The Economist Newspaper Limited shall not be liable to any person for loss or damage incurred or suffered as a result of his/her accepting or offering to accept an invitation contained in any advertisement published in The Economist.
The Economist J a n ua ry
21st 2012
sought in the following areas: •
Human Resource Management
•
Operations Management
•
Strategic Management
•
Sustatnablllty
•
Economics
The
successful
appllc.ant
will
have
an
extensive
publication
record in ranked and peer-reviewed journals and be a leader In their field of research. S/he will be required to further develop and Implement N BS' research agenda in their field of ex pertise, publish tn leadrng nternat onal journals, foster rndustry-academ c partnerships, and teach in the graduate and executive programs of NBS. Please note that conferment of the trtle of Professor will be dependent on the successful candidate meeting the University's Professorial criteria under the Awards and Titles Regulat ons The Business School may ma e appointments at the level of 'Reader' where appropriate. lf you have any specific queries I n rela on to the e positions, please contact Professor Baback Yazdani, Dean of Nottingham Bus ness
School
on
+44 (0) 1 1 5 848 8145
baback.yazdanf
ntu.ac.uk
or
As ociate
of School
on
Dean
email simon.mercado C losing
ntu.ac.uk.
Professor
or
v1a
Simon
emall
Mercado,
+44 (01 1 5) 848 8029
or via
date: 2 8 February 2 0 1 2
Jf you require documentation In alternative formats (e.g. Bntll l e,
Further application details are availabl
a w-.ntu.ac.u /vacancl s.
large print) please c.ontact us at job.vacanc esOntu.ac.uk
Nottingham Trent University Ia committed to promoting equality and valu n g di ve rsity and we a ek p opt who share tho e valu •·
www.ntu.ac.uk
•' "!-.. :.# / . ....\".
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Tenders
Call for Expression of I nterest: G43 Anatolian Venture Capital Fund Overview
African Union Research G rants : 201 2 Open Cal l for Proposals Ref: H RST/ST/AURG/CALL2/201 2/EuropeAid/132-331/M/ACT/ACP
The African U n ion Commission is seeking proposals for research focusing on the following thematic priorities articulated in Africa's Science and Technology Consolidated
Plan of Action
(CPA)
and its Lighthouse Projects: (a) Post-harvest and Agriculture, (b)
Renewable and Sustainable
Energy,
and (c) Water and
Sanitation in Africa. The programme is financed through the Financing Agreement between the E u ropean Commission and the ACP G roup of States under the ACP Research for Sustainable Development Program of the 1 Oth EDF lntra-ACP Envelop. The full G u idelines for Appl icants, Appl ication form and other supporting documents are available for downloading from the following Internet Sites:
The European Investment Fund (ElF), through the European Union's Instrument for Pre Accession Assistance (IPA) and in collaboration with the Istanbul Venture Capital Initiative (iVCi), Turkey's dedicated Fund of Funds advised by ElF, is promoting the creation of a new Small and Medium Sized Enterprises (SM Es) risk capital fund targeting Turkey's most disadvantaged reg1ons.
The FIE isseekjoga E!JOd Managerfor the G43Anatoljan \/eot!Jre Capl1aLEurui
Scope
The Fund Manager is expected to fundraise and reach a target fund size of EUR 30 million, with minimum first closing of EUR 20 million. At target size, the Fund should be invested in 8- 1 2 SMEs operating i n the Target Region. The Target Region comprises 43 Turkish provinces with GDP per capita below 75% of the national average as at 200 1 . Investment Criteria
The criteria that ElF will consider in selecting the Fund Manager shall include the following· • • • • • • •
1 . http ://www.africah rst.org/stict/rgp 2. http ://www.africa-union.org 3. http ://webgate.ec.eu ropa.eu/europeaid/onli ne-services/ index.cfm?do=publ i.welcome The deadline for submission of proposals i s April 20, 201 2 at 1 7h00 hours (+3 GMT) Addis Ababa time.
Credibility and clarity of the Fund Ma nager's Investment Strategy; Experience and cohesiveness of the team; Independency of the Fund Manager; Ability to demonstrate a track record in relevant activities; Local capability and network to generate an investment pipeline; Detailed understa nding of the Target Region; Ability to fund raise from market oriented investors and apply the industry's best practices
IPA and iVCi Support
The European Union and the Government of the Republic of Turkey, mandated ElF to cornerstone the G43 Anatolian Venture Capital Fund. Fund of Funds advised by ElF with a public and private investor base, IPA Both IPA and iVCi resources shall contribute together an amount of up to EUR 16 million.
utilising IPA funds, has iVCi, Turkey's dedicated will co-invest alongside totalling the equivalent
Further Information
The complete text of the Call for Expression of Interest can be found at wwweif ora and at wwwivri com tr. The deadline for application is 20 March 2 0 1 2 .
Emai l : research-i nfo@ africa-union.org
Ap pointments Economist Intelligence Unit
Senior Analyst, Custom Research, Asia S h a n g hai o r Beijing preferred The Economist Intelligence Unit helps business leaders prepare for opportunity, empowering them to act with confidence when making strategic decisions. Success when operating internationally means understanding how tomorrow will differ from today. From such insight comes opportunity. Our forecasting and advisory services have informed entrepreneurs, financiers and government
SU PPLY AND DELIVERY OF MATERIALS FOR THE CONSTRUCTION AND I N STALLAT ION OF THE ELECTRICAL POWER S U P P LY N ETWORK TO PROV I D E ELECTR IFICATION T O MARG I NAL A N D DEPR ESS ED R U RAL AND P E R I - U R BAN COMMUN ITIES I N BELIZE FROM R E N EWABLE GRID EXTENSIONS
E N E RGY
SOURCES
TH ROUGH
figures around the world since 1946. Working alongside the Asia Custom Research Director, you will help build and
The Belize Electricity Limited (BEL), the Purchaser, has available
maintain a th riving Custom Research business in Asia, with a focus on China.
funds to execute the Project to provide Electrification to Marginal
Your key responsibilities will include project execution, client management and supporting our sales team with business development. The successful candidate is expected to have a strong academic background in
and Depressed Rural and Peri-Urban Communities in Belize from Renewable Energy Sources through Grid Extension (the action). The project is being funded by the European Commission in Belize
economics, business, statistics, international relations or related fields, and
and the Belize Electricity Limited (BEL). BEL intends to apply
will need to demonstrate in-depth understanding of international business,
part of the funds to cover eligible payments under the contract for the supply and delivery of materials for the construction
industry and government issues within multiple Asian countries. Excellent written English and editorial skills are essential. Prior experience of working in client-facing research and consulting environment is also required. A knowledge of Mandarin would be highly desirable.
and installation of the Electrical Power Supply Network to the communities in the six Districts of Belize: Belize, Cayo, Corozal, Orange Walk, Stann Creek and Toledo Districts.
If you want to develop your career with a dynamic global leader, please send your CV by email with a covering letter and details of your current salary to [email protected]. Closing date for all applications is Feb 6th 2011. The Economist Group values diversity. We are committed to equal opportunities and creating an inclusive environment for all our employees. We welcome applicants regardless of ethnic origin, gender, religious beliefs, disability, sexual orientation or age.
Monday, January 30th, 201 2 from the following email .tamina. flowers@hel com hz or at Telephone 501 -227-0954, Ext 1703.
Interested suppliers can obtain tender documents commencing
The closing time and date for the submission of tenders is by 4:00 p.m. (local time) on Thursday, March Olst,
2012. Any tender
received after this deadline will not be considered. All tender information shall be submitted in the English language and shall
An Economist Group business
be sealed in an envelope clearly labeled "Bid for the Banana Belt
Prepare for opportunity.
Electrification Project".
The Economist J a n ua r y
21st 2012
Te nders
91
Busi ness & Personal Gollemm of Mol Mini try o F nonce. 1
Economy and I
n
al
Call for Tenders
Sealed �rs will be received at the Mlnktry of FLMnce, th Economy and lnftltment. Souttl Street. VallettA� by not later than 1 Olm. on Monday, 1 3th February 2012: For the Provblon Of Consul nC)' S.rvkes On The Man.agU�ent Oflhe V hide Fleet Of The Government Of Malta
For furlher lnfonnatlon � send an e-mail to tms.mfetOqov.mt
PERSONAL CORPORATE TAX PLANNING WEALTH &. ASSET PROTECTION PRIVATE BANKING
1ir + 4 4 ( 0 ) 2 0 7 7 3 1 2 0 2 0 enquiries scfg roup.com
NOTICE TO DEVELOPERS REQUEST FOR PROPOSALS
-
FOR PLANNING, DESIGN, CONSTRUCTION, FINANCING, AND OPERATION OF A MIXED-USE TRANSIT ORIENTED DEVELOPMENT IN HONOLULU, HAWAII, USA
To advertise within the classified section, contact:
The State of Hawai i, Hawaii Community Development Autho rity (HCDA) is requesting sealed proposals from qualified Real Estate Developers to enter into a development agreement for planning, design, construction, financing, and operation of a mixed-use Transit Oriented Development in Honolulu, H I .
Martin Cheng - Tel: (44-20) 7576 8408 United Kingdom
[email protected] United States Beth Huber - Tel:
Interested Developers can view details o f the Request for Proposals
(212) 541-0500
[email protected]
(852) 2585 3232
(RFP) at the HCDA website: www. hcdaweb.org.
Asia
Proposal requirements and due dates are specified in the RFP.
[email protected]
For more information, contact Mr. Deepak Neupane, P.E., AlA, Di rector of Planning & Development,
(808) 594-0300,
or by email at
David E. Smith - Te�
Middle East & Africa
Mirasol Galindo - Tel: (971)
4433 4202
[email protected]
deepak@ hcdaweb.org
Europe Sandra Singharaj - Tel:
DEADLI N E EXTENSION AN NOUNCEMENT
P ROVISION OF PROFESSIONAL SERVICES FOR THE LIQUIDATION OF A PORTFOLIO OF SOCIALLY OWN ED ENTER PRISES IN THE REPUBLIC OF KOSOVO Further to Tender Announcement on December, 1 6th 201 1 , hereby you are informed of Deadline Extensions as following:
February 10th, 2012 at 14h00 (GET)
PROPOSAL SUBMISSION DEADLINE:
January 21st, 2012
REQUEST FOR CLARIFICATIONS OF THE TENDER DOSSIER:
Tender Dossier is available upon request from PAK procurement:
procurement @ pak-ks.org Procurement Department, Privatization Agency of Kosovo llir Konushevci Sir, 8, 1 0000 Prishtine, Republic of Kosovo +381 -38-500·400-2023 or +381 -38-500-400-2002 Estimated assignment duration:
48 months
Full version of the contract award notice is available from
http://krpp.rks-gov.net/
www.pak-ks.org
Readers are recommended to make appropri ate enqui ries a n d take appropriate advice before sending money, incurring a ny expense or entering into a bin ding commitment in relation to an advertisement. The Eco n omist Newspaper Limited shall not be Liable to any person for
\
Loss or damage incurred or suffered as a result of his her accepti n g or offering to accept a n invitation co ntai ned i n a ny advertisement published i n The Economist.
The Economist J a n ua ry
21st 2012
(33) 153 9366 14
[email protected]
.
92
.
.
.
.
Economic data % change on year ago
Gross domestic product latest
qtr*
2011 I
Industrial production latest
Consumer rices Unemployment rate*, % 20111 latest
Current-account balance
Budget balance
Interest rates, %
% of G O P
% of G D P
10-year gov't bonds, latest
latest 12 months, $ b n
20111
20111
-3.1 +3.0 +2.9 Dec 8.5 Dec 1.89 -8.7 +1.7 +3.4 Nov -466.8 03 +9.2 +12.8 Dec +4.1 Dec +5.6 6.1 2010 +259.3 03 111 +2.9 -1.8 3.57 6.31 6.58 76.8 82.1 03 -0.6 -4.0 Nov -0.5 Nov -0.3 4.5 Nov +130.8 Nov +2.4 -8.3 0.96 03 +0.9 -3.1 Nov +4.2 Dec§ +4.4 8.4 Novtt -70.6 03 -2.5 -8.8 1.95 0.65 0.63 ��c!! _ _ _ .±.?,i � _ __:i:L'i_ .±.2.l. _ _ _ .:!j� �- .±.2..1 !:!!>v_ _:t-b.9_ __ l:�� - - --±'J.2 Sll __ .:.?:2_ _ _ _ -� Q_ _ _ _.?..�- - - - _l.Q.! _ _ _ Q;.� +1.4 03 +0.6 +1.4 0.78 -0.3 Nov +2.8 Dec +2.5 10.3 Nov -4.1 0.74 1.80 Euro area -83.2 Oct -0.5 +3.0 Oct +3.3 Dec +3.2 +2.9 03 0.78 4.0 Nov +1.4 +2.9 0.74 +10.5 03 -3.6 Austria 3.24 +2.6 -0.5 +2.0 0.78 +0.3 Sep +1.9 03 4.11 0.74 +2.9 Oct +3.5 Dec +3 . 3 -3.8 Belgiu m 7 . 2 Novll +1.6 +1.5 03 0.78 +2. 2 9.8 Nov -65.3 Nov 0.74 3.13 -5.8 +1.2 +1.6 +0. 9 Nov +2.5 Dec France -2.5 0.78 0.74 Germany +2.5 0 3 +2.0 +3.0 +3.6 Nov +2.1 Dec +2.4 6.8 Dec +189.6 Nov +5.2 -1.0 1.78 Greece -5.0 03 na -5.3 -7.8 Nov +2.4 Dec +2.9 18.2 Oct -28.9 Oct -8.4 -9.5 34.96 0.78 0.74 0.78 0.74 Italy +0.2 0 3 -0.6 +0.5 -4.1 Nov +3.3 Dec +2.8 8.6 Nov -76.6 Nov -3.7 -4.0 6.41 Netherlands +1.1 03 -1.0 +1.5 -1.2 Nov +2.4 Dec +2.4 5.8 Novtt +66.6 03 +6.7 -4.2 2.07 0.78 0.74 ��n_ _ _ _ .!Q� � - - .!!il_ .:t.O.:§. _ _ _ :],Q. t:!£_v_ .±_2� .Q!Oc_ _:t-l:_1_ _ _2_b2._N� - - --2_4_,Q. �t- - 3� - - - -,£;'2._ __ _2.�- - - - _Q.Z§ _ _ _ Q;.7_i _ Czech Republic +1.2 03 -0.3 +2.1 +5.4 Nov +2.4 Dec +1.9 8.6 Dec -5.6 03 -3.1 -4.6 3.50 19.9 18.0 5.80 5.52 Denmark +0. 1 03 -2.2 +1.0 -0. 1 Nov +2.5 Dec +2.7 4.2 Nov +22.1 Nov +5.8 -3.9 1.65 239 202 Hungary +1.4 03 +2.2 +1.5 +3.0 Oct +4.1 Dec +3.9 10.6 Novtt +1.8 03 +1.5 +1.2 9.68 6.00 5.80 Norway +3.8 03 +5.8 +0.8 -1.2 Nov +0.2 Dec +1.4 3.3 Oct§§ +70.2 03 +13.6 +13.1 2.14 Poland +4.2 03 na +3.8 +8.7 Nov +4.6 Dec +3.9 12.1 Novll -21.9 Nov -4.8 -6.0 5.69 3.39 2.87 Russia +4.8 03 na +4.0 +3.9 Nov +6.0 Dec +8.5 6.3 Novll +101 . 1 04 +5.0 -0.8 4.73 31.5 29.8 Sweden +4.6 03 +6.6 +4.3 +0.2 Nov +2.3 Dec +2.8 6.7 Novll +39 . 7 03 +6.4 nil 1.62 6.86 6.60 0.94 0.96 Switzerland +1.3 03 +0.9 +1.8 -1.4 0 3 -0.7 Dec +0.3 3.1 Dec +95.7 03 +13.2 +0.8 0.65 Turkey +8.2 03 na :!].5 :!:§.4 Nov +10.!! Dec +6.3 9. 1_0ctll -]].8 Nov .::J . 8 -1.8 9.42 1.84 1.55 Australia +2.5 03 +3.9 +1.8 +0.8 0 3 +3.5 0 3 +3.5 5.3 Nov -32.6 03 -2.2 -2.6 3.85 0.96 1.00 7.76 7.78 Hong Kong +4.3 03 +0.4 +5.4 +0.3 03 +5.7 Nov +5.1 3.3 Decll +13.6 03 +4.2 +1.8 1.26 India +6.9 03 na +7.6 + 5 . 9 Nov + 9 . 3 Nov +9.0 1 0 . 8 2010 -65.1 03 -3.5 -5.4 8.42 50.4 45.5 Indonesia +6.5 03 na +6.5 + 5 . 0 Nov + 3 . 8 Dec +5.3 6.6 Aug +3.6 03 +0.4 -1.0 4.021 tt 9,048 9,050 Ma laysia +5.8 03 na +4.5 +1.7 Nov +3.3 Nov +3.3 3.0 Oct +32.7 03 +10.4 -5.6 2.93ttl 3.11 3.05 85.7 Pakistan +2.4 2011.. na +2.4 -1.5 oct +9.7 Dec +12.2 5.6 2010 -0.2 03 -1.3 -5.9 90.2 15.041tt 1.28 1.28 Singa pore +3.6 04 -4.9 +5.1 -9.6 Nov +5.7 Nov +5.1 2.0 03 +49 .2 03 +17.7 +0.6 1.47 South Korea +3.5 0 3 +3.3 +3.8 +5.6 Nov +4.2 Dec +4.2 3 . 1 Dec +25.1 Nov +2.0 +2.4 3.75 1,142 1,110 Taiwan +3.4 03 -0.6 +4.4 -3.6 Nov +2.0 Dec +1.5 4.3 Nov +38.6 03 +8.0 -2.7 1.29 30.0 29.0 30.5 31.8 Thailand +3.5 0 3 +2.1 +2.5 _ .2. . 24 -1§.6 Nov +3.5 Dec_ _+.i_2_ .Q..8 Sep _ _ _+12.1 Nov_ _ +4.1 _ _ -2.9 4.32 3.98 Argentina +9 .3 03 +4.5 +8.5 +0.8 Nov +9.5 Dec• .. +9.9 7.2 0311 nil 03 -0.3 -1.4 na 1.77 1.67 Brazil +2.1 0 3 -0.2 +3.0 -2.5 Nov +6.5 Dec +6.7 5 . 2 Novll -49.3 Nov -2.2 -2.7 1 1 .50 Chile +4.8 0 3 +2.6 +6.3 +2.0 Nov +4.4 Dec +3.2 7.1 Novttll -1.2 0 3 -0.5 +0.2 2.291tt 496 492 1,823 1,842 Colombia +7.7 03 +7.1 +5.1 +5.0 Oct +3.7 Dec +3.4 9.2 Novll -9 .6 03 -2.7 -2.5 3.611 tt Mexico +4.5 03 +5.5 +3.9 +3.2 Nov +3.8 Dec +3.3 5.0 Novll -10.0 03 -1.9 -2.9 6.01 13.3 12.1 ���e� _ _ .:!j ,1_ � _ _ .i!!!_ .±?� _ _ _ .±.?:2_ � _+1_9_,Q .Q!Oc_ .:f:?£,_3_ _ _ � �� - - -+1..6 .,Q. Sll _ _ .:':§� - - --2, £.._ _ _ _§_.2?!.!!_ _ _ _ .2·� - - - -� Egypt +0.3 02 na +1.8 -1.8 02 +9.5 Dec +10.2 1 1 . 9 Q311 -4.1 03 -1.7 -10.0 8.071 tt 6.04 5.81 Israel +5.1 03 +3.4 +4.4 +2.3 Nov +2.2 Dec +3.3 5.6 03 +1.8 03 -0.1 -2.8 3.46 3.80 3.55 +6. 7 + 5 . 3 Dec +75.3 2010111 +25.9 3.75 3.75 na na Saudi Arabia +4.9 +14.3 +6. 7 2011 na na +1.4 +3.1 -4.1 South Africa +5.0 25.0 03 11 6.97 -5.5 7 .88 8.02 +2.4 Nov +6.1 Dec -11.6 03 +3.1 03
United States China Japan Britain
+1.5 +8.9 -0.7 +0.5
03
04
+2.0 +8.2 +5.6 +2.3
*% change on previous quarter, annual rate. tThe Economist poll or Economist Intelligence Unit estimate/forecast. tNational definitions §RPI inflation rate 4.8 in December. * *Year ending June. ttLatest 3 months. §§Centred 3·month average. . . *U nofficial estimates are higher. lttDollar-denominated bonds. Ill Estimate.
II Not seasona lly adjusted.
The Economist J a n ua ry
Economic and financial indicators
2 1 st 2012
Markets
% change on Dec 31st 2010
one in local in $ week currency terms United States (DJIA) +1.0 +8.6 +8.6 China (SSEA) -0.4 -19.2 -15.7 Japan (Nikkei 225) +1.2 -16.4 -11.9 Britain (FTSE 100) +0.6 -3.3 -5.2 � '!!d� (�I?_TS1) _ _ _ gl_??_:.? _ 2:.Q.i_ _ _:8]. _-1Q . §_ Euro area (FTSE Euro 100) 774.6 +2.1 -13.4 -18.1 Euro area (OJ STOXX 50) 2,390.6 +2.2 -14.4 -19.1 Austria (ATX) 1,960.6 +3.5 -32.5 -36.2 2,155.7 +0.7 -16.4 -20.9 Belgium (Bel 20) France (CAC40) 3,264.9 +1.9 -14.2 -18.9 Germany (DAX) * 6,354.6 +3.3 -8.1 -13.1 670.0 +6.5 -52.6 -55.2 Greece (Athex Comp) Italy (FTSE/MIB) 15,278.0 +2.7 -24.3 -28.4 Netherlands (AEX) 315.5 +1.2 -11.0 -15.8 Spain (Madrid SE) 842.2 -0.1 -16.1 -20.7 Czech Republic (PX) 902.4 +1.3 -26.3 -32.3 373.9 +1.4 -12.4 -17.0 Denmark (OMXCB) 18,150.3 +8.3 -14.9 -28.1 Hungary (BUX) 451 .1 +0.1 -7.3 -10.8 Norway (OSEAX) �land ��) _ _ _ _ 1_2,Q1� _ _:!i.1_ _ :l.J.& _-]1.0 Russia (RTS, $ terms) 1,488.4 +2.5 -12.5 -15.9 Sweden (OMXS30) 1,028.6 +1.9 -11.0 -13.7 Switzerland (SMI) 6,116.2 +1.8 -5.0 -7.3 Turkey (ISE) 54,384.8 +5.8 -17.6 -31.9 4,280.6 +0.9 -11.7 -11.0 Australia (All Ord.) Hong Kong (Hang Seng) 19,686.9 +2.8 -14.5 -14.5 India (BSE) 16,451.5 +1.7 -19.8 -30.9 Indonesia (JSX) 3,978.1 +1.8 +7.4 +5.7 �a§'�a _(_K�E.L _1 21?.!f .:Ql._ _:O.:l _:2:2_ Pakistan (KSE) 11,547.7 +5.6 -3.9 -8.6 2,795.4 +1.8 -12.4 -13.2 Singapore (STI) South Korea (KOSPI) 1.892.4 +2.5 -7.7 -9.6 Taiwan (TWI) 7,233.7 +0.6 -19.4 -21.6 1,051.6 nil +1.8 -3.3 Thailand (SET) Argentina (MERV) 2,862.2 +1.3 -18.8 -25.2 61,722.9 +2.9 -10.9 -18.1 Brazil (BVSP) Chile (IGPA) 20,451.2 +1.0 -11.0 -17.7 Colombia (IGBC) 13,468.0 +1.5 -13.1 -9.9 Mexico (IPC) 37,506.8 +0.5 -2.7 -12.3 �nezuela (f!C) __1Q,679.4 2:_Q.i_ +80.1 n.2_ 3,904.1 +3.7 -44.9 -47.0 Egypt (Case 30) 1,027.7 +0.7 -16.2 -22.9 Israel (TA-100) Saudi Arabia (Tadawul) 6,378.0 -1.7 -3.7 -3.7 +4.5 -15.0 South Africa (JSE AS) _21550.1 +2.2 Index Jan 18th 12,579.0 2,374.3 8,550.6 5,702.4
_ _ _
,
_
_
_
I
The Economist commodity-price
index
A roller-coaster ri d e for prices in 2011
January 1st 2008=100, $ terms Food
res u lted in several co m m odities rea ching
- All items
- Industrials
record Levels i n the early part of t h e yea r
1 60
before d roppi n g s h a r p ly i n t h e Latter h a lf. O u r do llar a ll-ite m s i n dex, which ex cludes oi l a n d precious m etals, e n d e d the year at its Lowest Level si n ce Septe m b e r 2010 a n d 23% off its p e a k i n February 2011. B u m p e r ha rvests in cereals, sugars a n d oils, coupled with falli n g d e m a n d , Led t o a d r o p i n food prices ( o u r fo od
price i n dex fell by a ro u n d 15% from its
2011 high ) . The prices of i n d ustrial raw m aterials, m ea nw h i le, suffered beca use of concerns a b o ut the debt crisis in t h e e u ro a r e a , w h i c h risked causi n g a globa l downturn that would reduce d e m a n d for things such as i ro n ore a n d copper.
% change on Dec 31st 2010 Index one i n local i n $ Jan 18th week currency terms United States (S&P 500) 1,308.0 +1.2 +4.0 +4.0 United States (NAScomp) 2,769.7 +2.2 +4.4 +4.4 China (SSEB, $ terms) 221.1 -0.3 -30.4 -27.3 Japan (Topix) 735.0 +0.2 -18.2 -13.8 !!! ��_ (�� ��t l_OQ } _1.��- 21·1._ - _:7.& --�& World, dev'd (MSCI) 1.222.2 +1.5 -4.5 -4.5 Emerging markets (MSCI) 980.9 +3.4 -14.8 -14.8 World, all (MSCI) 310.9 +1.7 -6.0 -6.0 �o!!_d J!.o� u Ci !! 9!.0 .!!.1?L 'E?..:J 2:QL .2_6.1_ .:!:§.� 599.5 +0.4 +8.7 +8.7 EMBI+ (JPMorgan) Hedgefunds (HFRX) 1,121.3 +0.1 -7.9 -7.9 20.9 +21.1 +17.8 (levels) Volatility, US (VIX) 161.9 -8.2 +54.7 +46.3 CDSs, Eur (iTRAXX)t CDSs, N Am (CDX)t 109.7 -5.4 +28.8 +28.8 Carbon tradin EU ETS € 6.9 -2.7 -51.7 -54.3 _
_
11
10
09
2008
12
40
Source: The Economist
Other markets
_
'"'"'""''""'"''"''''"!!!!'"' ItII"II"'
_
*Total return index. tcredit-default-swap spreads, basis points. Sources: National statistics offices, central banks and stock exchanges; Bloomberg; CBOE; CBOT; CMIE; Cotlook; Oarmenn & Curl; EEX; FT; HKMA; ICCO; !CO; ISO; Jackson Rice; JPMorgan Chase; NZ WoolServices; Thompson Lloyd & Ewart; Thomson Reuters; Urner Barry; WSJ; WM/Reuters
The Economist commodity-price index 2005=100 % change on one one Jan 10th Jan 17th* month year Dollar index
�l_it:e�s- _ _ _}�,i
f2!2£ -
___
Industrials All. .
..Nf� �. .
Metals
_?�&. -
__
. . .163. ,4. ..1.(9 ..2 156.7
_
.Mli_5 _lJ\1.:_1
__ __
-.2V -.21.2
_
_:2.z.§_
-!1&
_ _
. . 169_.4. . .. . �9 ..2 . . . �21_.8 . .1.82.:4. . �6 ..0 . .. �_3 1 } 163.8 +10.8 -16.3
Sterling index All items
216.7
218.6
+7.0
-14.2
179.6
180.1
+7.8
-13.4
1 , 660.3
+2.7
+21.4
100.7
+3.6
+10.3
Euro i ndex All items
Gold
lllli..!£_ 1,638.1 West Texas Intermediate $ per barrel 102.3
•Provisional !Non-food agriculturals.
Indicators for more countries and additional series, go to: Economist.comfindicators
93
tent with treating them as underdogs and abrogating the equal rights they had been guaranteed, the Greeks intended to drive them off the island and then unite with Greece. Archbishop Makarios, their leader, and his EOKA guerrillas had sought that enosis violently for years before reluctant ly compromising. As a colonial lawyer in the 1950s, sharp and London-trained, Mr Denktash had prosecuted Greeks found running Greek-made dynamite in little boats off Paphos, and did not doubt that though they were fighting the British who then ruled Cyprus, their ultimate target was his own people. If enosis ever hap pened, he wrote, Turkish-Cypriots would be snuffed out like candles in a storm.
Rauf Denktash
Rauf Denktash, leader of the Turkish-Cypriots, died on]anuar y13th, aged 87
I south-western Cyprus, that the goddess
T WAS on the coast near Paphos, in
Aphrodite rose radiant from the sea-foam to waft abroad her message of harmony and love. Ironic, then, that it was also that spot of the coast that produced Rauf Denk tash, short, fat and immovable as a rock, whose face was set against every harmoni ous solution of the island's governance, unless it met his conditions first. His conditions were simple. Turkish Cypriot North Cyprus, covering roughly one-third of the island and emptied of its Greek inhabitants, was a republic equal in sovereignty, powers and rights to the much larger Greek-Cypriot part, and must be so recognised by the world. The fact that it has never been, except by Turkey, was not for want of effort on his part. After two de cades as the Turkish-Cypriots' wily chief spokesman and most intransigent "negoti ator" he declared, in November 1983, uni lateral independence, and ruled as a one man show for the next 22 years. Although he formally accepted the idea of a loose federation, a two-state settle ment was his overwhelming desire. Visi tors to his presidential palace, charmed by his bulky hand-kissing, his eagerly snap ping camera and the sweet canaries sing ing in his office, were also treated to hour long lectures on the atrocities inflicted by
Greek-Cypriots on Turkish-Cypriots be tween 1963 and 1974. Foreign envoys, in cluding the redoubtable Dick Holbrooke in 1998, were sent away with fleas in their ears. Even a bout of serious heart trouble in 2002 could not stop him passionately re sisting a careful Cyprus settlement ("dia bolical" to him) drawn up by Kofi Annan, then head of the United Nations. What he-like Greek hardliners-dis liked in all such schemes was that, first, they assumed the existence of a Cypriot nation. There was no such thing. Cypriot donkeys, yes. Certain Cypriot habits, such as his own favourite of dunking fried lady finger pastries in cognac and slurping the cognac, yes. But otherwise, he said, the is land consisted of Turks and Greeks living side by side. They had co-existed thus since the Ottomans had taken over in 1571, as sep arate communities speaking different lan guages. The Turks were Sunni Muslims, the Greeks Orthodox Christians. In his boy hood he had played with Greeks, but he had soon learned to distrust them, as they did him. They could put on a show of be ing "lovebirds"-as when Glafcos Clerides, his Greek-Cypriot counterpart and an old courtroom rival, joked and ate soup with him in 2001. But he knew their souls. The deep wish of Greeks, he said, was to colonise the Turks-and worse. Not con-
Friends to the north Their only hope was stiff resistance, partition-taksim, his war-cry-and the help of Turkey. Mr Denktash considered himself his own man, calling all the shots in his little patch. But it was only a Turkish invasion in 1974, in response to an abortive Greek coup, that had allowed his commu nity to consolidate its territory; it was only Turkish aid, to the tune of $4oom-5oom a year, that allowed his statelet to survive; and it was only the presence of 30,000 Turkish troops, turning tracts of northern Cyprus into a military camp, that made him feel secure. From the pool of his villa on Snake Island, wallowing gently, it was Turkey he looked to across the sea. From the late 19 50s he had fed intelli gence to Ankara about EOKA, and there after all his negotiating stands were checked with Ankara first. Hence, in part, his rocklike certainty. There were disagree ments: in particular, over Turkey's dream of joining the European Union, which Mr Denktash abominated because the EU in sisted on recognising only the Greek-Cyp riot part of the island, which had joined in 2004. Single-handed, he took great plea sure in impeding Turkey's application. But he made no secret of the fact that if Cyprus were to be ceded to any country, that coun try should be Turkey: because, he rea soned, Turkey had once owned it, while the Greeks, from Homer's time onwards, had merely settled there. As time passed, Mr D enktash got out of step with his people. He won his third term as president, in 1995, only in the second round. Despite his fulminations, Turkish Cypriots voted for the Annan plan, though the Greek-Cypriots did not. Northerners also rather liked the idea of joining the EU and, thereby, gaining some of the tourism and towering development they envied in the south. In some places the barbed-wire barriers between the communities began to be taken down. The "Cyprus problem", however, re mained-and remains. Mr Denktash, as long as he breathed, embodied it. •
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