The economist europe 23 july 2016

A circus arrives in Cleveland The dirty secret of natural gas AIDS: down but not out Six of the best economic ideas JULY 23RD– 29TH 2016

Erdogan’s revenge

The coup and the crackdown

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The Economist July 23rd 2016 3

Contents 5 The world this week

On the cover Turkey’s president is destroying the democracy that Turks risked their lives to defend: leader, page 7.

Recep Tayyip Erdogan drifts away from America, NATO and the EU, pages 14-16. Plots to topple leaders are becoming less common. That’s a good thing for many reasons: Free exchange, page 58

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Volume 420 Number 8999 Published since September 1843 to take part in "a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress."

Editorial offices in London and also: Atlanta, Beijing, Berlin, Brussels, Cairo, Chicago, Lima, Mexico City, Moscow, Mumbai, Nairobi, New Delhi, New York, Paris, San Francisco, São Paulo, Seoul, Shanghai, Singapore, Tokyo, Washington DC

Leaders 7 The failed coup in Turkey Erdogan’s revenge 8 Britain’s “industrial strategy” Open for business?

8 The politics of Thailand The generals who hide behind the throne 9 Methane leaks Tunnel vision 10 Big economic ideas Breakthroughs and brickbats Letters 12 On Kurdistan, immigration, executive pay, the passive voice, China Briefing 14 Turmoil in Turkey Coup and counter-coup 15 Turkey and the world Running out of friends Europe 17 Another attack in France Madness and terror 18 Russia’s Olympian drug habit Tamper proof 19 Italy’s upstart party The Five Star question 20 Charlemagne The EU v its parliaments Britain 21 Industrial strategy A change of gear 22 Foreign takeovers Fear and favour 22 London buses Parting the red sea 23 Bagehot Britain’s place in a post-Brexit world

Middle East and Africa 24 Israel and the Arab world The enemy of my enemies 25 Syrian refugees in Jordan From haven to hell 25 Lebanese cronyism Hire power 26 Agriculture Africa’s real land grab 27 Smoking in Africa Plains packaging 27 Nigeria’s currency If you love it...

United States 28 The Republican convention Donning the mantle 29 On the trail Cleveland special 30 Paul Ryan’s agenda Better than what?

30 Roger Ailes Kingmaker no more 31 Policing after Baton Rouge Ambushed and anguished 32 Michael Elliott The Fab One 32 Immigration economics Wages of Mariel 33 Lexington Mike Pence, prime minister The Americas 34 Canada’s internal trade A great provincial obstacle course 35 Cuba’s economy Caribbean contagion 35 El Salvador The price of peace 36 Bello Lessons from a liberal swashbuckler

37 40

40 42

Asia Politics in Thailand Twilight of the king Pakistan’s “honour killings” Challenging a licence to kill Dissent in Laos An outpost of Stalinism South Korea’s DIYers A home-decor fad

Is Britain open for business?

The takeover of a British microchip-maker belies a cooling climate for foreign investors: leader, page 8. The new government’s mixed signals , page 21. The evidence is that foreign managers improve the British firms they acquire, page 22. Masayoshi Son sets the tone for SoftBank after the exit of Nikesh Arora, page 49

Republicans in Cleveland Confusion and division at the convention, page 28. Mike Pence, useful underling: Lexington, page 33. The Speaker’s policies are the best a divided party has to offer, page 30. Cleveland’s lessons on economic clusters: Schumpeter, page 51

Stress New research shows that even severe stress can have an upside, page 45. How firms are easing the strain, page 46

1 Contents continues overleaf

4 Contents

The Economist July 23rd 2016

China 43 Hong Kong police Serving the law, or the party?

44 The South China Sea Xi Jinping’s agenda

Big economic ideas What economists can learn from the discipline’s seminal papers: leader, page 10. George Akerlof’s 1970 paper, “The Market for Lemons”, is a foundation stone of information economics. The first in our series on seminal economic ideas, page 52

Thailand’s monarchy The country is ill-prepared for the death of its king: leader, page 8.The strange politics that surround the Thai royals, page 37

International 45 Stress What makes us stronger 46 Workplace stress Fuss and bother Business 47 Natural gas and methane A dirty little secret 48 China’s industrial internet of things The great convergence 49 SoftBank and ARM Everything under the Son 49 Media content A martial-arts deal 50 American company earnings Of populism and profits 50 Consumer products His and hers 51 Schumpeter Silicon Valley 1.0 Briefing 52 Information asymmetry Secrets and agents Finance and economics 54 African banks Subprime savannah 55 Buttonwood Ageing and debt 56 The Big Mac index Patty-purchasing parity

56 Postal Savings Bank of China A red-letter IPO 57 The 1MDB affair Thick and fast 58 Free exchange The economics of coups Science and technology 59 The 21st International AIDS Conference Rallying the troops 61 Data storage Atoms and the voids 61 Medical technology All sewn up Books and arts 62 Xi Jinping The people’s pope 63 Vietnam A new history 64 South Africa The death of Amy Biehl 64 Australian fiction Things come naturally 65 Diane Arbus Shuttered 68 Economic and financial indicators Statistics on 42 economies, plus a closer look at GDP forecasts

AIDS Those working to defeat the disease face setbacks, both epidemiological and financial. But they are about to be handed new weapons to carry on the fight, page 59

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Methane Even natural gas needs to clean up its act: leader, page 9. Its reputation as a cleaner fuel than coal and oil risks being sullied by methane emissions, page 47

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The Economist July 23rd 2016 5

The world this week Politics

A faction of Turkey’s armed forces attempted a coup, but was defeated by other military units, police and crowds of civilians. President Recep Tayyip Erdogan launched a crackdown, arresting or purging thousands of military officers, judges, academics, journalists and others. The government accused Fethullah Gulen, a Muslim cleric based in America, of plotting the coup (which he denied), and sought his extradition. The EU and America warned Mr Erdogan not to crush democracy.

A Tunisian resident of France drove a lorry through crowds of pedestrians celebrating Bastille Day in Nice, killing 84.

Islamic State claimed responsibility, but police found no evidence he had pledged allegiance to the group, though he had watched violent jihadist videos. The French government said it would extend the country’s state of emergency.

In Germany, a 17-year-old Afghan refugee was shot dead by police after he attacked passengers on a train with an axe, injuring five people.

Pavel Sheremet, a muckraking journalist, was killed by a car bomb in Kiev. Working for Ukrainska Pravda, he had written exposés of government corruption in Belarus, Ukraine and Russia over several decades. Petro Poroshenko, Ukraine’s president, called for an EU inquiry into his death.

The effort by MPs in Britain’s Labour Party to topple Jeremy Corbyn as leader intensified.

To avoid splitting the anti-

Corbyn vote one challenger, Angela Eagle, withdrew in favour of another, Owen Smith. However, Mr Smith soon came under pressure over his previous job working for drug companies. For a party on a mission to gain credibility, the choice between a candidate who shilled for “Big Pharma”, or a leader with rock-bottom parliamentary support, may be a bitter pill to swallow.

In her first week as Britain’s prime minister, Theresa May cruised through a crucial parliamentary vote on the renewal of Trident, the country’s nuclear deterrent. Trips to Berlin and Paris followed, as Mrs May met Germany’s Angela Merkel and France’s François Hollande. Convincing European heads of state of her desire to achieve a mutually beneficial Brexit may prove difficult. She ruled out holding any talks this year.

Throwing his hat in the ring

The Republicans held their convention, nominating Donald Trump for president.

There was some mild excitement when Republicans still opposed to Mr Trump’s candidacy tried to register their protest on the convention floor. They were drowned out by rock music. Ted Cruz, a rival in the primaries, was booed off the stage when he refused to endorse him.

Mr Trump, meanwhile, said that if he were president, America would come to the aid of the Baltic states if they were invaded by Russia, only if they “fulfil their obligations to us”. Mr Trump has signalled before a lack of commitment to the NATO alliance.

The issue of policing featured heavily at the convention following the latest shooting of police by a black gunman.

Three officers were killed in Baton Rouge, Louisiana, by a former marine who lured them into an ambush close to police headquarters.

A death in the family Pakistan arrested the brother of a social-media star, after he confessed to killing her for the family’s “honour”, because “girls are born to stay at home.”

Qandeel Baloch rose to fame by posting cheeky, politically controversial videos on Facebook. Hailed by some as a feminist, she was reviled by conservative clerics. Her brother strangled her at home.

America’s Justice Department began proceedings to seize assets involved in “an international conspiracy to launder funds” from 1MDB, Malaysia’s state investment fund. Investigators in America, Switzerland and elsewhere have been piecing together a money trail in a suspected multibillion-dollar scam involving senior politicians.

A prominent liberal-leaning journal in China, Yanhuang Chunqiu, stopped publication after the dismissal of its senior editorial staff by the stateaffiliated academy that supervised it. With support from many retired officials, the journal had often published articles at odds with the Communist Party’s line, especially on historical issues. President Xi Jinping has launched a campaign to tighten party control over the media.

Reinforcing peace The African Union proposed deploying additional troops to South Sudan after recent clashes left hundreds of people dead. The proposed peacekeeping force will join the UN’s 12,000-strong mission already on the ground to maintain a tenuous peace deal signed last year.

Meanwhile, the AU was forced to extend the term of chairman Nkosazana Dlamini-Zuma by

six months, after a summit in Rwanda of African leaders failed to settle on her successor. None of the three contenders was able to attain the twothirds majority required.

Israel’s Knesset passed a law that will allow it to impeach any member accused of racial incitement or supporting violence against the Jewish state. Critics said the controversial law was aimed at Arab lawmakers and would harm democracy.

Three members of the French special forces died in Libya when their helicopter was shot down by an Islamist militia.

The militia claimed that French jets bombed its positions in response, raising the prospect of an escalation in fighting.

A quick dash to the shops

More than 100,000 Venezuelans, suffering from shortages of food and other basic goods, crossed the border into Colombia to buy them. This was the second time Venezuela had opened its border recently to allow its citizens to go shopping. Venezuela’s government shut the border last year because, it said, paramilitaries and criminals were crossing it to enter the country.

Mexico enacted laws that establish a long-awaited national “anti-corruption system”, which creates independent authorities to monitor, investigate and punish corruption. Announcing the measures, Mexico’s president, Enrique Peña Nieto, apologised for his role in a scandal in 2014, in which his wife acquired a $7m house from a government contractor, but said he did not break the law. 1

6 The world this week

Business The IMF warned that Britain’s decision in a referendum to leave the European Union had thrown a “spanner in the works”, causing widespread economic and financial uncertainty that is still unfolding. It slightly reduced its expectations for global growth this year and next, but slashed its forecast for Britain to 1.3% for 2017, from the 2.2% it had projected in April. The fund said the effects of Brexit would be felt mostly in Europe (it cut its estimate of German GDP growth next year to 1.2%) and that there would be a “relatively muted impact elsewhere”.

The Economist July 23rd 2016 founder, known in the industry as “the bond king”, left on acrimonious terms in 2014.

Assets parked in its Total Return Fund have fallen from almost $300 billion in April 2013 to $86 billion today.

The FBI charged HSBC’s global head of foreign-exchange cash trading with fraud in a currency-trading deal. The man was arrested at JFK airport in New York shortly before he was to take a flight to London. Several big banks paid fines last year in an unrelated investigation into the rigging of currency rates.

Disaster movie Netflix Net new subscribers, m

China’s economy grew by 6.7% in the second quarter, the same as in the previous three months and a healthier pace than many had expected given the country’s stockmarket crash and depreciation of the yuan. Investment in infrastructure has surged and personal consumption has been strong.

Strong ARM tactics SoftBank, a multinational telecoms company based in Japan, agreed to buy ARM, a British designer of smartphone chips, for £24 billion ($32 billion). ARM’s technology is licensed by Apple, Samsung and others and used in virtually all phones sold around the world. The firm is expanding rapidly into the “internet of things”. Masayoshi Son, SoftBank’s boss, announced the deal in London, where the government trumpeted it as proof that Britain was open for business following Brexit. It is the biggest-ever takeover of a European tech company.

Trying to draw a line under two years of upheaval, PIMCO, one the world’s largest bond funds, appointed Emmanuel “Manny” Roman as its chief executive. Mr Roman currently heads Man Group and is credited with turning round the hedge-fund group. PIMCO hopes he will do the same when he moves to its headquarters in Newport Beach, California. Bill Gross, its

United States

International 8 6

fees, which has put off subscribers; nearly all its new ones were outside the United States.

Its reliance on growth from its international base looks set to continue; early next year Netflix will stream episodes of the new Star Trek series within a day of their broadcast on CBS. Lockheed Martin’s F-35 fighter jet, the West’s most-expensive weapons programme, helped boost its revenue in the second quarter to $13 billion and profit to $1 billion. The company is still haggling with the Pentagon over its next jet contract, but sales have taken off in Britain, Israel and Turkey.

Monsanto rejected a second takeover bid, of $64 billion, from Bayer. It said it was open to “continued and constructive conversations”.

4 2 0 2013

14

15

16

Source: Company reports

Netflix’s share price fell sharply after it reported that subscriber growth had slowed appreciably in the second quarter. A net 1.7m customers joined the video-streaming service, half the number in the same quarter last year. In America Netflix has raised its

A civil lawsuit lodged in New York by three states alleged that Volkswagen’s chief executive, Matthias Müller, had been aware in 2006 that some of its cars did not meet emissions-testing standards. The suit does not say that Mr Müller authorised or even knew about the software that was installed in cars to evade the tests, but it is the first time he has been named directly in relation to the scandal. He

worked at Audi, VW’s luxury brand, at the time, and has denied any involvement in the wrongdoing.

Paul Romer was appointed chief economist at the World Bank, replacing Kaushik Basu, who has held the job since 2012. Mr Romer, who currently teaches at New York University, is known for his work in endogenous growth theory and for developing the notion of “charter cities”, encouraging poor countries to create urban centres that can experiment with economic and political reforms. Unusually for an academic, he is also an entrepreneur, having created (and sold) Aplia, a homework website.

Smooth operator Unilever offered a reported $1 billion to buy Dollar Shave Club, a startup that has undercut its rivals in the market for razors by selling its products exclusively online, appealing to hirsute hipsters with a humorous viral-marketing campaign. Private-equity firms were also interested in buying Dollar Shave Club, but Unilever’s bid beat them by a whisker.

Other economic data and news can be found on pages 68-69

The Economist July 23rd 2016 7

Leaders

Erdogan’s revenge Turkey’s president is destroying the democracy that Turks risked their lives to defend

M

UCH is unknown about the attempted military coup in Turkey on the night of July 15th. Why was it botched so badly? How far up the ranks did the conspiracy reach? Were the putschists old-style secularists, as their initial communiqué suggested; or were they followers of an exiled Islamist cleric, Fethullah Gulen, as the government claims?

But two things are clear. First, the people of Turkey showed great bravery in coming out onto the streets to confront the soldiers; hundreds died (see pages 14-15). Opposition parties, no matter how much they may despise President Recep Tayyip Erdogan, united to denounce the assault on democracy. Better the flawed, Islamist-tinged strongman than the return of the generals for the fifth time since the 1960s.

The second, more alarming conclusion is that Mr Erdogan is fast destroying the very democracy that the people defended with their lives. He has declared a state of emergency that will last at least three months. About 6,000 soldiers have been arrested; thousands more policemen, prosecutors and judges have been sacked or suspended. So have academics, teachers and civil servants, though there is little sign they had anything to do with the coup. Secularists, Kurds and other minorities feel intimidated by Mr Erdogan’s loyalists on the streets.

The purge is so deep and so wide—affecting at least 60,000 people—that some compare it to America’s disastrous deBaathification of Iraq. It goes far beyond the need to preserve the security of the state. Mr Erdogan conflates dissent with treachery; he is staging his own coup against Turkish pluralism. Unrestrained, he will lead his country to more conflict and chaos. And that, in turn, poses a serious danger to Turkey’s neighbours, to Europe and to the West.

One more earthquake The failed putsch may well become the third shock to Europe’s post-1989 order. Russia’s annexation of Crimea and invasion of eastern Ukraine in 2014 destroyed the idea that Europe’s borders were fixed and that the cold war was over. The Brexit referendum last month shattered the notion of ineluctable integration in the European Union. Now the coup attempt in Turkey, and the reaction to it, raise troubling questions about the reversibility of democracy within the Western world—which Turkey, though on its fringe, once seemed destined to join.

The turmoil is unsettling NATO, the military alliance that underpins Europe’s democracies. Without evidence, Mr Erdogan’s ministers blame America for the coup; they have demanded that it extradite Mr Gulen, who lives in Pennsylvania, or risk Turkey turning its back on the West. Electricity to the military base at Incirlik, a hub of American-led air operations against Islamic State (IS), was cut off for a time. Were Turkey an applicant today, it would struggle to qualify for NATO; yet the alliance has no means to expel a member that goes bad.

With the second-largest armed forces in NATO, Turkey has been the forward bastion of the West, first against Soviet totali-

tarianism and then against the chaos of the Middle East. In the early years of government under Mr Erdogan’s Justice and Development (AK) party, the country became the model of a prospering, stable Muslim democracy. It sought peace with the Kurdish minority, and the economy grew healthily thanks to sensible reforms. The EU opened membership negotiations with Turkey in 2005.

But since major protests in 2013 against plans to build over Gezi Park in Istanbul, and then a corruption scandal, Mr Erdogan has become ever more autocratic. His regime has jailed journalists, eviscerated the army and cowed the judiciary, all in the name of rooting out the “parallel state” Mr Erdogan claims the Gulenists have built. As a cheerleader for the overthrow of Syria’s president, Bashar al-Assad, he turned a blind eye to the passage of jihadists through Turkey. Mr Erdogan wants a new constitution to allow himself to become an executive president, though he hardly lacks power. He has abandoned all caution to achieve it, not least by letting peace talks with the Kurds break down. Turkey now faces a double insurgency: by the Kurds and the jihadists.

Autocrats R Us Handled more wisely, the failure of the coup might have been the dying kick of Turkey’s militarists. Mr Erdogan could have become the magnanimous unifier of a divided nation, unmuzzling the press, restarting peace talks with Kurds and building lasting, independent institutions. Instead he is falling into paranoid intolerance: more like the Arab despots he claims to despise than the democratic statesman he might have become.

Granted, the AK party has won every election since 2002.

But Mr Erdogan’s view of democracy is distinctly majoritarian: though only about half of Turks vote for him, he thinks he can do what he wants. It will be principally for Turks themselves to check their president, by peacefully resisting his power grabs and backing his opponents at the ballot box.

Turkey’s Western friends must urge Mr Erdogan to exercise restraint and respect the law. But what if he will not listen? Turkey is a vital ally in the war against IS. It controls the south-eastern approaches to Europe, and therefore the flow of everything from natural gas to Syrian refugees. Europe cannot change geography, but it can make itself less vulnerable, starting with a proper system to control the EU’s external frontiers and handle asylum-seekers. And although Mr Erdogan holds many cards, he is not immune from pressure. Just before the coup he patched up relations with Israel and Russia.

Mr Erdogan’s greatest success—the economy—has become his weak point. Many tourists are now too frightened to visit, so the current-account deficit will only gape wider. To stay afloat the country needs foreign investment and loans, so it must reassure foreigners that it is stable. With Mr Erdogan acting like a vengeful sultan, that will be hard.

The repercussions of the putsch will be felt for a long time.

The coup-makers killed many fellow Turks, discredited the army, weakened its ability to protect the frontier and fight terrorists, rattled NATO and removed the restraints on an autocratic president. A terrible toll for a night of power-lust. 7

8 Leaders

The Economist July 23rd 2016

Britain’s “industrial strategy”

Open for business?

The takeover of a British microchip-maker belies a cooling climate for foreign investors

T

HE “Silicon Fen” of tech firms on the outskirts of Stock, 2015, $trn Cambridge is less glamorous 0 2 4 6 than the California cluster after United States Hong Kong which it is nicknamed, but it has Britain nonetheless produced some China stars. The brightest of them is Germany ARM Holdings, whose microchips power cars, drones and most of the world’s smartphones. This week’s announcement that ARM would be bought by SoftBank, a Japanese tech giant, was hailed by Britain’s new government as evidence that the country is still “open for business” following last month’s decision to leave the European Union.

ARM’s sudden appeal to its Japanese suitor may owe something to the post-referendum slide of the pound, but the deal is welcome nonetheless. Foreign companies play a pivotal role in Britain’s unusually open economy, carrying out half of all research-and-development spending as well as raising productivity and wages in the firms they snap up (see page 22). Yet, despite the good news about ARM, two clouds hang over Britain’s ability to attract foreign direct investment. The new government appears to have a more interventionist approach to the economy, one that may put the brakes on similar deals in the future. And Brexit may eventually mean that there are fewer British firms worth bidding for in the first place.

Foreign direct investment

After Brexit, techxit?

In her pitch to be prime minister, Theresa May sounded decidedly sceptical of foreign takeovers, citing past bids by food and pharmaceuticals companies that she might have blocked. In office, she has set up a ministry of “industrial strategy”, a banned phrase during the Thatcher years (see page 21), and floated the idea of expanding the list of sectors in which for-

eign takeover bids can be subjected to a “public-interest test”.

(At present this is possible only for defence, financial services and media companies.) Mrs May seems keen to decide on a case-by-case basis whether a deal is in Britain’s national interest. That degree of meddling is not good. Foreign suitors will be less inclined to pursue British firms if they have to win over the prime minister, too.

The bigger worry is that the government’s main aim—withdrawal from the EU—will dry up the supply of firms in outward-facing industries such as technology. Britain’s hitherto borderless approach to capital and labour has helped to make it a European tech centre. By one count London has birthed three times as many startups as Paris in the past decade.

Brexit threatens this position. The loss of “passporting” rights, enabling firms based in Britain to provide financial services across the EU, would hamper fintech firms. Stricter migration rules would deprive startups of valuable foreign geeks (university dropouts such as a young Steve Jobs or Bill Gates wouldn’t make it through the points-based migration criteria that the government is proposing). And British universities, the route through which many techies first end up in Britain, are preparing to take fewer students from continental Europe.

The best “industrial strategy” would be to leave well alone.

Though the country is committed to Brexit in some form, it should go for a variety that preserves the broadest-possible access to European markets and puts the lightest-possible controls on migration. In all but the most sensitive industries it should let foreign companies make whatever offers they like for British firms. At the moment the government is edging in the opposite direction: tightening the tap for labour, backing out of Europe’s single market and developing a taste for tinkering with takeover deals. Britons may one day look back and think that worrying about foreign firms wanting to buy their successful companies was a nice problem to have. 7

The politics of Thailand

The generals who hide behind the throne Thailand is ill-prepared for the death of its king

T

O THE tourists who still flock to its beaches and golden temples, Thailand seems calm. But this is an illusion. Thai politics are as ugly as the country is beautiful—and could soon get uglier. The country’s beloved king, Bhumibol Adulyadej, whose 70th year on the throne was celebrated on June 9th, is 88 years old and gravely ill. The country is scared of what might happen when he dies (see page 37).

Were Thailand a normal democracy with a constitutional monarchy, the death of a king would cause national sorrow

but not political instability. Alas, it is not. Two years ago the army seized power in a bloodless coup. An “interim” constitution grants the prime minister and junta leader, Prayuth Chanocha, almost unlimited power. Because the regime is illegitimate, it hides behind Thailand’s most revered institution.

Its propagandists do all they can to fizz up adulation of the monarchy; for example, by building colossal statues of seven Thai kings. And the regime has applied Thailand’s strict lèsemajesté laws with ferocity, arresting people for the slightest perceived insult to the dignity of the king, his family or even his pet dog. Those deemed to have defamed his majesty face up to 30 years in prison. This creates an atmosphere in which critics of the government, too, can be bludgeoned into silence. 1

The Economist July 23rd 2016 2

Leaders 9

Whereas Mr Prayuth rambles self-righteously on his weekly television show, opposition parties are gagged and parliament stuffed with the junta’s allies. The regime has hauled critics to army bases for “attitude adjustment”. It has charged Thailand’s former prime minister, Yingluck Shinawatra, with neglect-in-office, and may hand her ten years in jail. The army’s latest ploy is a new constitution, which would allow fresh elections but keep the next government subservient to a nominated senate and a handful of junta-stacked committees.

It hopes to win public approval for this plan in a referendum on August 7th. Just to make sure, it has trained bureaucrats to “explain” the charter to voters, but it forbids civilians from campaigning against it, on pain of a ten-year prison sentence.

The generals insist that their actions have been for the good of Thailand. Their coup in 2014 ended months of pro- and antigovernment street protests, which had turned violent. Locking out Ms Yingluck, they hint, keeps a dodgy family out of power.

Ms Yingluck backed an amnesty bill that could have allowed her brother, Thaksin, another former prime minister, to return from exile in Dubai. The army had deposed him in 2006, arguing that his administration was corrupt.

Indeed it was, but probably no more so than most Thai governments. The army’s excuses for seizing power are wearing thin. Thailand has seen a dozen successful coups since the 1930s and a new constitution on average every four years. The army typically installs conservative governments that favour the urban elite. That has entrenched inequality and infuriated the rural poor. Mr Thaksin won two elections by wooing poor voters with free public health care and subsidies for farmers.

He may have left the scene, but his supporters are still there.

The army has long defended its coups by claiming to have the king’s support. After taking power, coup-leaders have al-

ways trekked to the palace to receive royal assent. But if King Bhumibol is succeeded by the crown prince, who is unpopular, the claim ofroyal approval will count for less. Elites fret that the succession will disrupt long lines of patronage which for generations have shovelled wealth and influence their way.

They fear that anti-government activists will seize the chance to push for big changes in how the country is run.

Little time, much to do With luck, the succession will pass peacefully. But securing long-term stability will require reforms that the army may not like. Royals should speak out against the lèse-majesté law (which King Bhumibol has already once condemned, in 2005).

The generals must allow Thais the freedom to debate the new constitution. A better one would be more like the 1997 charter, so far Thailand’s best. If and when the soldiers return to barracks, they will need pruning: their idle ranks include more generals and admirals than America’s armed forces, which serve a superpower nearly five times as populous.

Politicians must rethink, too. Thailand’s middle classes may find Thaksinite populism abhorrent, but they have failed to provide poorer Thais with an alternative. The Democrat Party, the establishment’s main political outfit, has been squealing about the generals’ stifling rule. But for years it has put off the groundwork needed to win an election, betting instead that friends in the army or judiciary will help it. Any lasting solution will require decentralising power to the provinces.

Untangling this mess will take years, but it is not impossible. If the junta blocks reform, allies such as America should impose financial sanctions and travel bans on its leaders and their cronies. Thailand needs a civilian government that is accountable to voters and the law, not to the men with guns. 7

Methane leaks

Tunnel vision Even natural gas needs to clean up its act

C

ARBON DIOXIDE is the main greenhouse gas emitBy source, 2014 ted by human activities. But it is Natural gas Livestock not the only gas capable of caus33 digestion 22 ing great harm to people and the % planet. That point was driven Landfill Other 20 home by the emissions scandal 25 that engulfed Volkswagen last year. Since the 1990s policymakers in Europe had backed diesel as a way to reduce carbon emissions, turning a blind eye to other ways in which the fuel might damage human health. The VW affair drew back the veil on this trade-off. The company’s diesel engines did indeed deliver lower carbon emissions and better fuel economy, but at the cost of belching out noxious pollutants capable of shortening many lives.

A similar case of tunnel vision also exists in the energy industry. To its evangelists, natural gas helps satisfy demand for fossil fuels but causes less harm to the planet than coal and oil.

Like diesel carmakers, natural-gas producers make reduction of carbon-dioxide emissions a big selling-point, but downplay the effects of other gases they emit. For the car industry, the problem is nitrogen oxides. For natural gas, it is methane, the US methane emissions

fuel’s main component.

Burning natural gas converts methane into carbon dioxide, but in lower quantities than in alternative fuels. It emits almost half as much carbon dioxide as coal, and almost a third less than petrol. The problem is that lots of methane escapes into the atmosphere without being burnt. And methane has its own effect on the climate. Although it stays in the atmosphere for far less time than carbon dioxide, which hangs around for centuries, it is about 25 times more potent as a cause of global warming (see page 47).

Methane emissions come from several sources—not least the digestive systems of livestock such as cows. But the latest figures show that the biggest chunk of annual methane emissions in America, around a third, can be traced to the naturalgas industry. An estimated 2.5% of the natural gas flowing through America’s ageing energy infrastructure leaks out of wells, pipelines and storage tanks. Often it seeps discreetly into the air. Sometimes it leaves a more noticeable footprint—a 2015 blowout at the Aliso Canyon storage facility in Los Angeles produced the worst leak in American history.

Recognition of the problem is growing. This year America’s Environmental Protection Agency (EPA) admitted that it had 1

10 Leaders

The Economist July 23rd 2016

2 underestimated the extent of oil- and gas-related leakages, re-

vising them up by almost a third and ramping up regulation.

Recent use of infra-red cameras and airborne monitoring devices has shown where the worst problems lie in the naturalgas supply chain. Last month Mexico joined America and Canada in their commitment to cut methane emissions from oil and gas operations by 40-45% by 2025, compared with 2012.

The industry has been slower to acknowledge the problem.

American oil companies are reluctant to provide the public with emission-reduction targets. They chafe against new EPA regulations, such as those requiring them to monitor leaks at compressor stations twice as often as in the past. Controlling methane leaks should not be that expensive; the less gas that escapes, the more the industry has to sell, after all. But the head of the Railroad Commission of Texas, which regulates oil in the state, calls them part of Barack Obama’s “war against fossil fuels” and too costly for small producers to comply with.

If even American oilmen are so dismissive of the problem, it is hard to be hopeful for other places, like Russia, which have even creakier natural-gas networks. Few countries monitor methane emissions with the precision that they do carbon dioxide. Many developing countries have not reported energyrelated methane emissions for at least a decade, so it is impossible to know whether conditions are getting better or worse.

Without good data, it is hard to set targets for reduction.

Methane bane Natural-gas advocates have decent reason to hope the fuel will be a bridge to a post-carbon future. Thanks to the shale-gas revolution, natural gas last year rivalled coal as the main source of electricity in America. That brings immediate climate benefits.

But the problem of methane leaks should not be downplayed.

They do not just sully the climate. They sully the good name of natural gas. 7

Big economic ideas

Breakthroughs and brickbats What economists can learn from the discipline’s seminal papers

I

T IS easy enough to criticise economists: too superior, too blinkered, too often wrong. Paul Samuelson, one of the discipline’s great figures, once lampooned stockmarkets for predicting nine out of the last five recessions. Economists, in contrast, barely ever see downturns coming. They failed to predict the 2007-08 financial crisis.

Yet this is not the best test of success. Much as doctors understand diseases but cannot predict when you will fall ill, economists’ fundamental mission is not to forecast recessions but to explain how the world works. Over the next six weeks we will be running a series of briefs on important economic theories that did just that—from the Nash equilibrium, a cornerstone of game theory, to the Mundell-Fleming trilemma, which lays bare the trade-offs countries face in their management of capital flows, exchange rates and monetary policy; from the financial-instability hypothesis of Hyman Minsky to the insights of Samuelson and Wolfgang Stolper on trade and wages; from John Maynard Keynes’s thinking on the fiscal multiplier to George Akerlof’s work on information asymmetry, the topic of this week’s article (see page 52). These breakthroughs are adverts not just for the value of economics, but also for three other things: theory, maths and outsiders.

More than ever, economics today is an empirical discipline.

Thanks to the power of big data, economists can track consumer behaviour in real time or know almost precisely how much a good teacher is worth to the lifetime income of children. But theory remains vital. Many policy failures might have been avoided if theoretical insights had been properly applied. The trilemma was outlined in the 1960s, and the fiscal multiplier dates back to the 1930s; both illuminate the current struggles of the euro zone and the sometimes self-defeating pursuit of austerity. The Nash equilibrium describes an outcome in which everyone is doing as well as they can given the strategies of

others; it explains how countries compete with each other to cut tax rates in order to lure global capital.

Nor is the body of economic theory complete. Big gaps remain in the understanding of financial markets, for example, and on how best to regulate tech platforms like Facebook. The shortfalls are particularly glaring when it comes to modern macroeconomics. From “secular stagnation” to climate change, the discipline needs big thinkers as well as big data.

It also needs mathematics. Paul Romer, who is heading to the World Bank as its chief economist, has railed against “mathiness”, the habit of using algebra to disguise ideological positions. Economic papers are far too formulaic; models should be a means, not an end. But the symbols do matter. The job of economists is to impose mathematical rigour on intuitions about markets, economies and people. Maths was needed to formalise most of the ideas in our briefs.

Thinking far and wide In economics, as in other fields, a fresh eye can also make a big difference. John Nash was only 21 when he set out the concept that became known as the Nash equilibrium; Mr Akerlof had not long completed his PhD when he wrote “The Market for Lemons”, the paper that made his name. New ideas often meet resistance. Mr Akerlof’s paper was rejected by several journals, one on the ground that if it was correct, “economics would be different”. Recognition came slowly for many of our theories: Minsky stayed in relative obscurity until his death, gaining superstar status only once the financial crisis hit.

Economists still tend to look down on outsiders. Behavioural economics has broken down one silo by incorporating insights from psychology. More need to disappear: like anthropologists, economists should think more about how individuals’ decision-making relates to social mores; like physicists, they should study instability instead of assuming that economies naturally self-correct. This could make the maths trickier still. But not as hard as getting the profession to eschew its natural insularity. 7

12

The Economist July 23rd 2016

Letters Politics in Kurdistan It is true that the president of the Kurdistan region, Masoud Barzani, is in office beyond the mandate originally agreed to by all parties, but this is primarily because of a constitutional disagreement (“Dream on hold”, July 9th). Mr Barzani heads the Kurdistan Democratic Party and it wants popular elections to determine who should be president.

There is some background to this. In June 2005 Mr Barzani was elected president by the Kurdish parliament for the first time. A faction within the Patriotic Union of Kurdistan, which later formed a new party, Goran, demanded that the president should be directly elected by the people, which is what happened in 2009. Mr Barzani received 70% of the vote in a direct election.

Four years later, his mandate was extended for another two years by a majority vote in Kurdistan’s parliament.

Subsequently, political deadlock has developed, but your readers were not told why. The Kurdistan region had drafted and agreed on, but not issued or ratified, its constitution. Therefore its draft constitution is not in force. The draft envisaged a presidential, French-style system, under which the position of president would constitutionally be limited to two terms.

But in 2013, the very same faction that had previously demanded popular elections to elect the president came up with a new demand: the president should be elected by the parliament. Goran blocked the ratification of the constitution and has prevented the draft, previously the subject of an all-party agreement, from being sent to the public for ratification.

As such, Mr Barzani has remained president until the constitutional deadlock can be resolved. Given that the Kurdistan region is at war with Islamic State, providing the boots on the ground for the coalition effort, it is the view of many if not most in Kurdistan that the president, as commander-in-chief of the Pesh-

merga, is providing much needed stability.

SAFEEN DIZAYEE Spokesperson of the Kurdistan Regional Government Erbil Points make prizes The Economist argues that an immigration points system is wrong for Britain (“What’s the point?”, July 9th). Our current immigration system turns away deserving applicants while waving in anyone from the EU. A points system would treat all applicants fairly. In 2015, a big chunk of our net migration came from the EU, even though the EU has only 7% of the world’s population.

This imbalance arises because we reject vast numbers of deserving immigrants. If you’re an Australian, merely having a British spouse won’t get you in, and if you’re an Indian, a PhD and a job offer won’t help you. Even those who qualify for settlement are rejected on technicalities, since the application system is almost impossible to pass through without expensive legal help.

The question is not whether immigration is good or bad; it is whether we can improve our immigration policy. We cannot do so if we subscribe to the EU’s principle of freedom of movement.

NICOLAS GROFFMAN Head of International Harrison Clark Rickerbys Cheltenham, Gloucestershire Bagehot stated that in Britain, political upheavals “are as uncommon…as tornadoes” (June 25th). He may be surprised to learn that Britain experiences more tornadoes per square mile than anywhere else in the world.

DAVID HASSON Edinburgh Wage restraints Regarding executive pay (“Neither rigged nor fair”, June 25th) what harm would come from limiting the pay of chief executives to, say, 40 times that of the average worker? Do we honestly think there would be

a tragic exodus of managerial talent? Such limits would help restore workers’ faith in the economic system, which, as Joseph Stiglitz argued in “The Price of Inequality”, would increase productivity. A ratio linked to workers’ pay would also help bosses understand, and even increase, the pay of the rank and file.

PETER COLBY San Francisco Executive salary is a classic agency problem for which there is a simple regulatory fix.

Mandatory shareholding for chief executives would force their personal interests to align with the companies they head.

Require them to buy shares amounting to several times their total remuneration for the year and hold them for ten years. Those CEOs who really add value will have nothing to worry about. The others will lose their shirts.

SABESH SHIVASABESAN Pretoria, South Africa We are barraged by the left about the unconscionable salaries of chief executives.

The average pay of top athletes, pop stars and actors is higher, yet none of them contributes to the jobs, salaries, investment and returns to average investors the same way that a CEO does.

SCOTT PROCTOR Livonia, New York

produce a quite different result and it is important for the reader to be aware of this.”

DAVID SCOTT Loughborough, Leicestershire Active or passive? It depends on where you wish to place emphasis, on the actor (subject) or the one acted upon (object). An active verb can convey a powerful message.

The most perfect sentence ever written is “Jesus wept.” One subject and one active verb conveying intense emotion.

Now the case for the passive side. Isaiah’s mighty prophecy: “For unto us a child is born, unto us a son is given, and the government shall be upon his shoulder.” And what editor would dare touch this: “We hold these truths to be selfevident, that all men are created equal, that they are endowed by their creator with certain unalienable rights.”

The defence rests. Or the case has been made by the defence.

JIM RHODES Norfolk, Virginia Magic Middle Kingdom

Passive attack Johnson (July 2nd) is right that the passive voice is widely used in science. It gives the false impression of objectivity.

“The addition of X caused the mixture to ignite” sounds so much better than “When I added X to the mixture it blew up.” As an undergraduate I was marked down for writing in the first person. But a Nobel laureate speaking to the chemistry society told us, “It’s so important to write up experimental data in the first person, because it is you that has carried it out. Using the passive voice implies a level of objectivity that is simply untrue; someone else doing the same experiment may well

“Lord of the Jungle” (June 18th) dwelt on the negatives for Shanghai Disneyland. Instead, we should take the long view and dare to dream that now that the Cheesecake Factory and Disneyland have landed in China, can democracy be far behind?

W.L. CHANG Hong Kong 7 Letters are welcome and should be addressed to the Editor at The Economist, 25 St James’s Street, London sw1A 1hg E-mail: letters@economist.com More letters are available at: Economist.com/letters

Executive Focus

The Economist July 23rd 2016

13

14

Briefing Turmoil in Turkey

After the coup, the counter-coup

The Economist July 23rd 2016

Also in this section 15 The strongman runs out of friends

ANKARA, GAZIANTEP AND ISTANBUL

The failed putsch was the bloodiest Turkey has seen; the backlash is as worrying

T

HE brutality of the soldiers’ powergrab still horrifies many Turks. Each day brings fresh footage and stories of what took place during the long, bloody night between July 15th and 16th: one mobile-phone video shows a group of bystanders near the presidential palace in Ankara overwhelmed by the blast of an air strike; another captures a man diving to the ground between the tracks of a tank to avoid being crushed, rising to his feet, then falling again to save himself from another one; a third records soldiers shooting down unarmed protesters.

Stories are told of how the rebels kidnapped their commanders. The chief of general staff, General Hulusi Akar, was told by his aides to sign a declaration of martial law. When he refused, they tightened a belt around his neck, but he would not yield.

He survived the ordeal.

This was hardly the first time that Turkish soldiers had tried to seize power.

Forged in military revolt, modern Turkey has seen the generals topple four governments since the 1960s, sometimes ruling directly, sometimes indirectly (see chart on next page). Even when civilians have been in charge, the army has lurked in the background as the self-appointed guardian of secularism against Islamists and other radicals. The latest putsch was the bloodiest

yet: more than 230 people died, among them 145 civilians who had taken to the streets to confront the rebellious soldiers.

The government’s backlash has been harsh, too. “This uprising is a gift from God to us because this will be a reason to cleanse our army,” declared Recep Tayyip Erdogan, Turkey’s Islamist-tinted president, a few hours after he triumphantly returned to Istanbul to reclaim the country.

He proved as good as his word. On July 20th the government declared a state of emergency for at least three months.

Roughly 6,000 servicemen have been arrested, among them about 100 generals and admirals. Nearly 8,000 policemen have been sacked; almost 3,000 judges and prosecutors have been suspended or detained. University academics, teachers and civil servants—including some 250 from the prime minister’s office—have been pushed out.

Altogether more than 60,000 people have been purged for suspected links to Fethullah Gulen, a Muslim cleric exiled in America. His movement emphasises education; but his devotees are accused of infiltrating the government and fomenting the coup. Mr Gulen was for years an ally of Mr Erdogan, never more so than when Gulenist prosecutors were busy purging the military “deep state” on charges of foment-

ing a putsch. But when they started digging into corruption in Mr Erdogan’s entourage, the Gulenists were treated as a “parallel state” to be extirpated. The defeat of the latest coup seems to have opened the way for Mr Erdogan’s counter-coup.

Mehmet Simsek, the deputy prime minister, declares reassuringly: “Some of these measures might seem like a wholesale purge, but they are aimed at minimising the aftershocks after the earthquake.”

Turkey’s Western allies are pleading for restraint (see next story).

The identity of the plotters, and their motives, remain murky. They had impressive resources at their disposal: F-16 fighterjets, aerial refuelling tankers, helicopter gunships and transporters, and tanks.

Units took over parts of Istanbul and Ankara, but commandos missed capturing Mr Erdogan at an Aegean resort by less than an hour. The rebels bombed the police and intelligence-service headquarters in Ankara, but did not knock them out.

Face time with Erdogan Crucially, an air strike on the Turksat satellite broadcast station in Ankara failed to put it out of service. This meant that, even though the coup-makers took over the state broadcaster, private television networks continued to operate freely. The 1

The Economist July 23rd 2016

Briefing Turmoil in Turkey 15

2 turning-point came when Mr Erdogan,

hitherto a critic of internet activism, called a television station with his phone’s video app to urge followers to take to the streets.

As crowds surrounded pockets of rebel soldiers, the coup began to collapse. One Turkish ex-officer said it was madness to stage a coup at ten in the evening when the streets were still crowded. “Coups have to be carried out when everyone is asleep, so they wake up and it’s all over.”

So badly was the coup botched, and so well has it played into Mr Erdogan’s hands, that many of his opponents now think it was choreographed by the government all along. A more likely explanation is that it was a desperate, almost suicidal attempt to preclude an expected wave of arrests and demotions in the army this summer. Officials in Ankara acknowledge they had a list of officers suspected of plotting the coup but failed to nip it in the bud. “The network had been mapped as part of an investigation that, to be frank, did not consider an actual coup very likely,” says one.

Turks’ sacrifice in defence of their institutions—not just supporters of the ruling Justice and Development (AK) party but also of the opposition—offered Mr Erdogan a perfect opportunity to heal a country beset by growing terrorist violence and political divisions over his autocratic manner.

The entire parliamentary opposition and what was left of the free media, which Mr Erdogan despises, denounced the plotters.

“There was some level of dialogue, a level of solidarity we have not seen in years, something that could have been built on,” says Nigar Goksel of the International Crisis Group, a think-tank. Instead Mr Erdogan has squandered the opportunity, preferring to expunge his enemies, real or imagined, and extend his power.

Every night, crowds of distinctly Islamic flavour gather in town squares to hold vigils and deter any other would-be putschists. In the southern city of Gaziantep, where during the coup the governor blockaded the local army base with lorries and other vehicles, loudspeakers broadcast music reflecting the lurches of Turkey’s modern history: the drumbeat of Ottoman-era Janissaries, the national anthem of the ardently secular Kemalists and Islamic mantras set to techno beats. “Yallah.

Bismillah. Allahu akbar,” intones the crowd. Many give the four-finger salute first used by Islamists in Egypt after the army overthrew their elected president.

Crowds hold up effigies of Mr Gulen.

One banner in Taksim Square in Istanbul called him “Satan’s dog”, proclaiming: “We will hang you and your dogs with your own leashes.” Mr Erdogan says he may indeed reinstate the death penalty. He has resurrected a project to build a mosque in Istanbul’s Taksim Square and convert a nearby park into a replica of an Ottoman barracks—a plan that sparked mass prot-

Turkey’s tumult

Erdogan elected president

GDP per person

Recep Tayyip Erdogan becomes prime minister

% change on previous year

CIVILIAN GOV’T

MILITARY RULE

Turkey denies use of territory for US invasion of Iraq

US-led coalition against Iraq launches air strikes from Turkish bases

12

AK party wins general elections

8 4 +

0 –

4 8 1950

55

Coup “Soft” coup Failed coup

60

65

70

75

80

85

90

95

2000

05

10

16

Turkey applies for full membership of the EEC EU membership Turkey enters EU customs union negotiations launched EU agrees on a deal with Turkey to restrict flow of refugees into Europe

Sources: The Conference Board; United Nations; press reports; The Economist

ests, violently suppressed, in 2013.

The longer Mr Erdogan whips up his alliance of Islamists and nationalists the greater the danger of ethnic and sectarian violence—including against secularists, liberals, Alevis and Kurds. In the south-eastern city of Diyarbakir, a Kurdish stronghold, activists are bracing for a round-up.

“I’m waiting for the knock on the door,” says one Kurdish journalist after AK activists blacklisted her on social media.

Another concern is that Turkey’s security forces are being dangerously hollowed out by the purges at a time when they are confronted by the twin menaces of Kurdish and jihadist attacks. “We would not have such losses to the officer corps if we had fought a conventional war for eight years,” says Haldun Solmazturk, a former brigadier-general.

As with previous challenges to his rule, the coup attempt has left Mr Erdogan stronger, or at least more autocratic. For years, he suspected an unholy alliance of foreign and domestic foes of conspiring to topple him. Now that he has survived a real coup, Mr Erdogan may give free rein to his authoritarian instincts and seek new executive powers.

How far will he go? Some are not sticking around to find out. The day after the coup attempt, a newly wed couple swept incongruously into a restaurant near Taksim Square, alarmed and elated in equal measure. They had decided to go ahead with their wedding despite the previous night’s gunfire, explosions and roar of fighter jets. But they were fed up: in a few days they would be leaving for Germany.

They were not expecting to come back. 7

Turkey and the world

Running out of friends BRUSSELS, CAIRO AND ISTANBUL

Recep Tayyip Erdogan drifts away from America, NATO and the EU

O

VER the decades Turkey’s relations with America, its principal military ally, have withstood coups, skirmishes with Greece (a fellow NATO ally) and the invasion of Cyprus in 1974. Of late, however, the friendship has grown testier, particularly over the civil war in Syria and the American-led campaign against Islamic State (IS). With the failed coup, ties are close to openly hostile.

One Turkish minister, Suleyman Soylu, claimed (with no evidence) that America was behind the putsch. Pro-government media teemed with conspiracy theories. In Yeni Safak, a daily newspaper, Aydin Unal,

an MP from President Recep Tayyip Erdogan’s Justice and Development (AK) party, even suggested that American army officers disguised as Turkish ones had taken part in the fighting. For a time the government cut off electricity to Incirlik air base, from which America conducts air raids against IS. Some of the planes that took part in the failed coup were said to have been stationed there; the Turkish commander of the base was arrested.

A more contentious issue is the presence in America of Fethullah Gulen, the head of an Islamist movement that was once allied with Mr Erdogan but has be- 1

16 Briefing Turmoil in Turkey

The Economist July 23rd 2016

2 come his nemesis. Turkey wants Mr Gulen

extradited (he denies involvement in the coup, and denounces it). If America insists on evidence to satisfy its courts—beyond a four-volume dossier provided by Turkey— “even questioning our friendship may be brought to the agenda here,” warned Binali Yildirim, the prime minister.

The reaction from America has been just as blunt: it is Turkey that is endangering ties with America and the West. “Public insinuations or claims about any role by the United States in the failed coup attempt are utterly false and harmful to our bilateral relations,” said John Kerry, America’s secretary of state. In other remarks, he warned Mr Erdogan against using the coup as an excuse to clamp down on his opponents. A wide-ranging purge, he said, “would be a great challenge to his relationship to Europe, to NATO and to all of us.”

Were Turkey applying for NATO membership today, it would have little chance of success. Under the terms of NATO’s “membership action plan”, applicants are required “to have stable democratic systems, pursue the peaceful settlement of territorial and ethnic disputes, have good relations with their neighbours, show commitment to the rule of law and human rights, establish democratic and civilian control of their armed forces, and have a market economy.” As things stand, Turkey only ticks the last box. The Washington treaty, which established NATO in 1949, allows for a member to leave after giving 12 months’ notice, but there is no provision for expelling one.

America’s defence secretary, Ash Carter, makes no secret of his distaste for Mr Erdogan. He was infuriated by Turkey’s refusal to allow American aircraft to strike IS from Incirlik until this time last year. If the base again becomes a bargaining chip, calls from Congress to abandon it for another one elsewhere will grow louder.

In recent months tensions have run high over America’s de facto alliance with the Syrian Kurdish militia known as the People’s Protection Units (YPG). It is regarded by America as the most effective ground force against IS in Syria; but it is seen by Turkey as closely related, if not identical, to the Kurdistan Workers’ Party (PKK), which has resumed its decades-long insurgency for autonomy inside Turkey.

Several American pundits ask whether Turkey is still a reliable ally. Among their reasons for doubting it are Mr Erdogan’s disregard for democratic liberties, his selfharming Syria policy and his penchant for stirring up the AK party’s religious base with crude anti-American rhetoric.

Turkey’s relations with the EU, by far its largest trading partner, have been no less fraught. In March, in exchange for Turkish efforts to reduce the flow of refugees and other migrants to Greece, the EU made several promises. It agreed to revive Turkey’s

Lost in interpretation stalled accession bid, accelerate the abolition of short-term visas for Turkish tourists and businessmen, and fund Turkish efforts to support refugees. The deal was heavily criticised, in part because it relied on the EU designating Turkey a “safe country” for refugees. Now its first two elements, at least, may be in jeopardy.

Mr Erdogan would be wise not to create more enemies than he already has. For this reason, some EU officials believe he will honour the migrant deal. Moreover, Mr Erdogan no longer enjoys the leverage he did last autumn, when thousands of refugees were crossing from Turkey to Greece every day. The western Balkan route that most migrants followed on their way to Europe’s heart is now closed, and word has spread quickly. Even with the full co-operation of the Turkish gendarmerie and coastguard, migrants would have little reason to try their luck in Greece, for they could not easi-

Big ally, big problem Military personnel Selected NATO countries, 2015, m

0 United States

0.1 0.2 0.3 0.4 0.5 1.3 41 54

Turkey France

32

Italy

30

Germany

22

Britain

25

Greece

97

Poland

27

Canada

18

Netherlands

24

Belgium Denmark Source: NATO

Per 10,000 population

27 28

ly go farther.

Under the terms of the deal most arrivals in Greece were supposed to be returned to Turkey to have their asylum claims processed. But asylum adjudicators in Greece often refuse to send migrants back. The unfolding chaos in Turkey presents them with a fresh argument not to deport anyone.

The groaning camps on Greek islands hold around 9,000 asylum-seekers, and are swelling daily.

Moreover, Turkey may be less willing to accept returns if it does not win visa-free access to the EU’s Schengen passport-free zone. European officials had hoped for a breakthrough in the autumn, but European governments (and the European Parliament) that must sign off on the visa deal will be less minded to overlook Mr Erdogan’s excesses.

The accession process, which has never been easy, is also on the rocks. At a summit this week EU foreign ministers declared firmly that Mr Erdogan’s threatened reintroduction of the death penalty would kill Turkey’s candidacy. Germany, the most important advocate of the migrant pact, was particularly tough. A spokesman for Angela Merkel, the chancellor, condemned the “revolting scenes of caprice and revenge” against Turkish soldiers; Mr Erdogan’s subsequent purges of judges raised “profound and worrisome questions”.

The challenge for Europe is to find a way to argue that Mr Erdogan remains a credible partner in managing migration without tempering its criticism of his growing authoritarianism. Some worry that the next wave of asylum-seekers to Europe will be Turkish citizens.

The upheaval in Turkey matters to the Arab world, where Mr Erdogan has played an influential role. Mainstream Syrian rebel groups, squeezed around Aleppo, fear abandonment by Turkey. Newspapers in Egypt—a country run by Abdel-Fattah alSisi, a general who seized power in a coup and has been bitterly at odds with Mr Erdogan over his support for the Muslim Brotherhood—ran hopeful headlines announcing that the Turkish president had been overthrown. With no hint of irony, they now denounce his crackdown.

Can allies persuade Mr Erdogan to change course? Intriguingly, just before the coup attempt he acted to end two diplomatic rows. In June he struck a deal with Israel to normalise relations, which had broken down in 2010 after Israeli forces killed nine Turkish citizens trying to breach a naval blockade of Gaza. Mr Erdogan also apologised to Russia for shooting down a Russian fighter jet in November when it briefly entered Turkish airspace (hence the nervousness of Syrian rebels). But neither Israel nor Russia can substitute for Turkey’s military ties with America, or its economic ones with Europe. Whether Mr Erdogan realises that is another matter. 7

The Economist July 23rd 2016 17

Europe

Also in this section 18 Russia’s Olympian drug habit 19 Italy’s upstart party 20 Charlemagne: National parliaments and the EU

For daily analysis and debate on Europe, visit Economist.com/europe

Another attack in France

Madness and terror NICE

When a truck is a weapon of mass murder

T

HE spots where the bodies fell are now marked by makeshift memorials along the palm-fringed beachfront. Some are ringed by pebbles. Most feature candles, stems of white flowers and teddy bears.

Ten children were among the 84 killed on July 14th, when a 31-year-old Tunisian citizen ploughed a 19-tonne truck into Bastille Day crowds. A football lies among the mementos left where a 13-year-old French boy, Mehdi, was killed. His aunt died a step away. “I just hope this won’t be turned against us,” says a grieving family member, whose origins are in Morocco. “We grew up in France; we come from here too.”

This was the third mass terrorist attack in 18 months, and the bloodiest on French soil since the Paris attacks last November.

The proudest emblems of French life have been targeted: freedom of expression (Charlie Hebdo) and religion (a Jewish supermarket), as well as the security forces, in January 2015; sport, music and pavement cafés, in November 2015. Now, terror has struck seaside festivities for the country’s national day at one of its most famous resorts, favoured by Hemingway and Fitzgerald, and painted by Matisse and Dufy.

Mohamed Lahouaiej Bouhlel, a delivery-driver born in Tunisia but living in Nice, drove his rented lorry for 1.7 kilometres (1.1 miles) over a promenade closed off for the city’s annual fireworks display, where some 30,000 spectators had gath-

ered. He rammed the vehicle into the crowds, driving on and off the walkway used daily by joggers and cyclists, crushing bodies as he went. The carnage stopped only after he was shot dead by the police. A third of the dead were Muslims.

President François Hollande immediately called the attack “terrorist” in nature.

Mr Lahouaiej Bouhlel’s rampage, though, is a reminder of how the definition of Islamist terror has evolved. He showed a “certain interest” in radical Islamist movements, said François Molins, the Paris public prosecutor, and videos of decapitation were found on his computer. Islamic State (IS) claimed he was one of its “soldiers”.

But Mr Lahouaiej Bouhlel also ate pork, did not go to the mosque, and had an “unbridled sex life”, said Mr Molins. No direct evidence of his allegiance to IS has yet been found.

Those who study radicalisation in France say that this profile is not uncommon. Deep religiosity rarely plays a part in the swing towards political jihad. Nor does IS need to issue direct orders. It “inspires this terrorist spirit”, said Jean-Yves Le Drian, the defence minister. In 2014 Abou Mohammed Al-Adnani, an IS spokesman, urged jihadists not to worry if they could not blow themselves up or shoot a gun: smash the skull of a “French or American infidel” with a stone, stab him with a knife, or “run him over with a car”.

It is not unusual for radicalisation to take place quickly, particularly among the violent or unstable. A loner, unknown to intelligence services, Mr Lahouaiej Bouhlel was given a suspended prison sentence earlier this year for violence. He grew a “religious” beard just eight days before the attack, said Mr Molins. “This is not an anomaly,” says Hugo Micheron, a researcher on French jihadists: “There are different routes into jihadism today, and I’ve seen several cases of radicalisation taking place within a couple of weeks.”

Nice may be best known as a swish tourist destination. But behind the old town’s Belle-Epoque façade, the high-rise neighbourhoods that spread up the ravines beyond the city have become one of the most intractable centres of Islamist radicalism outside the Paris region. At least 55 residents of Nice and other towns in the department of Alpes-Maritimes, which covers the Côte d’Azur, have left for jihad in Syria or Iraq, including 11 members of one family. In part this is the work of a vigorous local French recruiter, known as Omar Omsen, or Omar Diaby. He was thought to have been killed in Syria last year, but seems to have faked his own death.

Côte de jihad A local early-warning unit set up by AlpesMaritimes in 2014 to counter radicalisation has so far received 600 alerts. Fully 37 individuals from the department have been expelled from France, and 15 others prevented from leaving the country. Five underground prayer houses suspected of preaching violent Islamism have been closed down. Moderate Muslim leaders fear that the latest attack will deepen distrust. A striking 36% of Nice voters backed the far-right National Front at the most recent elections. “The Muslim community is 1

18 Europe 2 doubly attacked,” says Boubekeur Bekri,

rector of the Al-Forqane mosque, which lies near the brutalist tower blocks of Ariane, a banlieue of Nice: “By Daesh [IS]—and by those who are playing Daesh’s game by dividing Muslims.”

The Nice attacks are sorely testing France’s ability to withstand a permanent terrorist threat. Manuel Valls, the prime minister, has told the French to “live with terrorism”. Mr Hollande announced fresh air strikes on Syria. Parliament has voted to extend the state of emergency, conceived last November as a temporary response, for a further six months. Yet such measures may be more about managing public anxiety than fighting terrorism. Hours before the Nice attack, Mr Hollande had announced that he would not renew the state of emergency. Of nearly 3,600 house raids carried out under its provisions, only five have led to a terrorism-linked judicial investigation.

Last year, the French reacted to terror mostly with defiance and unity. In Novem-

The Economist July 23rd 2016 ber parliamentarians of all political colours spontaneously sang the national anthem after Mr Hollande’s speech announcing a “war on jihadist terrorism”.

Today, however, there is increasing French anger at the failure of their government to keep people safe. After a minute’s silence this week, Mr Valls was booed by crowds in Nice. Only 33% told a poll they have confidence in the government’s counter-terrorism strategy.

Opposition politicians on the centreright have turned on the government too.

“If all measures had been taken, this drama would not have happened,” claimed Alain Juppé, a former prime minister and presidential hopeful for the 2017 election. Arguably there could be more robust blockades around crowded public events, Israelistyle. But France is already on maximum alert, and has stretched its armed forces by putting 10,000 soldiers on patrol on the streets. The cruel reality is that if terrorists can turn lorries into weapons, it is impossible to keep everyone safe. 7

Russia’s Olympian drug habit

Tamper proof MOSCOW

An investigation gives Moscow a gold medal for cheating

W

HEN Grigory Rodchenkov, the erstwhile director of Russia’s anti-doping lab, confessed that he had helped run a state-directed doping programme during the 2014 Sochi Winter Olympics, his story sounded fanciful. He said he had served athletes steroid-spiked cocktails mixed with cognac and vermouth, while Russia’s secret police, the Federal Security Service (FSB), had cracked the supposedly foolproof urine-sample bottles used in international competition. The sports ministry, Mr Rodchenkov claimed, fed lab officials lists of athletes to be protected; their druglaced samples were swapped for clean ones through a hole in the wall of the Sochi testing facility.

The World Anti-Doping Agency (WADA) dispatched a team to investigate.

This week, the results came back positive: Mr Rodchenkov’s story was true. The report, the latest in a string of WADA investigations of Russian sport, details a co-ordinated government-run doping effort. Since 2011 the Moscow anti-doping laboratory, in concert with the sports ministry, had used a technique called “the disappearing positive” to cover up for dirty athletes; the FSB helped cook up a more sophisticated sample-swapping plan for the Sochi games.

The cheating touched at least 30 sports, tainting Russia’s triumphant haul of 33

medals in Sochi and calling into question the results of the 2013 track and field World Championships and the 2013 World University Games, both held in Russia. Richard McLaren, a Canadian lawyer who led the inquiry, says his initial scepticism of Mr Rodchenkov’s claims proved unwarranted: “Now I know it did happen.”

Taking the piss

The evidence leaves no doubt. Investigators found signs of tampering on preserved samples from Russian athletes in Sochi. One man accredited as a “sewer engineer” at the Sochi games turned out to be a Russian intelligence officer, Evgeny Blokhin, who helped Mr Rodchenkov swap out the samples. In emails, Russian sports officials referred to Mr Rodchenkov’s cocktail by the nickname “the Duchess”. The report refutes Russian claims that doping was the fault of a few bad apples. Senior Russian sports officials, including a deputy minister and an anti-doping adviser, played key roles in managing the cover-up, dictating which athletes should be protected.

The International Olympic Committee (IOC) called the Russian programme a “shocking and unprecedented attack on the integrity of sport”. Russia’s track and field federation has already been banned from the Olympic Games in Rio de Janeiro, due to start on August 5th. As The Economist went to press, the IOC was meeting to decide whether to bar the rest of the Russian team too. The committee said it would balance the need to punish Russia against the right to compete of individual athletes who might not have used drugs.

Hoping to salvage his country’s chances, Vladimir Putin promised to suspend the officials named in the report. Yet rather than apologising, he called the allegations part of an American-led conspiracy to “make sport an instrument for geopolitical pressure”.

And he promised to stand by his embattled minister of sport, Vitaly Mutko, a longtime ally stretching back to their days together in St Petersburg’s city hall. The Olympic movement, he warned, “could find itself on the brink of division”. If so, it is hard to imagine who will side with a country that drugged its athletes and lied about it. Unlike bottles of tainted urine, this scandal cannot be made to disappear. 7

The Economist July 23rd 2016

Europe 19 al law passed on Mr Renzi’s watch, Italy now has a two-round system not just at local, but at national level. The prime minister is focused on winning a referendum this autumn to alter the constitution so that the next government has a free hand for its entire term. If he loses, he says he will resign, pitching Italy into a government crisis. But for his party an even greater danger is that he could win the referendum—and then lose to M5S in the next election.

Italy’s upstart party

The Five Star question TURIN

The new party has a clear path to victory, but fuzzy notions of what to do if it wins

R

OSARIO SCAVO remembers when 80% ofthe inhabitants ofBorgo Vittoria worked directly or indirectly for the Fiat car company. “It was a city within the city,” he says of the firm, to which he gave 33 years of his life. In those days, it went without saying that this working-class district of Turin, where the gleaming Alps are obscured by dismal apartment blocks, voted for the left. Once it was the Socialists or Communists, more recently the Democratic Party (PD) of Prime Minister Matteo Renzi.

Much of Fiat’s production has since left Italy for cheaper locations. Today, Borgo Vittoria is a lifeless place. A jeweller’s shop bears the melancholy sign “I Buy Gold”.

(Not much though, says an assistant: “Those who wanted to sell have already sold.”) As for Mr Scavo, the energetic 62year-old has already been a pensioner for five years. He gives €300 a month to his university-educated daughter, who has been unable to find any job better than part-time health and social work.

Such grim economic prospects are one reason why, at local elections last month, the Torinese ended 23 years of centre-left government and chucked out their PD mayor, Piero Fassino. Mr Fassino had carried on his predecessors’ project of developing Turin as a tourism destination, but little of that money reached the city’s fringes. In the run-off election, most voters in Borgo Vittoria backed Mr Fassino’s rival, Chiara Appendino (pictured), of the upstart Five Star Movement (M5S). With M5S

riding high in the polls (see chart), the PD is growing worried that what happened in Turin could happen in the rest of Italy, too.

Ms Appendino is a 32-year-old graduate of Milan’s Bocconi University, the business school of the northern Italian bourgeoisie.

That makes her an odd champion for working-class frustration. But M5S, which was launched in 2009 as an internet-based political insurgency by Beppe Grillo, a comedian, has much to offer such voters. It demands a referendum on membership of the euro, which it blames for Italy’s economic ills. It promises a minimum income for all citizens, whether they work or not.

Its candidates hammer relentlessly on the theme of onestà (honesty), a powerful rallying cry in Italy’s dirty political culture.

And it has tried to engage disaffected voters by soliciting their ideas. Ms Appendino ran on a platform of16 planks developed in concert with open-access citizens’ groups.

But M5S’s biggest advantage is its ability to appeal to the right as well as the left. Ms Appendino beat Mr Fassino in Turin’s runoff by winning over the voters who had backed right-wing parties in the opening round. In the European Parliament, M5S’s deputies sit with those of the UK Independence Party and Germany’s anti-immigrant Alternativ für Deutschland. M5S’s Eurosceptic tendencies and Mr Grillo’s hostility to immigration appeal to many on the right.

This makes the party highly effective in two-round elections. Thanks to an elector-

Heads we win, tails we win the run-off M5S is woefully unprepared to govern. Its left- and right-wing impulses are in tension, but, says Marco Ricolfi, a social scientist at the University of Turin, the left-wing side predominates. Last year Mr Grillo tried to get his MPs to vote against decriminalising illegal immigration; he was thwarted by a grassroots mutiny. In Turin, the party is aligned with the sometimes violent resistance by environmentalists to a high-speed rail link through the Alps to France. Ms Appendino’s governing programme vows to promote veganism. The right-wing voters who back it as a protest may not like such policies if it wins.

Worse, the movement’s efforts to solicit citizen input, however laudable, have left its platform a hotchpotch of ingenuousness, cynicism and ambiguity. Its foreign policies are suffused with anti-Americanism. One of its leading members wants to involve leftist Latin American governments in Middle East peace talks. Another returned from Russia to declare that Vladimir Putin should be considered an ally and sanctions should be dropped, since they hurt Italy’s food and furniture exports. On economics, M5S’s main policy is to demand a referendum on the euro. This may be unconstitutional; in any case, M5S will not say whether it wants out or in.

Coherent or not, these policies are popular. An average of recent polls puts the movement less than a percentage point behind the PD. In a run-off between the two, polls find, M5S would win. Italy may well end up granting its government more power, only to elect a party that has no idea how to use it. 7

Star power Voting intention in Italian elections, % Two-week moving average of polls

40 Democratic Party 30

Five Star Movement Northern League

20 10

Forza Italia

0 JF M A M J J A S O N D J F M A M JJ

2015 Source: Press reports

2016

20 Europe

The Economist July 23rd 2016

Charlemagne Parliament plot Giving more voice to national legislatures will not enhance the EU’s legitimacy

I

N FOOTBALL two yellow cards are enough to get a player sent off. But in the European Union three may pass with nary a word. Under the EU’s “yellow card” system, if one-third of the union’s national parliaments think that a proposed law tampers with matters better handled nationally, they can force the European Commission to reconsider it. Before this year parliaments had issued two yellow cards, once against a law limiting workers’ right to strike and once against establishing an EU-wide prosecutor’s office. The commission rejected the card both times (though it withdrew the strike law for other reasons).

This week the commission made it a hat-trick. In March, ten central and eastern European countries (plus Denmark) yellowcarded a directive that would force firms that post employees to work in other EU countries to match local pay and conditions, rather than simply paying the minimum wage. The easterners said this undermined their ability to set wages themselves, and would kill jobs. But on July 20th Marianne Thyssen, the employment commissioner, said the directive would remain unchanged.

The easterners, already annoyed offwith the commission over its plans to redistribute refugees around the EU, are now fuming.

So are some who want a greater EU role for national parliaments. For in the aftermath of Brexit the EU is undergoing one of its periodic fits ofsoul-searching. Whatever popular legitimacy is, the EU plainly lacks it. The European Parliament has utterly failed to capture the imagination of European voters. Turnout for its elections has steadily decreased even as it has accrued powers.

And it is far too cosy with the commission it supposedly holds to account. National parliaments are reckoned to have a greater feel for the weft and warp of citizens’ political preferences. Perhaps one remedy for Euro-blues is to hand them more influence.

David Cameron thought so. In the renegotiation of Britain’s EU status that preceded his doomed referendum, the former prime minister won agreement for a “red card” procedure under which groups of parliaments could block legislative proposals.

Research suggested the procedure would rarely, if ever, be used, and some analysts mused that vetoes were a rather blunt way of involving parliaments (under EU rules governments may already stop laws in their tracks). We will never know; Mr Cameron’s deal died with his premiership when Britain elected to leave the EU.

Does the raspberry the commission has blown at the latest yellow card suggest that the whole enterprise is pointless? Perhaps. But Ms Thyssen had no easy option. Several western European states, notably France, were hopping mad at the easterners for posting lower-paid workers to their countries, even though such employees represent just 0.7% of the EU labour force. These days such thinking holds sway in a commission fretful about the rise of anti-globalisation populists, like Marine Le Pen in France.

“We have to act according to the general interest of Europe,” says Pierre Moscovici, the (French) economics commissioner. “If you have total freedom for posted workers, you’re dead.”

In any case, the national parliaments have just won their biggest battle yet. Earlier this month the commission’s president, Jean-Claude Juncker, bowed to trade-wary governments and agreed to send a mooted EU-Canada deal to national parliaments for approval, even though lawyers had said ratification could be limited to the European Parliament. That could delay or even scupper the agreement. And it sets a precedent which could be bad news for TTIP, an EU-America deal that leftist MPs in countries like Germany and Austria have built careers opposing. A future Britain-EU agreement might face the same fate.

It is easy to romanticise national parliaments. But they also suffer from the distrust of political elites that is spreading across the democratic world. The Eurobarometer survey consistently finds that European citizens trust the EU more than their own parliaments (by 40% to 31%, in 2015). This helps explain Europe’s mania for referendums, which pose a greater threat to parliaments than anything the EU may do. One irony of the Brexit vote is that it was held to safeguard British parliamentary sovereignty, but the majority of MPs would have voted to remain in the EU. No doubt legislatures could do a better job of examining their governments’ EU positions. Many national MPs need a crash course in the procedures of the EU, and could start by paying more attention to what their party colleagues do in the European Parliament. The British House of Lords, perhaps surprisingly, is sometimes held up as a model of EU expertise and scrutiny. Nordic parliaments do a good job of telling their ministers what deals they are allowed to make in Brussels, though this does not seem to have made their voters any less Eurosceptical.

Make parliaments great again The real test comes when the EU interferes in matters that parliaments care about—euro-zone bail-outs, for example, which are funded from the national treasuries which parliaments oversee.

Each Bundestag vote on Greece is monitored closely across the EU; never before have so many non-Germans known so much about the views of deputies from Mecklenburg-Vorpommern. In 2011 all Europe held its breath as 150 Slovak MPs debated whether to support a euro-zone fund. As leaders negotiating late-night deals in Brussels well know, parliaments can insert themselves effectively into European debates when they care to.

The question is what this actually accomplishes for the EU. When the Bundestag demands tough bail-out terms for Greece, Germans may feel empowered—but Greeks feel trapped. Prescriptive agreements imposed on bailed-out countries do more to damage the EU’s legitimacy than any yellow cards can remedy. It is unclear why a Europe of feuding parliaments will be more popular or harmonious than the current one. Expect to hear more about the role of parliaments as the EU desperately seeks new sources of legitimacy. Do not expect it to help much. 7

The Economist July 23rd 2016 21

Britain

Also in this section 22 The pros and cons of foreign buy-outs 22 Pedestrianising Oxford Street 23 Bagehot: Britain’s place in a post-Brexit world

For daily analysis and debate on Britain, visit Economist.com/britain

The government’s “industrial strategy”

A change of gear

The new prime minister signals a more hands-on approach to business

I

F MAKING the gaffe-prone Boris Johnson foreign secretary was Theresa May’s most eyebrow-raising cabinet appointment, probably her most visible policy pronouncement since taking office on July 13th has been to signal the return of an “industrial strategy”.

Merely to mention the phrase in Conservative Party circles has amounted to heresy since the days when Margaret Thatcher was prime minister. She made it a test of ideological purity to reject the muddled state-interventionism of her predecessors, both Labour and Tory; there was to be no return to the disastrous meddling in, or nationalisation of, companies like British Leyland under the Iron Lady. Yet Mrs May has broken the taboo. She made a “proper industrial strategy” part of her pitch to be party leader in a speech in Birmingham on July 11th. And now in Downing Street she has created a new ministry with the phrase at the top of the bill: the Department for Business, Energy and Industrial Strategy, headed by Greg Clarke.

Although the details are yet to be fleshed out, Mrs May gave some indication of what it might entail in her Birmingham speech: raising productivity, a commitment to infrastructure projects (such as the north-south HS2 railway), more housebuilding and a regional policy that will “help not one or even two of our great regional cities but every single one of them”—perhaps a dig at the previous gov-

ernment’s championing of Manchester, Birmingham’s great rival.

Such a strategy will also involve helping particular sectors of the economy, an approach which, its proponents insist, is quite different from the now-unfashionable 1970s policy of “picking winners”.

This suggests a degree of continuity with David Cameron’s coalition government of 2010-15 when Sir Vince Cable, the Liberal Democrat business secretary, spoke enthusiastically of industrial strategies and singled out 11 industries with which the government would build long-term “partnerships”, including carmaking and aerospace. Both of these businesses, for instance, benefited from public investment in a networkof“Catapult” research and development centres.

People like Michael Hawes, the head of the Society of Motor Manufacturers and Traders, therefore welcome Mrs May’s more overt commitment to an industrial strategy. Free-market types, however, are more worried. Mark Littlewood, head of the Institute of Economic Affairs, a thinktank, argues that although the new policy remains “murky”, adopting even a limited industrial strategy could tempt the government into going further by propping up loss-making industries such as steel—especially once Britain leaves the EU and is no longer bound by European rules against state aid. He hopes that the new strategy might be more rhetorical than meaningful.

A first test of this came quickly. On July 18th it was announced that the Cambridgebased tech company ARM Holdings was to be sold to Japan’s SoftBank for £24 billion ($32 billion). If the deal goes through it will be the largest-ever Asian investment in Britain. Mrs May had vowed to defend “important” sectors ofthe British economy against foreign takeovers in her Birmingham speech. Yet the government enthusiastically welcomed the sale of the homegrown chipmaker.

In a nod to the new approach, it was stressed that the prime minister had spoken personally to the head of SoftBank, who assured her that ARM’s headquarters would stay in Cambridge and the number of jobs there would double over the next five years. Future takeovers would be assessed on a “case-by-case” basis, the government said. In practice this may mean increasing the number of sectors in which a public-interest test is applied—currently limited to defence, financial services and the media—to include other industries.

This compromise was designed to appease both free-marketeers (who nonetheless saw it as meddlesome) and interventionists (who still complained that Mrs May had let ARM slip out of British hands).

The temptation to tinker The ARM deal notwithstanding, the government is likely to spend more time trying to keep investment in Britain than fending it off. Business is still nervous about Brexit.

Britain’s booming auto and aerospace industries, for example, are very exposed to the EU, which bought 57% of Britain’s car exports last year. To avoid a draining away of investment to other countries, the government may be in a mood to grant concessions elsewhere. Mr Hawes says his industry will lobby for lower energy prices and business rates as Brexit looms. It is believed 1

22 Britain 2 that, in order to ensure that a big invest-

ment programme went ahead, Mr Cameron’s government had already talked to one carmaker after the referendum about how it could help the company to mitigate the effects of paying EU tariffs if Britain had to leave the single market.

The new business secretary, Mr Clarke, has a reputation as a pragmatist rather than a radical. The “industrial strategy” so far seems mild enough. Yet with the popular mood souring towards globalisation, and the government keen to occupy the political centre-ground abandoned by Labour, many Tories will be on the lookout for signs of mission creep on industrial strategy. Well-intentioned interventions could quickly become counter-productive.

And as the economy deteriorates, the calls for intervention will grow louder. 7

Foreign takeovers

Fear and favour The evidence is that foreign managers improve the British firms they acquire

F

OREIGN acquisitions have a bad reputation in Britain. Before Kraft, an American food-processing firm, swallowed Cadbury, a British confectioner, in 2010 it pledged not to outsource work abroad. Just days after the deal was done, it reneged.

Small wonder, then, that the probable takeover of ARM Holdings, a Cambridgebased tech company, by SoftBank, a Japanese one, has people worried.

Britain welcomes monied foreigners with open arms. Its stock of inward foreign direct investment is bigger than that ofanywhere but America and Hong Kong. In the past decade overseas investors have splurged £500 billion ($835 billion) to acquire nearly 2,000 British firms, almost three times the amount spent by British investors on acquisitions within Britain.

Foreign buy-outs increase demand for British assets and thus raise the pound’s value, making exporters less competitive.

And foreign owners are popularly suspected of having a “home bias”, making decisions which benefit their country rather than Britain. ARM’s founder, Hermann Hauser, lamented to the BBC that “what comes next for technology will not be decided in Britain any more, but in Japan.”

But the case against foreign investors does not stand up. A dear pound hardly helps exporters, but weak productivity is a bigger problem (in the manufacturing sector it is lower now than in 2011). And foreign owners seem to improve the situation. Economists reckon that about half the productivity gap between Britain and

The Economist July 23rd 2016 London buses

Parting the red sea The new mayor plans to pedestrianise Europe’s busiest shopping street

I

N 1963 the author of “Traffic in Towns”, a book commissioned by the Ministry of Transport, cursed Oxford Street as a “travesty of conditions as they ought to be in a great capital city”. Things have only deteriorated since then. Shoppers breathe in the highest levels of nitrogen dioxide in Britain as they navigate a road that is among the capital’s most dangerous. Those who cram into Oxford Street’s crowded buses quickly realise it would have been faster to walk.

They may soon have to. Sadiq Khan, London’s new mayor, has promised to pedestrianise Oxford Street by 2020 (it is already off-limits to private cars most of the time). The capital’s transport authority has previously warned that making big changes to the street is “neither deliverable nor desirable”. Built on a Roman road, it is one of London’s few east-west arteries. At peak times 250 buses an hour trundle along it, five times the number on Fifth Avenue in New York.

Powerful, posh residents’ groups such as the Marylebone Association will lobby against diverting buses down quieter streets. Mr Khan may not mind: the people of Marylebone High Street already preferred his Conservative rival by two votes to one in the last election.

But Westminster City Council, which is more beholden to local residents, will have to approve any changes.

A cull of bus routes is overdue, reck-

ons Alexander Jan of Arup, an engineering firm. Twenty-one different routes go down Oxford Street, some following the paths of horse-drawn predecessors. The crush developed in the early 1900s, when private companies competed for fares.

Things will get busier in 2018 when Crossrail, a new east-west trainline, adds as many as 150,000 daily visitors to the half-a-million Oxford Street already gets.

A “hopper” fare will soon allow passengers to switch buses without charge, as they can on the Underground. If they resent having to hop around Oxford Street, its fresher air might cheer them up.

America is down to bad management. A paper by Nick Bloom of Stanford University and others shows that the David Brents can learn from the Jack Welches: when they take over British firms, American multinationals bring better technology and practices, lifting productivity by up to 10%.

These benefits are easiest to grasp in heavy industry, where measuring output is straightforward. A study by Simon Collinson, now of Birmingham University, looked at British Steel Strip Products, which formed an alliance with Japan’s Nippon Steel in the early 1990s. Japanese management practices had a clear impact: within a few years the percentage of steel rejected because it was too rusty declined from 2-3% to less than 0.5%.

As well as cutting down on tea-breaks and making factory lines sleeker, foreignowned firms, which make up 1% of Britain’s businesses, appear to spend more on R&D than comparable British firms. That boosts productivity and thus wages: a study by the OECD found that in Britain

wages in foreign-owned companies were about 5% higher than they would have been were the firm under British ownership. Altogether, foreign-owned businesses account for halfofBritish R&D spending.

Overseas owners also shake up supply chains, says Mr Collinson. One paper found that a ten-percentage-point increase in foreign presence in a British industry raised the total factor productivity (which captures the efficiency with which capital and labour are used) of that industry’s domestic producers by about 0.5%.

No one celebrates when higher productivity arises from laying off workers, and foreign takeovers are, indeed, associated with job losses. But this is a feature of acquisitions in general, not of foreign ones in particular. Restricting buy-outs in order to protect jobs would ultimately depress living standards by keeping workers in inefficient companies. It is not always easy being at the mercy of global markets, but on balance Britain benefits from being open to foreign buyers. 7

Transport of delight

The Economist July 23rd 2016

Britain 23

Bagehot In the map room with Theresa May The outlines of Britain’s post-Brexit place in the world begin to emerge

I

F EVER you find yourself at a dinner party with British establishment types, ask them about the Foreign and Commonwealth Office (FCO). Jokes about gin-swilling, oikophobe globetrotters in linen suits will spill forth. The more chauvinistic may tut about that diplomat’s disease: “going native”, or sympathising more with foreigners than with folk back home. To sound clever, someone will decree that every prime minister since Thatcher has been his or her “own foreign secretary” (as if Churchill and Eden were remembered today for their education policies) and that the FCO these days is just a venue for formalities.

This image riles diplomats, and rightly. The essence of the grandest department on Whitehall is not that it deals with the world outside Britain. Practically every government body does that: the business department frets about foreign takeovers, the Ministry of Defence is hardwired into NATO, 10 Downing Street co-ordinates big summits. The point of the FCO is to go beyond the transactional focus of these branches, of fleeting political moods and fads, of narrow, immediate readings of the national interest. Its embassies are a nervous system conveying information, cultivating influence and generally providing a strategy for the country’s global role that transcends the next photo opportunity or crisis. Its goal is an influential Britain in an orderly world.

Or, as Ernest Bevin, the post-war foreign secretary, put it: the preservation of every Briton’s ability to “take a ticket at Victoria Station and go anywhere I damn well please!”

It is in this context that the sudden and brutal humiliation of the FCO following Britain’s vote for Brexit should be understood.

The swingeing budget cuts and departmental turf wars of recent years have been tough enough. But none of this compares with the indignities visited upon it in recent weeks.

Most colourful among them is Theresa May’s appointment of Boris Johnson as foreign secretary. The former mayor of London, who campaigned for Brexit, is affable and intelligent. But he is also unscrupulous and unserious. In Brussels he is loathed for his myth-making about the EU and for comparing the union to the Third Reich. German news readers struggled to stifle laughter when they read out the news of his promotion on July 14th. In Washington the reaction was no better: five days later the new foreign secretary grinned his way sheepishly through a press con-

ference as American journalists read from his litany of undiplomatic remarks. In 2007 he compared Hillary Clinton to a sadistic mental health nurse, for example; the following year he described Africans as “piccaninnies” with “watermelon smiles”.

What possessed Mrs May? It seems the prime minister wants to pack Mr Johnson off to parts foreign, welcoming him back in London only to help her, a Remainer before the referendum, to sell an eventual Brexit deal with the EU to Eurosceptics. That is dismal. It treats the FCO, a giant national asset, as a tool of domestic political management and thus suggests a drastic downgrade of Britain’s ambitions on the world stage.

So too does the prime minister’s creation of two new departments: one for Brexit and one for international trade. The former, in particular, will be composed from chunks of the FCO, including some of its brightest staff. Both are led by uncompromising Eurosceptics, David Davis and Liam Fox, who seem determined to nab further turf from the (in their eyes) all-too internationalist diplomats. Thus the FCO will now have to share facilities—like Chevening, the foreign secretary’s country retreat—and battle for influence with two rival outfits programmed to see other countries less as partners than as negotiating opponents.

A hint of what is to come came on July 20th, when Mrs May travelled to Berlin to meet Angela Merkel. The prime minister received military honours and exchanged warm words with her German counterpart. Yet insiders detected a shift. For all the talk of co-operation on Turkey and the refugee crisis, in the German capital Britain is now seen less as a solution than a problem. As one local diplomat put it to Bagehot: “Here Britain now means Brexit.” For the foreseeable future, then, the country’s scope to play the expansive, agenda-setting role for which the FCO is designed is limited. Brexit talks will drain energy from other fields.

The fragmentation of Britain’s diplomatic arsenal will Balkanise policymaking. Doors will close which once were open. Mark Leonard, the director of the European Council on Foreign Relations, reckons the country could end up as “a bit player in support of policies developed in Berlin, DC and other places.”

The new Westphalianism Too gloomy, say some, pointing to Britain’s ongoing NATO membership, UN Security Council seat, Commonwealth links and economic and military heft. These things matter, of course. But quitting the EU denies Britain opportunities to make the most of them (consider its leadership, alongside France and Germany, in the Iran nuclear talks). The country’s temperamental and institutional tilt in a more zero-sum, nation-state-centric, sovereigntyfirst direction makes its existing strengths less valuable: a less open and collaborative ally to its friends. Mr Leonard calls this “strategic shrinkage on steroids”. He sees Britain taking a more craven stance towards economic powers like China and Russia, whose cash might help it plug the economic gap left by Brexit.

Not everything about this is preordained. Perhaps Mrs May can play off her three sort-of foreign secretaries against each other. Abroad she has opportunities to shore up some of Britain’s influence, says Brendan Simms, a historian of the country’s place in Europe: by striving to remain a useful ally to Germany, by amplifying Britain’s voice on defence and security matters (it is still a major player in NATO’s defences in the Baltics, for example) and by throwing herself into debates about the future integration of continental Europe. Britain’s stature in the world is shrinking. By how much is up to its leaders. 7

24

Middle East and Africa

The Economist July 23rd 2016 Also in this section 25 Trapping Syrian refugees in Jordan 25 Backscratching in Beirut 26 Africa’s real land grab 27 Sub-Saharan smokers 27 Nigeria’s half-floating currency

For daily analysis and debate on the Middle East and Africa, visit Economist.com/world/middle-east-africa

Israel and the Arab world

The enemy of my enemies CAIRO AND JERUSALEM

As Arab states warm to Israel, the Palestinians feel neglected

E

GYPT’S ambassador to Israel was in Tel Aviv for less than a month before he was called backto Cairo in November 2012.

His government, then led by Muhammad Morsi of the Muslim Brotherhood, was incensed over Israel’s bombing of the Gaza Strip, which is controlled by Hamas, a Brotherhood affiliate. Mr Morsi also summoned Israel’s ambassador in Cairo, where a year earlier protesters had stormed the Israeli embassy.

What a difference a few years make. In February Egypt’s current president, AbdelFattah al-Sisi, who toppled Mr Morsi in a coup, sent a new ambassador to Israel, the first since 2012. Mr Sisi has closed Egypt’s border with Gaza, to great Palestinian dismay, and vilified Hamas. To complete the turnabout, there are now rumours that Binyamin Netanyahu, Israel’s prime minister, will soon visit Mr Sisi in Egypt.

Israel’s warmer relations with Egypt are a sign of a broader rapprochement with the Arab world. Mr Netanyahu may be stretching things when he says that Arab leaders now see the Jewish state as an ally, but their priorities, such as countering Iran and combating Islamic terrorism, are increasingly aligned. The shift has left the Palestinians, whose fate once topped the Arab agenda, feeling abandoned.

A different sense of betrayal has helped to bring the Israelis and Arabs closer. Barack Obama’s eagerness to pull America

backfrom the Middle East, and his dealings with Iran, resulting in a nuclear accord signed last year, alarmed Israel and the Arab states in equal measure. Both sides fear Iran will cheat on the deal and use the economic benefits to support proxies fomenting chaos in Iraq, Syria and Yemen.

So, quietly, Israel and the Gulf states have begun to co-operate over security. “We have the same understanding of the region,” said Tzipi Livni, a former Israeli foreign minister, in January.

Après Morsi, le déluge According to the Israeli officials, co-operation with Egypt and Jordan, with which Israel has signed peace treaties, is even better. In April the Israeli army’s deputy chief of staff spoke of an “unprecedented” level of intelligence-sharing between the countries. Israeli drones have been allowed to fire on insurgents in Sinai, where fighters loyal to Islamic State (IS) have tormented the Egyptian army. Since taking office in 2014, not only has Mr Sisi closed Egypt’s border with Gaza, he has flooded the smuggling tunnels beneath it in order to stop the flow of weapons. “The Egyptians now are more anti-Hamas than even we are,” says a senior Israeli officer. “They’re actually pressing too hard now on Gaza.”

Yet Egypt, hoping to re-establish its influence in the region, is trying to revive moribund peace talks between the Israelis

and Palestinians. To that end Mr Sisi sent his foreign minister to Israel on July 10th, the first such visit in nearly a decade. Mr Netanyahu has hailed the effort, if only to head off a French-led peace initiative that he fears will attempt to force an agreement on Israel. A senior Israeli diplomat says there is little actual hope for a renewal of serious talks.

The Palestinian Authority (PA), which rules the West Bank under Israel’s eye, has also welcomed Egypt’s efforts. Hamas, which is left out of Egypt’s plans, has stayed mostly silent for fear of aggravating Mr Sisi. But some Palestinians worry that Arab states are letting Israel upend the Arab Peace Initiative, which calls for it to withdraw from the West Bank and Gaza and agree to a “just settlement” for Palestinian refugees in return for recognition of Israel. “Israel wants normalisation and political ties with the Arab states, and to achieve this without solving the Israeli-Palestinian conflict,” says Elias Zananiri of the Palestine Liberation Organisation, the movement once led by Yasser Arafat.

This has contributed to a more general sense of unease among the Palestinians.

Officials in other parts of the Arab world talk more about Iran’s meddling, the wars in Syria, Iraq and Yemen, and their own domestic economic and political troubles.

Such issues seem more pressing to their people. And besides, many Arabs are resigned to the stalemate in the peace process. Mr Netanyahu appears intransigent; Palestinian leaders are seen as divided, ineffective and corrupt.

Mahmoud Abbas, the Palestinian president, still makes the rounds in Arab capitals—and foreign leaders still profess their support. But the Palestinians are aware of their diminished status. In a recent poll 78% of them said their cause was no longer the 1

The Economist July 23rd 2016

T

TURKEY Aleppo Latakia

Idlib

ra s

Hama

E u ph

te

Raqqa

Khmeimim (Russian airbase)

Tartus

S Y R I A

Deir al-Zor

Homs

Beirut

ISRAEL

HE hospitality of the Jordanian government reached its limits on June 21st, when a terrorist attack on the last entry point from Syria into Jordan killed seven Jordanian soldiers. The authorities slammed the border shut, and King Abdullah said that Jordan would respond “with an iron fist against anyone who tries to tamper with its security and borders”.

The closure has turned a desperate situation into a humanitarian black hole. According to the UN, more than 70,000 people are now stranded in a harsh no-man’s land-between Jordan and Syria, known as the berm (see map). No one knows the exact numbers in the settlements, nor indeed what life is like there, since the attack has stopped aid flowing in and information flowing out.

Before aid agencies were shut out reports and video footage suggested a hostile refuge. Mice and disease roam amid the sprawl of dusty tents. In May an NGO reported that women were using nappies to avoid defecating in the open, and that mothers were covering their newborn babies’ faces to protect them from rat bites.

In the blistering heat and without shade, water or greenery, the inhabitants

N

Thousands of Syrians are trapped on the border with Jordan

Palmyra

O

MAFRAQ

Mediterranean Sea

From haven to hell

AN

Syrian refugees in Jordan

depend on help from outside. But since June 21st the Jordanian government has blocked anything other than water from passing through. That means that for a month no food or medical services from the Jordanian side have reached the people stuck there. At first even the water did not get through to the berm, as people within refused it in the absence of food.

Aid workers are racing to negotiate better access. By July 20th the UN’s World Food Programme had a provisional agreement to send food in, but had been unable to get final Jordanian approval. Even this would buy it time only to explore other options, none of which looks good. Trucking in help through Syria would mean travelling through territory held by the hostagebeheaders of Islamic State. Dropping it from the sky would require permission from the Syrian, Russian, American and Jordanian governments, as well as being hugely expensive.

The people there will need to move. Before the attackJordan’s government had offered to fly them to wherever will take them, but so far no country has offered to. It closed other crossing points from Syria to reduce the influx of refugees, not expecting the fighting to push so many towards this passage of last resort. The aid on offer, and the hope of entry into Jordan, drew yet more in. Meanwhile the lawless vacuum has been a magnet for militias.

There are no easy exits. A return to Syria is too unsafe for most, though a very few may be going back. But last month’s attack made entry into Jordan much harder. The country’s authorities want to preserve its status as a haven in a region on fire and reassure citizens already disgruntled by the refugee influx.

The Jordanian government has an economic motive, too, for sealing off the settlements; it has long exploited its geography to squeeze goodies from worried foreigners. On July 20th, for example, details of

B

states of allying themselves with Israel against Iran. The amount of aid flowing from Arab countries to the PA has fallen by well over half in recent years. Funds from the West have also declined.

The public in some Arab countries may have softened its animus towards the Jewish state. An Israeli polling organisation has reported that only 18% of Saudis see it as their country’s main threat. But the Palestinian issue can still excite passion. In Egypt, for example, a member of parliament was hit with a shoe and expelled by his colleagues after meeting the Israeli ambassador in February. The Israeli flag is still burned at protests in the region.

What really stirs Arab emotions are scenes of Israelis killing Palestinians. Violence over the past year has left dozens of Israelis and more than 200 Palestinians dead. Most Palestinians, according to polls, back a return to an armed intifada (uprising). With the Arab world focused elsewhere, America in the throes of a presidential race and progress towards a two-state solution halted, they may see no other way to capture the world’s attention. 7

LE

2 top Arab priority, and 59% accused Arab

Middle East and Africa 25

Damascus Hadalatt

Mafraq

IRAQ

Rukbann m Ber

100 km

Deraa

Amman

JORDAN Azraq

Syrian areas of control, July 15th 2016

Refugee settlement

Syrian government

Islamic State

Other rebel

Jabhat al-Nusra

Kurds

Mixed

Source: Institute for the Study of War

SAUDI ARABIA

preferential access for Jordan’s exports to the EU were announced, in exchange for expanding Syrians’ right to work in Jordan.

The situation at the berm reminds foreign governments and agencies that Jordan has already taken in 660,000 registered refugees, putting huge pressure on its infrastructure and services. Even before the attack, Azraq camp, which had been receiving people from the berm, was nearly full. In Mafraq, where half the residents are Syrian refugees, rubbish piles up too fast for collectors to keep up. And donors have fallen short of their promises. With half of the year gone, only a third of the aid promised to Jordan at February’s conference in London has come through. 7

Lebanese cronyism

Hire power BEIRUT

Political connections create jobs in Lebanon, but only for some

W

HEN a visitor starts emphasising the historical links between their families, Carlos Edde, a Lebanese politician, knows where the conversation is headed.

Twenty minutes in, the visitor’s tone of voice shifts: “I’ve come to see you because I need a favour.” In Lebanon politicians find employment for their constituents in exchange for votes. Three quarters of university students surveyed by the Lebanese Centre for Policy Studies thought political connections were important to find jobs; 20% said that they had used them.

These days Mr Edde says that he never does more than forward a CV to one of his business contacts, without any pressure to hire. Anecdotal evidence suggests other politicians push harder (and win more votes—Mr Edde’s party has no MPs). Quantifying the damage caused by such stringpulling is tough.

A new working paper by Ishac Diwan at Paris Sciences et Lettres, a university, and Jamal Haidar of Harvard University, has a go. Using administrative data on every registered company in Lebanon between 2005 and 2010, they painstakingly map links between the people registered as the owners or officers of companies and lists of politicians. In this way they hope to identify the firms that make political hires.

They identify 497 companies, covering about 16% of the formal labour force.

They find politically connected firms in industries such as banking, media, energy, health and water, which tend to have a cosy relationship with the state. Similar methods applied to Tunisia and Egypt find the political tentacles reach much wider.

The authors suggest that the difference is 1

26 Middle East and Africa

The Economist July 23rd 2016

2 because Lebanon’s state is weakened by

divisions that date back to its civil war. Its politicians are not powerful enough to make big decisions that would create economic spoils—such as erecting trade barriers to protect local firms—so it has fewer favours to offer firms in exchange for hiring the dimwitted cousin of a donor.

The economists find strong hints that political connections drive hiring. In 2009, an election year, politically connected firms hired 14,500 extra people, compared with 8,000 in normal years. Meanwhile unconnected firms hired just 4,000 compared with their average of 6,000 a year.

Those with political connections create a third more jobs each year than unconnected firms in the same sector.

Politically connected firms pay higher wages on average yet produce less per person. In other words, the authors think that these companies are over-hiring to please their political contacts. Yasser Akkaoui, the editor-in-chief of Executive, a Lebanese business magazine, agrees, but explains that the companies would not hire so many unnecessary staff that they go out of business. Politicians, for their part, have an interest in the companies’ survival. They also have the power to keep them not merely alive but thriving. Rami Rajah, who works for a textbook company, says that “people who deal with the government grow, while people who don’t are just scrambling for the scraps.”

All this hurts consumers, unconnected firms and economic efficiency. But there may be a silver lining. Carving up the spoils may distract politicians from carving up each other. And in a state as fragile as Lebanon, that is important. 7

City slickers on the farm

Africa’s real land grab MOROGORO

Never mind foreign interlopers. African urbanites are scooping up more land

A

FTER half an hour poking around Martin Shem’s farm, Paul Kavishe is impressed, even a little jealous. “He has done well,” says Mr Kavishe. “He’s a real farmer!” This is strange praise, not because Mr Shem’s dairy, maize and mango-growing operation on the outskirts of Morogoro is not admirable, but because both men have had university careers. For middle-class Tanzanians, though, a successful farmer trumps a successful academic.

“Every Tanzanian is a farmer,” explains Ali Aboud, another professor who has moved into agriculture. He cultivates about 20 hectares of rice paddy; in the past three years a businessman from Dar es Sa-

My other car is a Porsche laam and another city-dweller have bought big farms near his fields. These men are part of a quiet, hard-to-track but momentous change in Africa, which has profound consequences for the continent’s most important industry.

Surveys show that most farms in subSaharan Africa are smaller than two hectares. But that is the wrong way of measuring agriculture, says Thomas Jayne of Michigan State University. Look at land rather than farms, he says, and it is clear that a fairly small number of farmers now own a large portion. The fastest growth is among the middle class. In Ghana, 38% of agrarian land is occupied by farms of between five and 100 hectares; in Zambia, 52% is. In both of those countries, and also in Kenya and Malawi, medium-sized farms collectively take up more land than larger ones, whether those are owned by rich Africans or the foreign investors who are often accused of “grabbing” land.

Mr Jayne and other researchers find that in Kenya, Malawi and Zambia (though not in Ghana) most medium-sized farms were not built by successful smallholders but bought by urbanites. In Tanzania, where about one-third of the population is urban, city-dwellers are thought to own 33% of the farmland, up from just 12% a decade ago. Typically, the new farmers are middle-aged public-sector workers. The popular obsession with foreign land grabs is wrong-headed, says Isaac Minde of Sokoine University of Agriculture in Morogoro. If there is a land grab in Africa, it is being done by African urbanites.

City-dwellers are going into farming partly because legal reforms have made buying land easier and ownership a little more secure. Another reason is that urban growth is making crops and meat more valuable. Still another is the weakness of African manufacturing, which means citydwellers lack good places to invest their cash. Most important of all, public-sector jobs seldom pay enough to sustain an upper-middle-class lifestyle. Mr Kavishe, who grows maize and keeps several thousand laying hens, is surprised to be asked whether he earns more than he did as a university administrator. Of course the

chickens are more lucrative.

Urban farmers often bring new ideas and technology to the places where they settle. Raphael Laizer, a government official who moved into farming, remembers paying smallholders to plant maize on his fields, insisting on precise distances between seeds. Soon the smallholders were planting their own fields the same way. Mr Aboud, the rice farmer, introduced his neighbours to mechanised seed drills (“for the first two years everyone just looked on”) and to a high-yielding hybrid seed known as SARO 5. Urban farmers’ tractors are hired by smallholders to process maize or plough the fields.

The new arrivals tend to be highly literate, legally savvy and assertive. That cuts their neighbours both ways. When it comes to procuring public goods, their bullishness is a boon. Some of Morogoro’s urban farmers are harrying local authorities to invest in irrigation schemes, which would boost overall productivity. Mr Kavishe even tried to persuade the Finnish government to chip in.

But the high-powered interlopers can be unpopular, especially in crowded rural districts. In addition to his farm near Morogoro, Mr Shem owns a large cattle ranch upon which smaller farmers have encroached, leading to court cases and what he calls “psychological warfare”. Much of Africa is moving away from communal land ownership towards the individual kind, but only gradually, leaving a lot of room for confusion and fights.

Tanzania’s urban farmers also have one foot in the old Africa and another foot in the new one. They are mostly the children of farmers and found it easy to return to the family line. Yet these men are not quite following their parents. They have bought little if any land in their ancestral villages, and do not expect to return there (“you go back when you are buried,” says Mr Aboud). Instead they farm close to the cities where they made their careers. Several predict that their children will have no interest in farming. They are a transitional generation. In a strange way, the rush to acquire farmland shows that Africa is becoming properly urban. 7

The Economist July 23rd 2016

Middle East and Africa 27

Smoking

Plains packaging Young Africans are lighting up at an alarming rate

I

N 2002 British American Tobacco (BAT), a big cigarette manufacturer, shuttled a temporary cinema around six Nigerian cities in what it called the “Rothmans Experience It Cinema Tour”. The company screened “Ocean’s Eleven”, “The Matrix” and other blockbusters for crowds of Nigerians, excited by the foreign concepts of high quality sound and a wide screen. To those who came to watch Brad Pitt gobble hamburgers and Keanu Reaves swallow red pills, BAT gave free packs of Rothmans cigarettes.

The tobacco industry’s desperation to recruit African smokers has only intensified since. In most countries the percentage of the population that smokes cigarettes has shrunk since 2000. Most of the exceptions are in Africa.

According to data collected by the World Health Organisation (WHO), smoking rates have increased in only 27 countries over the past 15 years; 17 are in Africa.

Congo-Brazzaville has witnessed the most staggering spike: 22% of its people admitted to smoking regularly in 2015, up from 6% in 2000 (see chart). Nearly half of Congolese men now light up. The share of smokers in Cameroon more than doubled in the same period as well, from 7% to 22%.

Africa’s low rates of smoking in the recent past were largely because of poverty and limited advertising, says Hana Ross, a researcher at the University of Cape Town.

But companies have caught on: in Zimbabwe recent advertisements cheerfully boasted: “Not British. Not American. Zimbabwe’s Finest Cigarettes”.

Happily between 1999 and 2010, the share of sub-Saharan Africans living in extreme poverty fell from 58% to 48%. Over the same period, the continent’s total population rose from 767m to over 1 billion.

The smoke is spreading Population aged over 15 years who smoke, % Selected countries

2000

2015 0

5

Lesotho Mali Nigeria Cameroon Congo Source: World Bank

10

15

20

25

30

The UN projects that Africa will account for more than half of the world’s population growth over the next 35 years. These predictions tantalise tobacco companies as smoking rates decline in places such as China, Russia and America.

“Tobacco companies are very good at finding market opportunities where there are not only potential smokers, but also weak regulations. Africa is in that sweet spot,” says Michael Eriksen, of Georgia State University. Granted, some African countries have recently tightened tobaccocontrol laws. In May Uganda banned smoking in public places—a move Ghana made in 2012. Mr Eriksen says such policies discourage smoking but they can also be difficult to enforce. Additionally, excise taxes in Africa are too low. Nigeria taxes cigarettes at only 20% of the retail price, far less than the WHO benchmark of 75%.

Particularly worrying is a rise in the number of young people smoking. Although African men smoke less than those in other developing regions, that is not the case with boys (some 9% of African boys smoke compared with 8% in the Middle East and 6% in the Western Pacific). At this rate Africa will face a greater public health crisis than anywhere else in the world. 7

Nigeria’s currency

If you love it...

LAGOS

A new “floating” exchange rate was fixed. But that may be changing

S

OMETIMES the worst is not bad enough. Or such is the case for Nigeria’s currency, which nosedived by 30% when the central bank first removed its peg to the dollar on June 20th. The naira is now this year’s poorest-performing currency in Africa. Internationally, only the currencies ofVenezuela and tiny Suriname have fared worse. Yet were it truly free, it would be weaker still.

In fact, the naira’s free float seems to have lasted exactly a day. Since its sharp drop on the first day of its devaluation, the currency has more or less flatlined at about 282 per dollar (see chart). This is rather odd given the pent-up demand for dollars after the central bank governor, Godwin Emefiele, restricted the supply in a bid to defend the currency at its old peg of199 to the dollar. Many analysts expected it to plummet as low as 350 when businesses hoovered up a backlog exceeding $4 billion.

Bankers say this stability came about after the central bank sold dollars and traders were bullied by it to keep to an unofficial peg. “If you want to sell or buy higher than the managed peg, life will be made

difficult,” says the former CEO of a bank.

So why did the central bank ignore its own policy on allowing a float? The most plausible explanation is that Mr Emefiele has been kowtowing to President Muhammadu Buhari, who fears a weak currency.

But these sorts of flip-flops hardly reassure foreign investors, whose dollars Nigeria desperately needs to fill a gaping trade deficit. Nor do they encourage Nigerian exporters to repatriate foreign exchange, since they still expect a further fall in the value of the local currency.

Starved of an inflow of fresh dollars, the new interbank market on which the naira trades has been painfully thin: little more than $50m in foreign exchange changes hands there daily, according to Renaissance Capital, an investment bank. (By contrast foreign exchange flows in South Africa are worth billions of dollars a day.) It reckons that about 90% of Nigeria’s flow comes from the central bank, which should be stepping away from the market.

Its reserves have fallen to $26.3 billion: barely enough for six months’ imports.

Yet there is reason for hope. By happy coincidence, the naira began to slide again in mid-July after the governor took an earbashing from foreign investors over his manipulation of the exchange rate (which he denies). By the time The Economist went to press it had reached 295 to the dollar, its lowest ever official rate. This is still about 20% stronger than on the black market— which is surely a more accurate representation of the naira’s worth.

The central bank’s policy of defending the naira has been disastrous, creating shortages of products such as milk and fuel and bringing factories to a standstill for want of imported inputs. The economy contracted by 0.4% in the first quarter of this year thanks to cheap oil and monetary mismanagement. The IMF expects GDP to shrink1.8% this year.

Worse still, inflation hit 16.5% in June— the highest rate in almost 11 years. With a weaker currency, it might surpass 20% by Christmas, calculates Chris Becker of Investec, a South African bank. Whatever happens, Nigerians will hurt more yet. 7

Floating like a stone Nigerian Naira against the $, inverted scale 100 Official rate 200 300 Unofficial rate 400 500 2014

15

Sources: Thomson Reuters; AbokiFX

16

28

The Economist July 23rd 2016

United States

Also in this section 29 On the trail: Cleveland special 30 Paul Ryan’s agenda 30 Roger Ailes’s demise 31 Policing after Baton Rouge 32 Michael Elliott 32 The economics of the Mariel boatlift 33 Lexington: Mike Pence

For daily analysis and debate on America, visit Economist.com/unitedstates Economist.com/blogs/democracyinamerica

The Republican convention

Donning the mantle CLEVELAND

Amid chaos and rancour, Donald Trump was confirmed as the Republican nominee

I

N THE run-up to the Republican National Convention, held in Cleveland between July 18th and 21st, Donald Trump lamented that its predecessor, in 2012, was “the single most boring convention I’ve ever seen”. As the party’s prospective nominee, he planned to prevent a repeat of that tedium, mainly by injecting “some show-biz” into the proceedings. On the evidence of the convention’s first three days, Mr Trump triumphed. The convention was one of America’s strangest and most compelling political set-pieces in decades. This was notwithstanding the C-grade celebrities, including a star of the reality television show “Duck Dynasty”, a golfer and a martial-arts impresario, whom Mr Trump wheeled out to praise him.

Proceedings at the Quicken Loans Arena plunged between perplexing inanity (to which the celebrities did contribute), shambles, and sometimes rowdy conflict among the almost 2,500 Republican delegates gathered to nominate Mr Trump. Little went according to plan. Entertainment aside, Mr Trump needed three things from the convention. He needed to impose a measure of unity on his divided party. He needed to project a sense that he is qualified to be president—which almost 60% of Americans doubt. And he needed to appear more likeable—especially to the third of Republican voters who dislike him. On these criteria, the convention looks to have

been a crashing failure.

The degree to which Mr Trump’s populist takeover of the Republican Party has rent it is hard to exaggerate. The party’s past two nominees, John McCain and Mitt Romney, refused to come to Cleveland. So did the past two Republican presidents, the Georges Bush, and their son and brother, Jeb Bush, a humiliated former opponent of Mr Trump’s who says he is mulling voting for the Libertarian Party. John Kasich, another vanquished rival, also gave the convention a miss—though, as the governor of Ohio, he was responsible for arranging its ample security. A dozen notable congressmen also stayed away, especially those, such as Senator Mark Kirk of Illinois and Mr McCain, in Arizona, who face daunting re-election battles which Mr Trump’s name on the ballot will probably make harder.

No wonder Mr Trump needed reality television stars to speak for him. Among elected Republicans, Chris Christie and Scott Walker, the governors of New Jersey and Wisconsin, were the only heavyweight speakers prepared to give him a fulsome endorsement. The Speaker of the House of Representatives, Paul Ryan, who was chairing the convention, gave a speech, notionally in support ofMr Trump, in which he referred to him only twice— and both times in the same breath as his running-mate, Governor Mike Pence of In-

diana, whose caustic conservatism Mr Ryan approves of more. That was one more mention than Senator Ted Cruz, a distant runner-up in the primaries and talented orator, afforded Mr Trump.

In a theatrical performance—delivered in a prime-time viewing slot on Day Three—Mr Cruz first congratulated the tycoon on his victory, then delivered a virtuoso argument for freedom and the constitution, conservative orthodoxies in which Mr Trump has little interest. “We deserve leaders who stand for principle,” said Mr Cruz, to, initially, thunderous acclaim from a crowd grateful, at last, for a revivifying dose of conservative dogma. “Please, don’t stay home in November,” Mr Cruz continued: “Stand, and speak, and vote your conscience, vote for candidates up and down the ticket who you trust to defend our freedom and to be faithful to the constitution.”

But then it dawned on the crowd that Mr Cruz had not named Mr Trump because he did not mean him. He had just punked the convention. As many Trump supporters began to boo, members of the Trump campaign rushed around the delegates, allegedly trying to whip up more dissent. To deflect attention from the wrecking-job afoot onstage, Mr Trump entered the arena and stood waving generally, with a waxen halfsmile, like a senile dictator. By the time Mr Cruz finished, there was pandemonium; his wife Heidi, assailed by livid Trump supporters jeering “Goldman Sachs!” (the capitalist outfit for which she works), had to be escorted outside by bodyguards.

Many delegates were also unhappy with their party’s choice. The opening day of the convention saw a last-ditch effort by some anti-Trump holdouts to express their dissent by forcing a disapproving vote on Mr Trump’s rules for the convention; they were drowned out by a burst of aggressive 1

The Economist July 23rd 2016 2 whipping and loud rock music. The 721 de-

legates who voted against Mr Trump’s nomination the next day, during the official tallying of his support, nonetheless made up the Republicans’ biggest dissenting vote since 1976, when Gerald Ford sealed his defeat of Ronald Reagan on the floor of the convention. Even many of Mr Trump’s loyal delegates seemed a bit halfhearted in their support; asked whether his champion was a Republican or a conservative, a delegate from North Carolina responded: “No, not yet.”

Even so, as the disapproving response to Mr Cruz suggested, most delegates were prepared to backMr Trump, whatever their misgivings about his disapproval of free trade and thuggish style, in order to wrest power from the Democrats; 90% of Republican voters say the same. Yet anyone looking to this convention for evidence that Mr Trump has the wherewithal to perform that feat must be disappointed. It was muddle-headed and disorganised, reflecting a campaign effort that appears amateurish, underfunded and insufficient.

United States 29 The programme was a mess; the convention’s expected breakout star, Senator Joni Ernst of Iowa, ended Day One speaking to a near-empty arena. Then a more embarrassing scandal erupted. It emerged that a moving tribute to Mr Trump by his Slovenian-born wife, Melania, contained passages lifted from Michelle Obama’s address to the 2008 Democratic Convention.

Paul Manafort, Mr Trump’s campaign chief, denied this was plagiarism; Mr Christie said it was no big deal. By the time the Trump campaign admitted that Mrs Trump’s wife had plagiarised the wife of the man he declares unfit to be president, the kerfuffle had dominated TV coverage of the convention for a day. It made those around Mr Trump, a self-declared straightshooter and problem-solver, appear phoney and incompetent. It made a mockery of his own ambition to show a softer side to his unloved character.

As The Economist went to press, Mr Trump had a chance to turn things around in his closing speech. It is the most important part of any convention and, given his

On the trail

Cleveland special The joker “I’ll let you know how I feel about it after it happens.”

Donald Trump fails to squash rumours that even if he wins the election, he may yet walk away from the presidency. New York Times

Tourist attraction “Home of10,000 lakes, home of Spam and home of the late, great Prince.”

The Minnesota delegation casts its vote

Another brick...

“We build 95-storey buildings with bathrooms, that’s tough construction…Walls don’t have bathrooms.”

Trump resumes his favourite project.

Sopan Deb, Twitter

Humblebrag “I think I am, actually humble. I think I’m much more humble than you would understand.”

Mr Trump’s first joint interview with Mr Pence was focused mostly on himself. CBS News “It was a Trump tour de force. Also, Mike Pence was there.” Washington Post

Trump Airlines?

“She was asked…Little bit difficult because of, you know, it’s a long ways away.”

Sarah Palin did not make the trip from Alaska to Ohio. Washington Examiner

Sad emoji “I’m worried that I will be the last Republican president.”

Former President George W. Bush, reportedly speaking to a reunion of former staff in April. Politico

Freudian slip “You can’t always get what you want.”

Mr Trump’s unfortunate choice of music, by the Rolling Stones, before officially introducing Mike Pence as his vice-presidential pick

A good lickin’ “I will utilise my 55 years of law enforcement. I don’t have a gun, but I have a tongue.”

Sheriff Joe Arpaio of Arizona objects to the anti-Trump delegates. Time

Deep throat “What is the T doing to that P?” John Dingell, a Democratic congressman, is bemused by the suggestive Trump-Pence campaign logo (above)

Keep Calm “It’s exciting. I think you can feel we’re resigned to this.”

A visitor to the convention is overcome by emotion

charisma and his campaign’s reliance on it, that may be especially true for Mr Trump.

Even so, the most enduring moment of this convention may prove to be from Day Two. It was supposed to be dedicated to the economy; “Make America work again” was its theme. Yet, in the absence of almost any talk onstage of jobs, business or Mr Trump’s economic plans, such as they are, the crowd began chanting a more appropriate slogan: “Lock her up! Lock her up!”

Hatred of Hillary Clinton, whom Mr Trump says is undeserving of her liberty, never mind the presidency, was the leitmotif in Cleveland. The word “Hillary” was spoken disdainfully onstage that day more often than “Trump” or “America”, and four times more often than “economy”. Almost all Mr Trump’s headline speakers joined the attack on his Democratic rival. The grieving mother of one of the four Americans killed by militants in Benghazi in 2012 blamed Mrs Clinton for their deaths—an allegation rubbished by nine official investigations so far. Scott Baio, a television actor in 1980s sitcoms, defended a tweet in which he labelled Mrs Clinton a “cunt”.

Ben Carson, another former opponent of Mr Trump’s, suggested a possible link between the former First Lady and Satanism.

The Republicans, their convention has confirmed, are irredeemably divided behind an unloved candidate whose platform and organisation appear unfit for the coming campaign. Rallying in detestation of his opponent is their only hope.

They are fortunate she presents such a juicy target. Mrs Clinton is almost as disliked as Mr Trump, which is why, despite his poor ratings, he remains within touching distance of her. An historically hateful campaign looks inevitable. The question, which the first post-convention polls may begin to answer, is which of the two will that hurt most? 7

Bigger, not better

30 United States

The Economist July 23rd 2016 Roger Ailes

Kingmaker no more NEW YORK

A media master disappears

“I

Paul Ryan’s agenda

Better than what?

CLEVELAND

The Speaker’s policies are the best a divided party has to offer

F

OR all the Republican Party’s problems, it does not want for policy. Donald Trump has several clear-if-crazy promises: build a wall on the Mexican border, suspend Muslim immigration and renegotiate trade deals. To coincide with the convention, the party, as usual, released an official policy platform. And since early June Paul Ryan, the Speaker of the House of Representatives, has been penning six papers laying out what he calls “A Better Way”.

The problem for the Republicans is that these multiple plans frequently contradict one another.

It is no secret that Mr Ryan does not support Mr Trump’s trade- and immigrantbashing populism. These areas have been left out of Mr Ryan’s agenda, to limit discord. But lapses in the Speaker’s restraint threaten the truce. At an event on July 18th he described Mr Trump as “not my kind of conservative”. In his speech the next day the Speaker barely mentioned Mr Trump, and said that his presidency would only provide a “chance” of a better way.

Mr Ryan also seems to have gone quiet on fiscal policy. For most of Barack Obama’s presidency, congressional Republicans have warned of the dangers of government debt. The Speaker still refers to a supposed “debt crisis”, but his economic policy papers barely mention it.

Two things probably account for this shift.

The first is that the deficit has fallen from 10% of GDP in 2009 to 2.5% in 2015. The second is Mr Trump’s fiscal abandon.

WANT to elect the next president,” Roger Ailes once told staffers at Fox News. It was no idle ambition. Mr Ailes, the pre-eminent master of the dark arts of politics and television in America, had been helping Republicans get elected president since Richard Nixon. This week, with the Republican Party nominating another candidate he helped to create, the kingmaker himself is being dethroned. Rupert Murdoch and his sons Lachlan and James, who control 21st Century Fox, appear ready to oust the 76-year-old chief of Fox News after a career spanning more than 50 years.

It is a sudden and ignominious downfall, the sort Mr Ailes would have put on the air nonstop if the subject had been one of his enemies. His network’s motto was, and is, “fair and balanced”, a shot at the perceived liberal bias of his competitors. Mr Ailes’s brand of angry, conspiracy-driven political news and opinion set Fox News apart, from the coverage of real scandals, including the impeachment of Bill Clinton, to imagined or overcooked ones, like Hillary Clinton’s failings over Benghazi.

Viewers ate it up. Mr Ailes, the son of a factory worker, instinctively knew how to appeal to white, working-class voters disaffected, as he was himself, with liberal elites and political correctness. In six years he built Fox News from a joke when it began, in 1996, into the numberone powerhouse in cable, eventually collecting profits of more than $1 billion a year. Along the way he helped redefine American right-wing politics, and created its media stars in Bill O’Reilly, Sean Hannity and, more recently, Megyn Kelly.

He also helped mould Mr Trump into a nasty populist. In 2011 Mr Trump was one of the loudest cheerleaders for Fox News’s questioning of Barack Obama’s birthplace. Though this seemed insane outside the Fox News bubble of hype, it

For a Republican to call for both balanced budgets and big tax cuts is not novel.

But Mr Trump has taken that inconsistency to new heights. His tax plan would, even after its growth-boosting effects, cost $10 trillion (about three times the total tax take in 2015) over a decade, according to the Tax Foundation, a think-tank. Yet he also claims, impossibly, that this largesse would not cause the national debt to rise.

On July 20th two of Mr Trump’s advisers said he would soon update his tax plan and bring it closer to Mr Ryan’s, which is

presaged a historic presidential run.

Few felt they could challenge Mr Ailes. It was only in the last year that weaknesses began to emerge. Mr Trump boycotted the network over his perception of mistreatment by Ms Kelly; eventually they made up. Then on July 6th Gretchen Carlson, a former presenter on the channel, filed a lawsuit alleging sexual harassment. Other women emerged, including in reporting by Gabriel Sherman, a journalist who wrote an unflattering biography of Mr Ailes. On July 19th Mr Sherman reported that Ms Kelly too had spoken of being harassed

by Mr Ailes a decade ago.

The theme of the allegations, which Mr Ailes denies, was that women would get ahead if they did what he asked. For years he seemed to hold such power. Mr Sherman wrote that Mr Obama greeted the media titan at the White House with the line, “I see the most powerful man in the world is here.” No longer.

Thriving on conspiracy modest by comparison. (The Speaker would, for instance, cut the top rate of income tax from 39.6% to 33%, compared with 25% under Mr Trump’s current plan.)

Aligning the two plans will require more than merely adjusting rates, however. So far, Mr Trump has ignored two key pillars of tax reform which the Speaker supports.

The first is to pay for lower rates, in part, by broadening the tax base; Mr Trump’s plan, if anything, makes the tax base narrower.

The second is to redefine the corporation 1 tax so as to encourage investment.

The Economist July 23rd 2016

United States 31

The forgotten issue CBO baseline Trump’s tax plan*

US budget deficit As % of GDP

0 –

2 4 6 8 F O R E C A S T

10 12

201516 17 18 19 20 21 22 23 24 25 26 Sources: Congressional Budget Office; Tax Policy Centre

2

*Assuming no change in economic growth

It is not yet known how pricey Mr Trump’s new plan will be. For now, Mr Ryan has banished his fiscal hawkery to his health-care plan, in which he promises to curb rising spending on Medicare (government health insurance for the elderly).

Yet Mr Trump has promised faithfully to protect Medicare.

Is there anything the two men agree on?

The need for deregulation may be one. Republicans lament the Affordable Care Act’s new rules for the health-care industry, the Environmental Protection Agency’s cleanenergy regulations, and the Department of Labour’s penchant for rule-making. Perhaps most vocally, they object to the endless new financial regulations resulting from the Dodd-Frank Act of 2010.

It is surprising, then, that the party’s official platform supports reinstating the Glass-Steagall Act of 1933, which forcibly separated commercial and investment banking. This would be a dramatic regulatory incursion by any measure. The platform is also noteworthy for its astringent language on gay marriage, transgender rights and pornography.

In short, Republican policymaking is divided between a populist presidential candidate, a sober but unconvincing Speaker, and a base which cares most about stern social conservatism and immigration. Mr Ryan’s ideas are the best on offer. They may prevail if the party wins in November. But it is far from certain. 7

Policing after Baton Rouge

Ambushed and anguished NEW YORK

The thin blue line is on edge after a new spate of shootings

W

HEN police officers hear on their radios that a 10-13 or an 11-99 is in progress, they drop what they are doing and go. A 10-13 means an officer needs assistance. An 11-99 means an officer is under attack, and all nearby units must respond.

Such an event happened in Baton Rouge, Louisiana on July 17th, when three officers were killed in an ambush. According to the city’s police chief, they were “targeted and assassinated” with military precision. Given the timing, the killer, Gavin Long, a black ex-serviceman, may have been enraged by the killings of unarmed black men by police in Baton Rouge and Minnesota—as was the black man who, on July 7th, shot dead five officers in Dallas.

In the wake of these shootings, several police departments have changed tactics.

In Boston and New York City officers have been ordered to work only in pairs. In New Orleans officers must respond in two patrol cars, instead of the usual one. One former cop speculates that, in future, officers responding to a call may park a block away and avoid using the front entrance, to avoid being ambushed.

After riots in 2014 in Ferguson, Missouri, where an unarmed black man had been shot by a white police officer, many departments tried to get closer to their communi-

ties. Police walked the streets rather than using patrol cars, getting to know shopowners and residents nearly as well as the criminals. But trust between the police and citizens, particularly blacks, has badly broken down. Anti-cop rhetoric is pervasive.

Camera phones mean more scrutiny. And there are more than 300m guns around.

One move towards reconciliation, at least

Navigating through a crowd in a state with open-carry gun laws is a nightmare.

Forty-five states now have them. In Dallas, during the protest at which the five officers were killed, as many as 30 people were carrying rifles. Although the number of police murdered in the line of duty is much lower than in the 1970s, when the average was127 a year, this year has seen a jump. According to the National Law Enforcement Officers Memorial Fund, 32 officers have been shot dead so far this year. Over the same period last year, 18 were.

In response to Black Lives Matter, some serving and retired officers have created Blue Lives Matter, a pro-police movement.

According to the New York Post, Blue-LivesMatter badges sold out at this week’s Republican convention. In May Louisiana became the first state to pass a Blue Lives Matter bill, which treats attacks on the police as hate crimes. Similar bills are afoot in other states, including Wisconsin and Florida.

Some departments are becoming better at dealing with explosive situations. Even smaller outfits, like Florida’s Palm Beach Gardens force, with just 100 officers, are spending money to improve the way police go about their jobs. A 10,000-squarefoot tactical training centre, opening in the autumn, will teach officers to use words, not force, to defuse dangerous moments.

In a classic example of the method, in November a man brandishing a knife in Camden, New Jersey was arrested without incident. Police followed him at a distance, encouraging him to drop the knife.

Camden was once one of America’s most dangerous cities. Crime there has reached record lows—homicides fell by 52% between 2012 and 2015—largely because of community policing. Handcuffs and firearms are now considered tools of last resort. As Camden’s police chief remarked not long ago, “Nothing builds trust like human contact.” 7

32 United States

The Economist July 23rd 2016

Michael Elliott

The Fab One One of Liverpool’s finest exports to America died on July14th, aged 65

A

ROUND the time that Michael Elliott, then a Britain correspondent at this newspaper, was steeped in an analysis of London’s revival—published in January 1986—Prince Charles came for lunch at The Economist. Where, the prince asked the journalists, were Britain’s entrepreneurial industries of the kind America nurtured at MIT? “There,” said Mike, with a sweep of his arm towards the panorama of London

behind him. “In Covent Garden, Sir, in music, in arts, in advertising. That’s our MIT.” The sweeping view was something Mike produced with gusto, not just at The Economist, but at Newsweek and Time too, for he had senior roles at all three. Here he was the founding author of both the Bagehot column on British politics and the Lexington one on America (named after the first skirmish in America’s war of independence, where the British drew first blood before being harried back to Boston).

In America Mike found his spiritual home. No one cared about a Scouse accent and, in contrast to Britain, blatant ambition was admired. The big ideas poured forth.

“No offence intended, but what is the point of the Senate?” began a typical Lexington column. A special report in 1991 probed why, despite the collapse of

Immigration economics

Wages of Mariel The effect of the boatlift is re-evaluated

I

T CAN be hard to work out the net impact of immigration on wages, especially in cities with bustling economies.

The only way to try to tease out causality from coincidence is by hunting for a “natural experiment”: a historical event that is something like the randomised controlled tests scientists would conduct in a lab. For immigration, one such useful event is the Mariel boatlift of1980.

For all its woes now, Cuba was an even tougher place 36 years ago for dissidents and economic strivers. Fidel Castro’s government persecuted citizens for their political beliefs, and barred most Cubans from emigrating. But in April 1980 Mr Castro decided that tensions in his country had grown too severe, and opened an escape valve. He declared that any Cubans who wanted to leave were free to go, provided that they left by the port of Mariel. Some 125,000 Cubans took up his offer that year, most of them

Sinking Weekly earnings* of high-school dropouts United States, men aged 25-59, 2014 $

400 MARIEL BOATLIFT

Rest of the United States

300 200

Miami 100 0 1973

80

85

Source: George Borjas

90

95

2002

*Three-year moving average

heading for Miami.

As the newcomers arrived, Miami’s workforce grew by 55,000, or 8%, almost at once. The marielitos were mostly lowskilled: around 60% lacked high-school degrees, and just 10% were college graduates. In theory, a supply shock of this magnitude might have been expected to depress the wages of workers already in Miami, particularly the poorly-educated, at least in the short run. But the empirical evidence has been mixed. In 1990 David Card, an economist now at the University of California, Berkeley, looked at the bottom quartile of workers in Miami and concluded that the Mariel boatlift had had “virtually no effect” on the wages of low-skilled non-Cubans. He also found no evidence of increased unemployment. His paper was highly influential.

Twenty-six years later, Mariel is in the policy spotlight once again. A forthcoming paper by George Borjas, an economist at Harvard, revisits the boatlift and contradicts Mr Card’s conclusion. By using a slightly different definition of low-skilled worker—high-school dropouts—he found that their wages fell precipitously after the influx of labour in 1980, both in absolute terms (see chart) and relative to other workers in Miami. A similar decline could be observed after 1995, after a second wave of immigration from Cuba.

It remains hard to generalise from either set of results. Mr Card’s study suggested that reality may not agree with researchers’ intuitions; Mr Borjas’s paper shows that empirical results may depend on exactly where researchers look.

communism, “America now is not selfconfident, not sure of its greatness. It feels the pressure ofthe outside world on its violate shores, and it fears a debilitating fragmentation within them.” The words still ring true 25 years on.

Presciently, too, Mike grasped in 1992 the political gifts of a young governor from Arkansas. And he had an eye for the sort of detail that could elude others. Setting off to take the pulse of the heartland after the Republican convention that year, he wrote: “Between Tulsa, Oklahoma and Rapid City, South Dakota, The Economist’s correspondent was unable to find a copy of Playboy openly displayed for sale.”

Having explained America to the world, he went on to explain the world to America. As editor of Newsweek and Time’s international editions, he splendidly interpreted everything from the geopolitics of football to the consequences of Asia’s rise. In all this, three things helped him. First, his family, who kept his feet on the ground. Second, a quick mind: he wrote with speed and panache, after strolling round leisurely with a big cigar beforehand. And, third, a winning personality: gregarious, fun, big-hearted. That made him a natural networker, as well as a generous mentor to young journalists.

For the past five years he was president and CEO of ONE, an anti-poverty advocacy organisation co-founded by the rock star Bono. It was a perfect place for his hobnobbing and high ideas. And it gave him a new mission: after explaining the world, it was time to change it.

Time, sadly, was not on Mike’s side. Two days before his death from cancer, ONE held a dinner in his honour. In homage to his Liverpudlian roots, Beatles references abounded. Bono adapted “When I’m 64” to “Now I’m 65”. But never mind the Fab Four: here was a Fab One, who with an expansive gesture and a few phrases could sum up not just London, but the world. 7

Big Idea brewing

The Economist July 23rd 2016

United States 33

Lexington At his majesty’s pleasure Mike Pence is no saviour for a divided Republican Party

C

ONSERVATIVE principles “work every time you put them into practice”, Governor Mike Pence of Indiana told the Republican National Convention in Cleveland in his first big speech as Donald Trump’s vice-presidential running-mate. Mr Pence cited as proof his home state’s balanced budget, lowered taxes and sharply trimmed public workforce. A strait-laced, silverhaired former altar boy, he waved hello to his mother and to his wife of 31 years, and promised that Mr Trump would bring “nononsense leadership” to Washington. The crowd was so relieved that spontaneous chants of “We like Mike” broke out.

Mr Pence was introduced by his former colleague from Congress, the Speaker of the House of Representatives, Paul Ryan.

Back in 2012 Mr Ryan reassured anxious conservatives as Mitt Romney’s vice-presidential sidekick. Mr Ryan called Mr Pence a “Reagan conservative through and through”, who could be trusted as a pro-growth, anti-abortion defence hawk from “the heart of the conservative movement and the heart of America”.

Others go further. Cleveland buzzed with talk of Mr Pence as vice-president-cum-CEO, who might wield sweeping delegated powers over foreign and domestic policy. Conservatives have been encouraged in thinking by such Machiavellian figures as Paul Manafort, the Trump campaign chairman, who told the Huffington Post, a website, in May that the putative president wanted an “experienced” vice-president to do bits of the job that do not appeal to him, leaving Mr Trump a “chairman of the board”.

Mr Ryan played up the idea of the general election as a team effort, telling the convention that the best end for a year of “surprises” would be America voting for a “conservative governing majority”. The Republican majority leader in the Senate, Mitch McConnell of Kentucky, asked delegates to imagine a President Trump signing bills placed on his desk by a Republican Congress, and naming stern conservatives to the Supreme Court.

For their part, several delegates in the hall cooed over Mr Trump’s snappily dressed, perfectly coiffed children, as they declared their love for and pride in their father. In an unusually feudal touch, the convention in Cleveland heard speeches from several Trump employees, including the manager of his Virginia wine estates. This vision of a leader surrounded by handsome children and loyal counsellors had its fans. A woman delegate

from New York, eyes wide in delight, predicted that a President Trump would surround himself with the “very, very, best people”, including the “best generals”, to keep the country safe.

Enough of these delusions. Start with a gulf of ideology. Such figures as Mr Pence and Mr Ryan, with their record of backing free-trade pacts and their wonkish talkofbalanced budgets, limited government and a global, outward-facing America, are describing ways to make their country more competitive. Boil Mr Trump’s platform down to its essence, and he is offering to shield his angry, unhappy supporters from global competition, whether by beating it back with protectionism, trade wars and a fortified border, or by an “America First” foreign policy that would hand in America’s badge as a global policeman. As if to prove the point, on the day of Mr Pence’s speech Mr Trump told the New York Times that, should Russia menace such NATO allies as the Baltic republics, he would weigh whether they had “fulfilled their obligations to us” before acting.

Listen to some in Cleveland, and “chairman of the board” hardly describes the role they have in mind for Mr Trump. With their word-pictures of Reaganesque bills being sent for the Trump signature, and their fawning praise for the Trump clan, some are describing a sort of elected monarchy, complete with princelings, in which important decisions are guided or taken by a Prime Minister Pence from the ruling Republican Party.

No such institution exists in America’s constitution, born of a revolution against a king. The most influential vice-presidents wield power only at the pleasure of the president. By the end of the second term of George W. Bush, even Dick Cheney was a much reduced figure. Moreover, much of a president’s political power derives from the unrivalled personal clout that comes with election by more than 60m voters: a mandate that explains why presidents enjoy honeymoon periods when they are first elected. The mandate ofCongress is sometimes fresher, after midterm elections, but it is never as weighty.

In as much as mandates are built on promises to do things, Mr Trump pledges to enact policies that repudiate much of what men such as Mr Pence and Mr Ryan stand for. Republican unity, such as it is, is currently built on what the party is against. Almost every speech in Cleveland attacked Hillary Clinton, the presumptive Democratic nominee, whose name was enough to prompt repeated chants from delegates of “Lock her up”. But for feuding wings of the Republican Party, having a common enemy is not the same as seeking the same governing mandate.

Trump Rex Mr Pence may not even broaden Mr Trump’s base much. He shores up the Christian conservative vote, but by taking positions liable to put off other groups vital to Republicans in national elections, such as college-educated whites or married suburban women. As governor of Indiana he signed, then tweaked, a law that appeared to allow religious business owners to refuse service to gay couples, as well as a far-reaching bill (since held up by lawsuits) banning doctors from performing abortions on such grounds as a diagnosis of Down’s syndrome.

In febrile times, it is hard to begrudge Republicans cheering a stolid midwesterner for whom “no-nonsense” is a compliment.

But nonsense is what has propelled Mr Trump this far. He needs a running-mate who will not overshadow him, and who will give Reagan-loving conservatives an excuse to embrace him, not control him. Hence Mr Pence. 7

34

The Economist July 23rd 2016

The Americas

Also in this section 35 Cuba’s ailing economy 35 War crimes in El Salvador 36 Bello: Lessons from a liberal swashbuckler

Canada’s internal trade

The great provincial obstacle course OTTAWA

The country is far from being a single market. That may be about to change

L

AST year Don Dean, a logistics expert, set out to solve a mystery: why were oil and mining firms in Alberta buying heavy equipment from Asia, landing it in United States ports and bringing it in by motorway rather than using suppliers in Ontario? The answer, he discovered, is bureaucracy. Lorries carrying heavy loads in Canada need permits from each provincial government, municipality and utility company along the route. Ontario can take 27 weeks to issue one, says Mr Dean, who works for Prolog Canada, a consultancy. The journey on American roads requires just one licence.

Canada’s constitution of1867 mandates the free flow of commerce across the country. But leaders of the ten provinces and three territories have spent 149 years inventing creative ways to favour local firms or issuing regulations that unintentionally snarl trade through sheer complexity.

Some are mere nuisances: lambs’ heads are thrown out by federally licensed slaughterhouses but given back to the farmer for sale in some provinces (they are a delicacy in some cultures). Other impediments loom larger. Canada lacks a single securities regulator; production of milk must be matched to local consumption; the sale of alcohol is reserved for provincial monopolies. Twelve regional regulators license engineers. Canada’s internal market for goods and services is less integrated than that of the EU, concluded Alicia Hinarejos, of the University of Cambridge, in a study in 2012.

No one knows how much this costs in lower productivity from lost economies of

At home abroad Canada’s provincial exports as % of GDP, 2014 Largest economies

International 0

Inter-provincial 10

20

30

40

50

Ontario Alberta Quebec British Columbia Saskatchewan Source: Statistics Canada

scale. In a recent report, “Tear Down These Walls”, the Senate’s banking committee guessed that the economy loses C$130 billion ($99 billion) a year from internal barriers, which is among the higher estimates. A more reliable answer will come later this year when EY, an accounting and consulting firm, completes work on an index of barriers and their costs that was commissioned by the federal government in 2014.

Internal obstacles are one reason that provinces trade more with foreign countries than with each other; another is the American market next door (see chart).

Earlier attempts to dismantle barriers have been half-hearted. An Agreement on Internal Trade reached in 1994 eliminated specific obstacles but did not sweep most away. Provinces often ignored it. Quebec protected its dairy farmers by insisting that margarine could not be the same colour as

butter; Alberta, which makes butter-coloured spread from canola, protested for years (before winning its case). Fines of up to C$5m, introduced in 2009, improved compliance. The agreement has been extended to cover some aspects of labour mobility, but large gaps remain.

Unlike the EU, Canada has left the demolition of internal trade barriers to politicians rather than the courts. Canada’s Supreme Court, reluctant to interfere in provincial affairs, has ruled narrowly in trade cases on whether a province was acting within its constitutional powers rather than on broader issues of internal free trade. That has spared Canada EU-style complaints about rules on banana curvature imposed from afar by bureaucrats. But it has also allowed the national market to remain a patchwork. The federal government, which has jurisdiction over interprovincial commerce, has sermonised on freer trade but not enforced it.

Two recent events have changed the mood. The first is the conclusion in February of negotiations on a free-trade agreement between Canada and the EU (CETA).

Under the proposed deal, Canada would offer European firms broader access (for example, in public procurement) than provinces give to each other’s companies. This showed that Canada’s internal obstacles are “a bit ridiculous”, said Tom Marshall, a former premier of Newfoundland and Labrador. After Britain’s vote to leave the EU, CETA is likely to fall apart, but its shaming effect lingers.

A bigger spur to reform is a decision by a court in New Brunswick in April to dismiss charges against a man who bought cheap beer and spirits in neighbouring Quebec to guzzle at home. The judge took a more expansive view of his powers than earlier precedent-setters have done. “The fathers of confederation wanted to implement free trade as between the provinces of the newly formed Canada,” he wrote. New Brunswick’s liquor laws thus violate the 1

The Economist July 23rd 2016 2 constitution. The province has appealed;

the case may reach the Supreme Court.

Before that happens the provinces may take action. On July 8th their trade ministers decided to revise the internal-trade agreement. The “positive list” of deregulated sectors will be replaced by a “negative list”, a limited number of sectors exempt from free trade. A new mechanism will be created to harmonise provincial regulations. Provinces are to offer each other the same access Canada does to countries with which it has trade deals. Brad Duguid, Ontario’s minister responsible for trade, calls the agreement “unprecedented”. As The Economist went to press, provincial premiers were expected to ratify it.

Yet resistance to the Canadian single market remains strong. Alberta lobbied to reserve for local firms a big share of contracts to rebuild Fort McMurray, the centre of its oil industry, which was burnt down by wildfires this year. Deregulation of trade in liquor, dairy products, poultry and eggs has been left until later. Provincial protectionism is not dead yet. 7

Cuba’s economy

Caribbean contagion HAVANA

Venezuela’s pneumonia infects the communist island

Q

UEUES at petrol stations. Sweltering offices. Unlit streets. Conditions in Cuba’s capital remind its residents of the “special period” in the 1990s caused by the collapse of the Soviet Union. Today, the benefactor in trouble is Venezuela.

For the past15 years Venezuela has been shipping oil to Cuba, which in turn sends thousands of doctors and other professionals to Venezuela. The swap is lucrative for the communist-controlled island, which pays doctors a paltry few hundred dollars a month. It gets more oil than it

Haircuts all round in Havana

The Americas 35 needs, and sells the surplus. That makes Cuba perhaps the only importer that prefers high oil prices. Venezuelan support is thought to be worth 12-20% of Cuba’s GDP. Recently, the arrangement has wobbled. Low prices have slashed Cuba’s profit from the resale of oil. Venezuela, whose oil-dependent economy is shrinking, is sending less of the stuff. Figures from PDVSA, Venezuela’s state oil company, suggest that it shipped 40% less crude oil to Cuba in the first quarter of 2016 than it did during the same period last year. Austerity, though less savage than in the 1990s, is back. Cuba’s cautious economic liberalisation may suffer.

On July 8th Marino Murillo, the economy minister, warned the legislature that Cuba would lower its energy consumption by 28% in the second half of this year and cut all imports by15%. The government has ordered state institutions to reduce their energy consumption dramatically.

Television producers have been told to film outdoors to save the expense of studio lighting. Foreign businesses, some of which have not been paid by their government customers since last November, are being asked to wait still longer, though the government is negotiating to restructure sovereign debt on which it had defaulted.

It has cut off the supply of diesel to drivers of state-owned taxis and told them to look for other work for the next few months. “It’s entirely illogical,” says Hector, a driver. Tourism has surged since the United States loosened travel restrictions in 2014, which will partially offset the loss of Venezuelan aid. The cost of fuel is minuscule compared with the fares Hector’s American passengers pay.

A week after Mr Murillo, the government’s leading economic reformer, issued his warning to the legislature he was relieved of his ministerial duties, though he remains in the Politburo. His replacement as economy minister, Ricardo Cabrisas, is seen as a competent veteran.

The crisis seems to have slowed reforms of Cuba’s socialist economy, which were never rapid. Raúl Castro, who took

over as president from his brother, Fidel, in 2008, has since allowed entrepreneurs to start small businesses, cut the state workforce by 11% and opened a free-trade zone for foreign firms at the port of Mariel. But Cuba still operates a price-distorting dualcurrency system. Small businesses cannot buy from wholesalers or import products directly. Many foreign investments in such areas as sugar and tourism, which would bring in billions of dollars, are stuck in the planning stages. Venezuela’s lurgy should sharpen Cuba’s eagerness for the remedy of reform. It seems to be dulling it. 7

El Salvador

Reconsidering the price of peace SAN SALVADOR

The striking down of an amnesty law rattles the establishment

W

ARPLANES flew over the capital. Exguerrillas waving red protest banners thronged the streets. On July 13th El Salvador’s supreme court struck down an amnesty law that had helped secure peace after 12 years of civil war. The law enacted in 1993 is unconstitutional, the court said, because it prevents victims of atrocities from seeking justice. But many Salvadoreans fear that justice will come at the expense of political stability.

Amnesty for crimes committed by both sides in the war, in which more than 75,000 people died, is almost the only point of agreement between the main political forces, the right-wing ARENA party and the left-wing FMLN. A “general amnesty” was the only way to move the conflict from the battlefield to the ballot box, says Mauricio Ernesto Vargas, a retired general who represented the military in the peace talks. Today’s elected leaders, heirs to the left-wing guerrillas who waged war against the state, are equally nervous. The court’s decision threatens “the fragile coexistence in our society”, said the president, Salvador Sánchez Cerén, a former guerrilla commander. He later backtracked.

Human-rights advocates insist that peace never depended on impunity for the worst crimes. The agreements signed in Mexico in 1992 provided for a UN-appointed “truth commission” to investigate “grave acts of violence”, an idea copied by other countries trying to overcome decades of conflict, including South Africa. A National Reconciliation Law enacted that year granted amnesty for most war crimes but said that perpetrators of atrocities should be prosecuted. That law is unaffected by the court’s decision.

Its target is the more sweeping amnesty law passed a year later, after the truth com- 1

36 The Americas 2 mission issued a report accusing leaders

from both sides of participating in massacres, assassinations, torture and other atrocities. That law violates both the constitution and human-rights treaties by declaring an “unrestricted, absolute and unconditional” amnesty, the court said. The government must investigate and punish “the material and intellectual authors of human-rights crimes”, which may include El Salvador’s most prominent politicians. It must also make reparations to victims.

Though politicians are alarmed, the ruling “puts El Salvador on the path to reconciliation”, contends David Morales, the coun-

The Economist July 23rd 2016 try’s human-rights ombudsman. He hopes that justice will heal the “open wounds” of victims’ families and help end a culture of impunity, one reason for the country’s horrific murder rate.

That thesis will be tested only if El Salvador’s prosecutors now pursue suspected war criminals. The decision falls to Douglas Meléndez, the attorney-general, who has shown an independent streak, for example by charging corrupt mayors in both parties. So far, he has not made it clear that he intends to prosecute war criminals.

The supreme court’s ruling is a sign that El Salvador’s judiciary is eager to assert its

independence of both political parties. If Mr Meléndez takes up its invitation to prosecute civil-war-era crimes, that separation of powers will become more pronounced.

El Salvador’s decision will be watched by other countries trying to settle longstanding conflicts, including Colombia, which is poised to end a 52-year war with the FARC, a left-wing guerrilla group. A belated pursuit of justice would force Salvadoreans to relive the horrors of the 1980s and remind them of the bloody origins of the main political parties. Some will ask whether amnesty and impunity were too high a price to pay for peace. 7

Bello Lessons from a liberal swashbuckler Francisco de Miranda and the betrayal of liberty in Venezuela

E

VEN by the standards of an extraordinary age, it was a remarkable life. Francisco de Miranda, who was born in Venezuela in 1750 and died in a Spanish prison 200 years ago this month, was a soldier, statesman, student of military affairs and philosophy, womaniser and bon vivant.

Above all, he was a peerless networker and self-appointed leader in the cause of independence for South America from Spanish rule. The populist rulers of present-day Venezuela claim Miranda as a forebear, but his hurly-burly life is a rebuke to their illiberalism.

He met everyone who was anyone in the Atlantic world in the age of revolution: Washington, Jefferson and Hamilton; Tom Paine and Lafayette; Pitt and Wellington; Napoleon and Catherine the Great of Russia; Joseph Haydn and Edward Gibbon; Jeremy Bentham and Lady Hester Stanhope. He counted several of them as friends and protectors. A man of the Enlightenment, he could converse in five languages as well as read Latin and Greek. His library of 6,000 books in the house in Fitzrovia, London, that was the closest he came to a home was one of the largest ofthe age. He was, as Karen Racine, a recent biographer, puts it, “an international celebrity, a must-have guest at any liberal host’s dinner party”.

As an officer in the Spanish army he fought in Morocco and in Florida against the British during the American war of independence. Slighted and mistrusted, he turned against Spain. The rest of his life became a quest for the liberation of South America, in which his main resources were charm, intelligent conversation and an unshakable self-importance. A tireless traveller and acute observer, he roamed across the United States and western Europe, and on to Greece, Turkey and Russia.

Catherine, infatuated by the handsome

South American, made him a count; the claims of excitable biographers that they were lovers lack evidence.

In 1792 Miranda turned up in revolutionary France. He was appointed a marshal in the army. He acquitted himself well in battles against the Austrian-Prussian coalition (his name is inscribed on the Arc de Triomphe in Paris) before falling victim to intrigue. Twice imprisoned during the Terror, he escaped the guillotine thanks to his popularity and sangfroid.

Fittingly for a man whom Napoleon judged a “saner” Don Quixote, at the age of 55 Miranda set sail with just three ships and some 180 freshly recruited New Yorkers to liberate his homeland from Spain.

The expedition failed. Back in London, he was persuaded by the young Simón Bolívar to try again. After Venezuela declared independence in 1811, Miranda was put in charge of the patriot forces. But he was old and, after 40 years abroad, ignorant of local realities; he was forced to negotiate peace. In one of history’s great betrayals, Bolívar, who had played a big role in the defeat, handed his fallen hero over to the Spaniards. It would be the younger man

who became the great liberator of northern South America.

Most revolutions disdain the past. Not so those in Latin America (which often claim to have fought a second imperialism, that of the United States). That is especially true of Hugo Chávez’s “Bolivarian revolution”, which used oil wealth (now dried up) to build an elected autocracy and a state-controlled economy (now in ruins). Perhaps because the United States never dominated Venezuela as it did Cuba, or because he came to power via a failed military coup and then an election, not a popular uprising, Chávez constantly sought to link himself to his country’s independence leaders. At the national pantheon in Caracas on July 14th, Nicolás Maduro, Chávez’s chosen successor, marked the bicentenary of Miranda’s death by declaring him (rightly) to be “a universal Venezuelan” and (mysteriously of a soldier) “admiral-in-chief of the nation”. If Miranda were alive today, “he would be a chavista,” opined a leader of the ruling party.

Like hell. True, Miranda was an antiimperialist and he believed in continental solidarity against Spain. But he was a lifelong admirer of the United States and (especially) Britain. His political philosophy was moderate liberalism. Personal experience gave him a particular horror of Jacobin extremism. In a pamphlet published in France criticising the Terror, Miranda “recommended that the various branches of government be kept separate, each charged with oversight of the others”, as Ms Racine writes. For Venezuela, a country whose president this month granted the army sweeping power over food production and distribution, who ignores the opposition-controlled parliament and whose courts bow to the executive, that remains sound advice.

The Economist July 23rd 2016 37

Asia

Also in this section 40 Pakistan’s “honour killings” 40 Dissent in Laos 42 South Korea’s DIYers

For daily analysis and debate on Asia, visit Economist.com/asia

Politics in Thailand

Twilight of the king

After the ailing monarch goes, what next?

T

O THE casual observer the country is calm and orderly. And reverential: adorning a sweet-seller’s stall in a buzzing market in Bangkok, Thailand’s capital, are a dozen laminated pictures of the 88-yearold King Bhumibol Adulyadej who, on the throne since 1946, is the world’s longestreigning monarch, indeed the only king most Thais have ever known. During his reign Thailand has become one of the richest big countries in South-East Asia, a manufacturing hub and a magnet for tourists. Bhumibol’s picture is everywhere, including in millions of homes. As for the ailing king himself, who lies in a hospital just opposite the sweet-seller’s stall—he has not been seen for months. The palace rarely breaks its silence. But in June and again this month doctors said they had drained fluid from his brain.

Whether it comes in weeks or years, the king’s passing will be more than a milestone. His death may set loose centrifugal forces that a coup in 2014 sought to contain, but seems destined in the long run only to aggravate. Below the surface, Thailand is deeply fractured. And so the army-enforced calm accompanying the king’s twilight is fragile. Not least of the problems is that his successor, the crown prince, Maha Vajiralongkorn, is deeply unpopular. After Bhumibol’s death the country, a crucial ally of America’s in South-East Asia, risks descending further into civil strife and economic dislocation, as an elite around the palace resists popular calls for a greater say

in politics and a more equitable sharing of wealth. At that point, all bets about Thailand’s stability and prosperity may be off.

When the junta ousted the elected government of Yingluck Shinawatra two years ago, it was the second army-backed coup in a decade, and the most recent of several during the king’s reign. This time the army appears to be digging in. The junta, under the self-declared prime minister, Prayuth Chan-ocha, has forbidden politics and censored the press. Even criticism of an illiberal draft constitution that the generals hope to ram through in a popular referendum on August 7th is banned. Critics of the junta, including journalists, activists and a few politicians, have been hauled in for “attitude adjustment” sessions.

Notably, the junta has made draconian

Less majesty Thailand, total number of people detained under lèse-majesté laws COUP D'ETAT

60 50 40 30 20 10 0 2014

15

Source: Internet Dialogue on Law Reform

16

use of Thailand’s law on lèse-majesté, which provides for long prison terms for anyone deemed to have spoken ill of the king, queen or heir-apparent. Facing growing anti-establishment sentiment in the provinces among people who feel that an urban alliance has conspired to disenfranchise them, the authorities have presided over a big rise in the law’s use over the past decade, with imprisonments rising sharply after the 2014 coup (see chart).

More than 50 people spent some time in jail in June for lèse-majesté; they included Thais accused of defaming the royals in a student play, scribbling on toilet walls and speaking unguardedly in a taxi. Military courts have handed out staggering sentences: last year two Thais convicted of posting anti-monarchy messages on Facebook received jail terms of 28 and 30 years.

Any Thai may report an instance of lèsemajesté, and the authorities invariably act, scared that going soft on suspects might itself be a crime. Hardliners argue that even criticising the law or the long sentences is an offence. (Though the king himself did so in 2005, complaining that: “If you say that the king cannot be criticised, it suggests that the king is not human.”)

A big part of the generals’ project is to eradicate any lingering influence of Thaksin Shinawatra, a populist politician (and elder brother of Ms Yingluck) now in selfimposed exile, but who has been the biggest factor in politics for most of the past decade and a half. Though the traditional elites abhor him, his parties have won every election they have been allowed to contest since 2001. His movement is loosely associated with the “red-shirt” activists who have sometimes congregated in support of the Shinawatras (and who are themselves opposed by “yellow-clad” royalist protesters, mostly drawn from the middle and upper classes).

A police officer turned tycoon, Mr Thak- 1

38 Asia 2 sin took advantage of a liberal constitution

VIETNAM

LAOS

Chiang Mai 18

7 9

34

NORTH

AN

5

MA

11

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R

The royal role Seeking legitimacy—and, as wars raged in Indo-China, a bulwark against communists—generals who had come out on top by the late 1950s sought to turn the monarchy into a nationalist symbol. With army

help (and American financial backing), the palace clawed back esteem and wealth.

Elevating the king’s prestige has made it easier for Thailand’s armed forces to paint the politicians they have routinely ousted as petty and ignoble. And it has allowed the palace to become a political actor in its own right. Its power has fluctuated. It remains opaque and the subject of debate.

One analysis describes Thailand’s monarchy not as a person, nor even really an institution, but as a network centred on royal advisers in the privy council (appointed by the king) and encompassing royalists whom they can promote through the army, bureaucracy and judiciary. Though interests differ and sometimes conflict, many benefit from the whiff of authority which proximity to the palace endows.

MY

adopted in 1997 in the wake of the Asian financial crisis. He transformed a system of retail, local vote-buying into a machine that spread patronage more broadly. Helping him were billions of dollars earned from his telecoms and media businesses, built on government concessions. His parties draw support especially from Thailand’s neglected north and north-east.

There was much to object to about Mr Thaksin’s time as prime minister between 2001and his ouster by the generals in 2006.

Berlusconi-like, he blurred the line between politics, media and business. And the bloody vigilante justice he dealt to alleged drug-runners and to government opponents in the Muslim and often strifetorn south of the country was appalling.

But the generals’ squabble with him is part of a broader tension, which has pitted a Bangkok-centred establishment against poorer Thais, many in the countryside.

For all Mr Thaksin’s flaws, he recognised the plight of the less well-off and shaped a politics that appealed to them.

His first government introduced free health care and increased subsidies to rice farmers. That, in 2005, helped him become the first elected Thai prime minister to complete a term in office. Yet the business and political establishment around the royal court pushed back. Bangkok bigwigs, hardly clean themselves, complained about corruption and cronyism. They accused Mr Thaksin of pouring cash into crowd-pleasing schemes to tighten his grip on power. They warned that rural giveaways would bust the budget. But, above all, they worried that he appeared to be setting up a network of patronage and economic power to rival their own. Their royal-sanctioned network was—and remains—huge, and ill-understood. Yet it is the chief obstacle to the modernisation that Thailand needs for long-term stability.

The importance of royal patronage to Bangkok’s elites helps explain why reverence for the king is so obsessively enforced.

Yet neither that reverence, nor its enforcement, were self-evident necessities to the reformers who, in 1932, replaced a long line of absolutist kings with a constitutional monarchy. Nor were they deemed so in 1946, when the current king ascended the throne as a young, American-born son of a commoner. Soon, however, struggles between civilian and military factions had halted progress towards democracy. Palace advisers and military-led governments sought to shape the Bhumibol reign, and the behaviour of the man himself.

The Economist July 23rd 2016

T H A I L A N D 44

Bangkok 17

75

CAMBODIA

6

CENTRAL 26

7 10

14

17

BANGKOK

SOUTHERN

Thailand’s regional share of: 2012, % of total

Songkhla

General public expediture GDP Population

200 km

MALAYSIA

Source: World Bank

In times of crisis, the palace has occasionally acted as a final arbiter—as in May 1992, when the king was seen to call an end to bloody battles between pro-democracy demonstrators and an army-led government, whose prime minister then stepped down. More often the palace is seen to endorse military takeovers. No coup is considered successful until its leaders are granted some sort of royal audience.

Less obvious but equally important, a near-divine figurehead is convenient for blessing the sometimes dodgy business activities of palace elites and the army. It is desirable, too, for the elites to have a monarch who is a source of patronage and power in his own right. The monarchy bestows honours, for instance, in return for donations to royal charities and good causes. Such things are valuable: indeed, the courts imprison people deemed to have feigned royal links for personal gain.

And though the economy has liberalised considerably since the Asian financial crisis, government concessions, public works and special policy deals still produce vast fortunes for palace-linked businesses. Serhat Ünaldi, the German author of a recent book about the monarchy, notes that some royally connected businesses outperform peers simply because consumers consider them more prestigious.

Follow the money When the king was healthier, cameras would film him trekking around poor parts of the country, inspecting royally sponsored development projects and meeting subjects. For decades he presided over every public university’s graduation ceremony. But over this foundation grew a thick layer of myth. Courtiers reinstated archaic traditions, such as a requirement that commoners prostrate themselves before royals. Royal pageants with spiritual overtones became more frequent. A royal philosophy was devised, of the “sufficiency economy”. Its vision of development based on harmonious rural life and a deferential hierarchy is fantasy. No matter: the generals who ousted Mr Thaksin in 2006 accused him of flouting the notion of the sufficiency economy—ie, the king’s will.

In the zero-sum calculations of the court, Mr Thaksin’s own network threatened to supplant that of the monarchy.

And the stakes were huge. The palace controls billions through its stewardship of the Crown Property Bureau (CPB), a firm that manages the royal family’s properties and investments. Its holdings include chunks of Siam Commercial Bank, one of Thailand’s largest banks; Siam Cement, its biggest industrial conglomerate; and the Kempinski hotel group. It owns swathes of land, including several square miles of Bangkok. Its finances are outside the government budget, and opaque. A study in 2015 guessed that it was worth about $44 billion. That may be an underestimate.

The CPB’s board is appointed by the palace (though by tradition the finance minister holds a seat). It is not required to pay tax, and in principle its income is the king’s to spend. The CPB’s cash pays a big chunk of the monarchy’s household expenses; it is also used for provincial developments that have done much to burnish the palace’s prestige. Some of its business in Bangkok looks charitable, too. All but a sliver of its property there is leased cheaply—and sometimes to palace cronies.

The risk that the succession will disrupt or divert patronage is one reason for jitters in Bangkok. The CPB’s holdings amount to an “insane” amount of money, says a local businessman. “People kill for much less.”

The 63-year-old crown prince, Vajiralongkorn (pictured on next page), is spoilt and demanding, and—to put it mildly— widely loathed. Three times divorced, he 1

The Economist July 23rd 2016 2 spends a lot of time abroad, often in Ger-

many. In 2007 leaked video footage showed him and his then-consort, who was wearing nothing but a G-string and heels, holding a lavish royal party. The only guest appeared to be Foo Foo, his poodle, which before dying in 2015 enjoyed the rank of air chief marshal. One of the prince’s more generous critics calls him “a loose cannon”.

What once especially troubled the elites was a rumoured friendship between the crown prince and Mr Thaksin, who upon his election in 2001is said to have given Vajiralongkorn a luxury car. The establishment worried that, when crowned, the prince, unpopular at court and among the middle classes, might align himself with Mr Thaksin’s populist movement. That could grant Thaksinites access to the crown’s wealth, and end up locking the old elites out of power. This may have been a key factor behind the army coups against Mr Thaksin and his sister.

For years it was rumoured that palace insiders might interfere with the succession in order to elevate Vajiralongkorn’s more admired sister, Princess Sirindhorn, to the throne (Thailand has never had a reigning queen). But this gossip has recently died down. The junta has shown clear support for Vajiralongkorn, whose reputation it is buffing with a lavish publicity campaign. It has also involved the prince in jolly public events such as two huge charity bike rides. It may have come to some kind of accommodation with him, or simply decided that interfering with the succession will only cause more trouble.

Born unequal still Some observers now suggest that the succession will prove less disruptive than many had feared. There is even talk that King Bhumibol might abdicate before he dies, in order to help smooth the transition.

Certainly, vague worries in Bangkok that “red-shirts” could use the occasion for antiestablishment protests are likely to prove overblown. Might Bangkok’s elites, less worried that a royal transition would threaten their privileges, countenance the shifts needed to heal the country’s rifts, starting with a huge economic divide?

They certainly ought to. More and more Thais are aware of their country’s stark inequalities. Yes, rapid growth has lifted tens of millions from poverty and the curse of subsistence farming. Many from outlying regions have found work in the booming capital or have moved abroad. Yet inequality remains high compared with similarly developed countries. One analysis finds that a tenth of Thailand’s landowners own nearly two-thirds of its titled land. A fifth of rural Thais remain unbanked.

National governments have long overlooked such disparities, committing the bulk of resources to the capital region, even

Asia 39 though incomes there are five to seven times higher than in Thailand’s poorer parts. A three-year study reported by the World Bank in 2012 found that three-quarters of all public expenditure was lavished on Bangkok and adjacent provinces, even though the capital region had only 17% of the population of 67m (see map on previous page). Spending per head on education was four to five times higher in Bangkok than elsewhere, and on health, 12 times higher. But instead of devising policies to deal with such inequalities, the junta has been cracking down particularly hard on opposition in the rural north and northeast, the largest and poorest regions. One opponent recalls being taken away blindfolded and detained for seven days.

An obstacle to sounder policy is Thailand’s extreme centralisation. Neighbouring Indonesia, after the fall of Suharto, its last dictator, undertook radical decentralisation, which has helped entrench democracy. Yet even during periods of democratic rule, Thailand’s provincial governors have been appointed by the central government rather than elected locally. That means regions lack champions—and the stakes in national politics are raised. Under the army, which sees itself as the guardian of a unitary state, regional autonomy seems unimaginable. Historically, civilian and military governments alike have played down, not celebrated, Thailand’s provincial dialects and patchwork of ethnicities.

It is all storing up trouble for later. Some Thais seem persuaded that eradicating the last lingering influence of Mr Thaksin and his family will help heal social and economic divisions. The establishment intimates that the so-called “good people”— soldiers and selfless bureaucrats—are the only ones who can be trusted to lead the country. Yet such thinking is holding back the development of democratic institutions that might have kept Mr Thaksin in check. The generals have not banished the

Vajiralongkorn: uncrowned and unloved

dissatisfaction caused by the instability and low growth that followed Mr Thaksin’s defenestration. “The junta’s attention is nowhere near where a normal government’s ought to be,” says an analyst familiar with the north-east.

Continuity bordering on stasis looks likely to be the watchword. Portraits of King Bhumibol will not disappear any time soon. Indeed, one Thai observer thinks his veneration will extend long beyond his death and mourning period. Yet the eventual dissipation of Bhumibol’s charisma, and his moral and sacred authority, mean that the palace’s authority seems bound to dwindle. A new generation of royal advisers could come to realise that the monarchy’s survival would be best secured through a more defined kind of constitutionalism. The palace might attempt to speak out more plainly against the most egregious abuses of the lèse-majesté law (rumours have swirled that a large number of pardons may be granted soon).

Unsteady as you go A palace less tolerant of authoritarianism would be an improvement. But it is only the most optimistic scenario. A grimmer one sees the army using the royal transition as an excuse to impose even greater limits on political activity and free speech—becoming ever more at odds with civilians whose taste for bowing and scraping before the monarchy can only fade. Observers who once thought that the generals’ only priority was to act as an escort to the succession now detect nostalgia for the days when military government was the norm; it looks keen to pull Thailand’s strings for years to come. That would probably mean many more policies designed to smother, rather than solve, Thailand’s problems—such as the suspension oflocal elections, which are seen to foment discord. All this would doubtless drag out the country’s economic slump.

Things would get only more volatile should the next king choose to pull enthusiastically on all the levers that have passed to the palace under Bhumibol—elevating henchmen and pursuing vendettas, for instance. It is not clear how far eminences who have thrived under Bhumibol’s reign would tolerate a sovereign they consider actively damaging to their interests: were he, for example, to appear overly chummy with factions linked to Mr Thaksin (or, worse, appear to favour his return).

Yet efforts to restrain him would risk angering “red-shirt” activists who in recent years have rallied to defend Mr Thaksin and his sister, and more broadly their own democratic rights. They might perceive another effort by the establishment to stifle change they feel is overdue. All is quiet now. But the elements of post-Bhumibol turmoil in Thailand are all there, should events conspire to arrange them so. 7

40 Asia Crimes against women

Can the licence to kill be revoked?

ISLAMABAD

“Honour killings” can be stopped only by scrapping religiously inspired laws

F

EW Pakistanis have broken taboos as gleefully as Qandeel Baloch, a socialmedia star who used the internet to titillate and scandalise her fellow citizens. The 26year-old (pictured with her iPhone), whose real name was Fauzia Azeem, twerked on camera, posted suggestive selfies and mocked the mullahs who police the social boundaries of a Muslim-majority nation that has become more religiously conservative over the years. It was too much for many, including her brother, who strangled Ms Baloch after drugging her to sleep.

Waseem Azeem proudly admitted his crime: “She was bringing disrepute to our family’s honour.” He has been arrested on suspicion of murder. Ms Baloch’s funeral (pictured) was held on July 17th.

So-called “honour killings” are rarely so sensational. But nor are they rare. The Human Rights Commission of Pakistan tallied 1,096 female victims of them last year.

Many go unreported to the police. Cases in the past three months include a 19-year-old girl burned to cinders for refusing a marriage proposal; a 16-year-old girl who met a similar fate for helping a friend elope; and an 18-year-old killed by her mother for marrying a man from a different ethnic group against her family’s will.

Such atrocities are widely accepted. At a recent screening of “A Girl in the River”, an acclaimed documentary about honour killing, male students at a leading university applauded an interview with a man who was unrepentant about trying to kill his daughter for entering a “love marriage”.

The problem is rooted in tribal and cultural traditions at odds with young women

She mocked the mullahs. She died

The Economist July 23rd 2016 in a growing middle class who increasingly wish to choose their own husbands. Often such killings will be agreed beforehand at a gathering of local men.

Pakistan’s mullahs are united in declaring that Islam condemns such murders.

But this clerical consensus frays when it comes to the sharia-inspired laws of qisas (retribution) and diyat (blood money) that enable men to get away with it. Introduced in 1990, the laws allow the heirs of murder victims to decide whether killers should suffer qisas or be pardoned, sometimes having paid diyat. Since most honour killings are premeditated conspiracies involving entire families, charges are often dropped even before the case goes to court.

Mr Azeem, however, may not dodge punishment. His distraught father vowed not to forgive the killer of a daughter who was financially supporting the family. And the local police have taken the unusual step of bringing the case themselves. But rights activists say that is no guarantee against a court later agreeing to a forgiveness deal. Families come under immense pressure to pardon honour-killers.

Pakistan’s clerical establishment is loth to endorse change. A bill in 2004 to reform the law was “severely mutilated”, says the Aurat Foundation, a human-rights group.

Reforms proposed in 2015 that would make honour-killers serve at least seven years in jail, even if pardoned, have gone nowhere.

But there is now an encouraging sign: a private member’s bill to make such crimes “non-compoundable”, meaning that families would no longer be able to forgive each other, is expected to be presented to parliament for debate within weeks. It had long languished in limbo, even after Nawaz Sharif, the prime minister, vowed in January to crack down on honour killings after “A Girl in the River” was nominated for an Oscar, which it then won. Now the government appears to be backing it.

But Mr Sharif has been beset by corruption allegations, by disputes with the army and by open-heart surgery. While the lead-

ing clerical party, the Jamiat Ulema-e-Islami (JUI), has only 13 seats, Mr Sharif values its support at a shaky time and may be wary of pushing through a new law.

The bill’s sponsors think the JUI may be persuaded that honour killings are an abuse of sharia concepts that were intended to resolve tribal wars, not to provide cover to murderers. But the mullahs may still balk if they believe reform is part of a “Western agenda” epitomised for many by the outrageous Ms Baloch. 7

Dissent in Laos

Radio silence VIENTIANE

As Barack Obama prepares for his first visit to Laos, its civil society struggles

A

HIGHLIGHT of Ounkeo Souksavanh’s years as a radio host in Vientiane, the capital of Laos, came in late 2011 when he hosted an episode of Wao Kao (“News Talk”) on land disputes in the south of the country. Near the end of the programme, Mr Ounkeo says, a listener called in and criticised the son of a Politburo member for allegedly grabbing land from farmers for a property-development project. In mid-2012 the Lao government appeared to show sympathy with such complaints: it said it would suspend the granting of permits to take over farmland for rubber plantations, a big cause of farmers’ gripes.

But there was no on-air celebration. The government had shut down the radio programme, one of the country’s only public outlets for grievance. In December 2012 Sombath Somphone, a campaigner for farmers’ rights who had publicly challenged the granting of rural land-use concessions to businesses, was stopped at a police post and put into the back of a pickup truck. He has not been heard from since.

His supporters put up notices about his disappearance, like the one pictured on the next page. Officials told them to stop. Mr Ounkeo felt that he was in danger, too. He eventually left for America. He now works there for Radio Free Asia, a station funded

by America’s Congress.

Foreign ministers from the ten-country Association of Southeast Asian Nations (ASEAN) are due to meet in Vientiane on July 24th for talks on regional issues. One delegate is Aung San Suu Kyi from Myanmar, which has recently taken a big step away from the authoritarianism that once gripped it. Mr Ounkeo describes Miss Suu Kyi as an “icon of democracy”. He says she is an inspiration to young people and intellectuals in Laos.

But Mr Ounkeo and observers in Vientiane say there is little chance that Myan- 1

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Sombath is missing 2 mar’s opening will be replicated soon in

Laos, which resembles Myanmar in its darkest days. It has no free press and dissent is rare and dangerous. NGOs must be approved by the government, which is led by the communist Lao People’s Revolutionary Party (LPRP), the only one allowed by law. They are often strangled by red tape.

There has been a notable chill since Mr Sombath’s disappearance. Most local civilsociety organisations have government links and stick to non-controversial initiatives in areas such as health and education (Mr Sombath’s Participatory Development Training Centre is a rare exception). In May three people who wrote anti-government posts on Facebook were shown on state television in prison garb, confessing their crimes. Their fate is unclear, yet the message is obvious. “It’s an unreconstructed Stalinist dictatorship,” says Phil Robertson of Human Rights Watch, an NGO. When Western diplomats raise the case of Mr Sombath’s disappearance, Lao officials say that they, too, do not know where he is. They insist that the government is constitutionally bound to protect the civil rights of its citizens. In December officials even took part in a conference hosted by the United Nations Development Programme to discuss human rights (delicately) with foreign experts and civil-society members. But the government also says it prizes the stability that Laos has enjoyed since 1975, when the LPRP seized power with backing from North Vietnam.

This hints at what it really thinks: that civil liberties must be kept in check.

Western countries, however, are not likely to put the kind of pressure on Laos that they once did on Myanmar. They are eager to court friendship with ASEAN (of which Laos is chairman this year), partly as a counterbalance to Chinese power in the region. In September Barack Obama is due to become the first sitting US president to visit Laos, where he will attend an ASEAN summit. That will put the impoverished country of 7m people under a spotlight,

WIFE and daughter arrive home to find their living room transformed.

Behind a partition, Daddy is sitting in a soundproof cubicle, strumming his guitar. He offers his stunned wife a drink at his new bar, and gleefully shows off his table-football skills. He is the star of a recent episode of “Macho House”, a new television show that creates dream spaces for South Korean men.

The programme is more of a gag show than one on thoughtful redesign. But it taps into a growing desire among South Koreans to rearrange their private living spaces. At first sight that is surprising for a nation that spends more hours at office desks than any other among rich countries. Yet in a recent poll by Macromill Embrain, a local market researcher, over half said they had spent more time at home in the past year due to “growing social anxieties”. Amid an economic slump, city-dwelling South Koreans are seeking solace in their cramped flats.

They want time there to be “very special, almost festive”, says Soh Yoon-young, an architect and author.

Jipbang—“house broadcasts” that often weave tips on design makeovers with advice for unhappy occupants— promote a new approach to domestic wellbeing. “Let Me Beautify Your Home”, which started airing in the spring, is a spin-off of “Let Me In”, a controversial series that offered radical plastic surgery as a cure for misery. The new show tailors interior designs to a family’s problems: an uncommunicative teen, or a retired father who lacks authority. It suggests, for example, new partitions to create privacy—or to force all family members to pass through a shared living space in order to get to their bedrooms. In “Old House, New House”, two teams of experts compete to revamp a celebrity’s house, recreated in a studio. In “My Room’s Dignity”, DIY geeks offer tips on how to spruce up dingy studios.

but human rights are expected to be a side issue at best. America needs the support of China-leaning Laos in its efforts to forge a regional consensus on how to deal with China’s assertiveness in the South China Sea. Laos is littered with unexploded American bombs that were dropped during the Vietnam war. Mr Obama will try to win hearts and minds by announcing more funding to help clear them up.

Regional civil-society leaders normally convene what they call a “People’s Forum”

Clutter is a big theme. Designers pride themselves on ideas for storing things, such as under sofas. They regularly suggest ways of creating what for some is their first experience of a room dedicated just to accommodating a Western-style bed. In urban apartments, rooms are commonly multifunctional: a bedroom might, once a sleeping mattress is rolled up, turn into a tea-room by day.

Oddly, given the state of the economy, sales at Hanssem, a home-furnishings store, rose by nearly a third last year compared with 2014. DIY shoppers collect tips from internet forums and online “housewarmings” on social-media sites such as Instagram. These involve the sharing of snaps of renovated flats: in South Korea people “bangstagram”, after the word for “room”.

Ms Soh says some are mimicking the modern designs of South Korea’s vibrant cafés. These are popular places to socialise in a country where few people feel confident enough to invite others into their homes. As more homeowners gain pride in their slick interiors, they may feel readier to spend less time sipping latte and more hanging out with friends in their own alluring lounges.

alongside ASEAN summits. There will be no such gathering in Vientiane. Mr Robertson says Lao civil-society leaders have told counterparts elsewhere that their government will not allow certain topics to be discussed in Laos. These include gay rights, the building of controversial dams on the Mekong River and the case of Mr Sombath.

So the People’s Forum will instead be held in Timor-Leste, 2,400 miles (3,900km) away. Even there, Laotians expect their government will keep a close watch. 7

The Economist July 23rd 2016 43

China

Also in this section 44 Xi’s control of nationalism

For daily analysis and debate on China, visit Economist.com/china

Hong Kong police

The force is with who?

HONG KONG

Falling public trust in the territory’s police bodes ill

H

ONG KONG had long been renowned for the peacefulness of its protests and the tact with which police normally handled them. So it was a shock to the territory when, in 2014, police at first responded aggressively to pro-democracy unrest that began with large-scale demonstrations and continued with weeks of sit-ins on roads. The protesters’ means of defence against the pepper spray and tear gas gave its name to the movement: the Umbrella Revolution. It ended peacefully, but the damage had been done. Growing public mistrust of a vital institution was added to longstanding anxiety about China’s political influence in the territory. This does not augur well for Hong Kong’s stability.

For a long period under British colonial rule, Hong Kong’s police were widely reviled for their corruption; during violent anti-British unrest in the 1960s leftist radicals were rounded up even for peaceful protest. But the force’s image began to change in the 1970s: a new anti-graft body, the Independent Commission Against Corruption (ICAC), purged its ranks. Public trust in the police helped ensure a smooth transfer from British to Chinese rule in 1997.

Hong Kong’s police did little more than change their cap badges (some of its British officers stayed in place, a curious sight on the streets of a Chinese territory); the law remained essentially the same. Even after anti-government demonstrations in 2003, far larger than the ones in 2014, the police

continued to be held in high esteem.

Rule of law is what made Hong Kong such a great centre of international business, and what continues to distinguish it from the Chinese mainland. Hong Kong is still one of the safest cities in the world. In 2015 its crime rate fell to a 43-year low, with fewer offences per person even than famously law-abiding Tokyo. But there is a growing perception that the 33,000-strong force is becoming politicised. It still largely operates by rules bequeathed by the British. Yet officers work for a government that ultimately answers to the Chinese Communist Party in Beijing, even though it has been granted a “high degree of autonomy” by the central authorities. On the mainland, the most important role of the police is political: to keep the party in power.

The thin red line China’s critics in Hong Kong point to what they see as examples of a similar imperative swaying the territory’s police. In 2002 several followers of Falun Gong, a Chinese spiritual movement which the Communist Party regards as a serious threat to its rule, were convicted for obstruction after meditating outside the central government’s liaison office in Hong Kong. The ruling was later overturned; a judge deemed that no obstruction had been caused.

When Li Keqiang, now China’s prime minister and then one rank below, visited Hong Kong in 2011 police shielded him

from seeing protesters. The tactic was repeated this year when Zhang Dejiang, a member of the Politburo’s Standing Committee and head of China’s rubber-stamp parliament, went to the territory.

Public satisfaction with the force slowly fell after 2007, according to a poll by the University of Hong Kong. After the protests in 2014 it plummeted to less than 21%, down from nearly 75% when Chinese rule resumed. It has since recovered slightly.

The fall was partly the result of police violence against protesters during the Umbrella movement (police also reportedly stood by as thugs attacked demonstrators). Nathan Law Kwun-chung, who was a student leader of the movement and now heads a new political party, Demosisto, describes front-line police as “like monsters beating us, you could see nothing in their eyes.”

(Their use of pepper spray and tear gas on protesters was very rare.) On July 21st Mr Law was convicted of inciting demonstrators to gather, and two fellow protesters were found guilty of unlawful assembly— the first criminal convictions of student leaders of the unrest in 2014.

Among the units patrolling the demonstrations was one normally assigned to fighting Triad gangsters; police from this group were allegedly among seven officers who were filmed beating a demonstrator, Ken Tsang (pictured, escorted by officers), with his hands tied behind his back. It did not help the force’s image that it took the police a year to lay charges against the officers allegedly responsible (their trial has been adjourned until October).

Qualms about the force’s quality extend beyond their handling of demonstrators. Some people accuse the police of failing to attach due importance to the disappearance of five Hong Kong booksellers who many believe were seized by mainland agents because they dealt in sa- 1

44 China 2 lacious works about Chinese politicians.

One was apparently snatched from Hong Kong itself and another from Thailand; the others were visiting the mainland. (All but the one who disappeared from Thailand have since returned; he is thought to remain in the custody of mainland police.)

The investigation of the disappearances was handed to the missing persons unit, and was not taken up by the far stronger anti-Triad one, which deals with most cross-border crime and liaises often with mainland agents.

The neutrality of the ICAC has also been questioned this month following the reassignment of its chief investigator after only a year in office (she subsequently resigned). Though officially she was replaced for not being up to the job, some commentators suggest that her real shortcoming was refusing to mute an ongoing investigation into a HK$50m ($6.5m) payment to Hong Kong’s chief executive, Leung Chunying. His office has denied Mr Leung was involved in any wrongdoing.

The Economist July 23rd 2016 Suspicions abound in Hong Kong that the party’s tentacles are spreading. One of the booksellers, Lam Wing-kee, says he has been followed by strangers since his return to Hong Kong. Some pro-Umbrella publications have reported cyber-attacks or harassment. On July 14th Hong Kong’s government ruled that candidates for September’s elections to the territory’s legislature must sign a declaration acknowledging that Hong Kong is an “inalienable part” of China, a response to a small but growing call for independence for Hong Kong. Several groups say they will not sign.

The malaise is helping to nurture a generation of protesters who are more prepared to confront the police—and cops, in turn, who expect to be targets of crowd violence. In February police used batons and pepper spray and fired two warning shots into the air in Mongkok district during a crackdown on unlicensed street hawkers that snowballed into a riot—China blamed it on “separatists”. The erosion of public trust increases the risk of such turmoil. 7

The South China Sea

My nationalism, and don’t you forget it BEIJING

Xi Jinping tries to contain public fury over the South China Sea

C

HINA is smarting. A tribunal in The Hague ruled on July12th that its claims to most of the South China Sea had no basis in international law. In the days since, China’s government has shown no sign of wanting to dig itself out of a diplomatic hole—or any sign that it thinks it is in one.

Officials had two opportunities to be emollient and passed them both up. The first came when discussing bilateral talks with the Philippines, which had brought the case. Before the verdict the Philippines’ new president, Rodrigo Duterte, had said “let’s talk.” But according to his foreign minister, Perfecto Yasay, China demanded the talks take place without reference to the tribunal’s ruling. When Mr Yasay said no, the Chinese side muttered that “we might be headed for a confrontation.” China also continued to block Philippine fishermen from their traditional grounds.

The other chance to step backcame during a visit to Beijing by the chief of America’s navy, Admiral John Richardson. His opposite number, Wu Shengli, did not miss the opportunity to miss an opportunity.

“We will never stop our construction on the Nansha [Spratly] islands half way, no matter what country or person applies pressure,” he said, referring to China’s controversial building of harbours and runways on disputed outcrops in the South

China Sea. At least they were talking.

Bellicosity from the brass is the order of the day. According to Reuters, another Chinese admiral, Sun Jianguo, told a forum in Beijing that “freedom of navigation” by American warships in the South China Sea, designed to ensure sea lanes stay open, could “play out in a disastrous way”.

A vice-chairman of the Central Military Commission, the Communist Party body

Playing chicken with the party

that controls the armed forces, talked about beefing up combat preparedness during an inspection tour in the southern province of Guangdong. And so on.

More worrying than words were the actions. The maritime authority of Hainan, an island province off Guangdong, said it was closing an area in the South China Sea for three days while naval exercises took place. Xinhua, an official news agency, said China had recently dispatched a combat air patrol, consisting of H-6K bombers and fighters, over the South China Sea. China has been talking about setting up an Air Defence Identification Zone in the area, requiring incoming aircraft to identify themselves to its authorities. The air patrols could help China implement one. John Kerry, America’s secretary of state, has called the idea of such a zone “provocative and destabilising”.

Two things are clear. One is that stubborn nationalism is a strong feature of China’s foreign policy. The other is that Xi Jinping—China’s president, Communist Party leader and commander-in-chief—is determined to control it, just he is to dominate all aspects of China’s politics. State media have dismissed the tribunal as an American puppet, but Mr Xi does not want anti-US fervour to disrupt his diplomacy.

China’s navy is still taking part in biennial naval drills called RIMPAC, hosted by America and joined by more than 20 other countries, that are under way off Hawaii. It appears to relish the prestige.

After the verdict, China’s social media started to call on people to boycott bananas from the Philippines and American brands such as iPhones and KFC, a fastfood chain. But the last thing Mr Xi wants are public demonstrations. (In the past century, patriotic protests have had a habit of turning against the government in China.)

So this week, Xinhua and People’s Daily, a party newspaper, started criticising the “irrational patriotism” of social media. A picture (left) that circulated on social media of a protest outside a KFC outlet was deleted by censors. If there is one thing more important than Chinese nationalism, it seems, it is party control.

That was borne out on July 17th when the Chinese National Academy of Arts forced the closure of one of China’s most important and few remaining liberal magazines, Yanhuang Chunqiu. The decision to close it was remarkable because Mr Xi’s late father, Xi Zhongxun, was one of its most important fans. The closure was inconceivable without the younger Mr Xi’s say-so. The magazine won its spurs by challenging the party’s account of events ranging from the Communist takeover of China in 1949 to the Cultural Revolution of the 1960s and 1970s. But nothing may now challenge the official version—as the government’s angry defence of its “historical” claims in the South China Sea shows. 7

The Economist July 23rd 2016 45

International

Also in this section 46 Keeping calm at work

Stress

What makes us stronger

New research shows that even severe stress can have an upside

F

OR centuries physicists have used the word stress to describe force applied to materials. It was not until the 1930s that Hans Selye, a Hungarian-born endocrinologist, began using it of live beings. Selye injected rats with cow hormones, exposed them to extreme temperatures and partially severed their spinal cords to prove that all these sorts of maltreatment affected the rodents in the same ways: they lost muscle tone, developed stomach ulcers and suffered immune-system failure. He used the word for both the abuse of the rats and the health effects. Later on, it started to be used for psychological suffering as well.

Today, the Oxford English Dictionary defines stress as “a state of mental or emotional strain or tension resulting from adverse or demanding circumstances”. The causes vary enormously: one person may be stressed by exams but happily swim with Great White sharks. Another may have to take sedatives before flying, but adore speaking to a crowd. This makes stress hard to measure. Proxies, such as the Negative Experience Index produced by Gallup, a pollster, suggest the world is growing more pessimistic, which may indicate increasing stress levels. Other surveys confirm what is perhaps obvious: stress is universal.

The American Psychological Association (APA) suggests that, at least in America, the most common causes are to do with money, work and family. Women report

being more stressed than men and are twice as likely to be diagnosed with anxiety disorders. Studies on rats indicate that sex hormones such as oestrogen and progesterone may play a part; so may the double burden of family and work. Men may also be more likely to conceal their distress.

Black and Hispanic Americans, as well as poor people and parents, also report higher levels of stress. In 2015 half of Americans starting university reported being stressed most or all of the time.

Young people have long reported more stress than old people, says Mary McNaughton-Cassill of the University of Texas at San Antonio. But she believes today’s youth are more overwhelmed than ever before. Globalisation means rapid change in the workplace, and firms increasingly expect employees to be constantly connected. The mass media flood us with bad news while creating unattainable aspirations, she adds: “you have to look like a movie star, stay informed about politics, take care of the kids and hold down a job.”

Social media, which may lower stress when used to strengthen connections with friends, have been associated with higher stress when they deliver news of friends’ travails, such as divorces and accidents.

Many studies have shown that stress has similar effects on humans as on Selye’s rats. It has been linked to high blood pressure, headaches, stomach upset and insomnia. According to the APA, chronic

stress can “ravage” the immune system and increase unhealthy behaviours, such as drinking and smoking, that raise the risks of diabetes and cardiovascular diseases. A recent study by Bruce McEwen, a neuroscientist at Rockefeller University, showed that exposing rats to stress for just three weeks changed their brain architecture. Forcing his rats to swim, among other unpleasant tasks, shrank the dendrites in their amygdalae, the parts of the brain that control emotional responses, decisionmaking and memory. Though reversible, such changes in humans increase the risk of anxiety disorders and depression.

Snapping point Late in his career Selye came to distinguish between “eustress”, or the good stress caused by positive experiences, such as falling in love, and distress, the bad sort.

Other scientists extended the original physics metaphor: just as many materials can withstand stress until a certain point, it was thought that humans could cope with stress if it did not become too severe. Indeed, the idea took hold that moderate stress might be a good thing. In 1979 Peter Nixon, a consultant at Charing Cross Hospital in London, described a “human function curve”: a moderate amount of stress, such as a deadline or race, was now understood as not just harmless, but beneficial.

But above a certain threshold humans, like metal bars, would break.

Now a new body of research is challenging that notion. Some scientists posit that what matters is not just the level of stress, or even its type, but how it is thought about. The same stress, perceived differently, can trigger different physical responses, with differing consequences in turn for both performance and health.

Recognising that stress can be beneficial seems to help in two main ways. Peo- 1

46 International 2 ple who have a more positive view of

stress are more likely to behave in a constructive way: a study by Alia Crum of Stanford University’s Mind and Body Lab and others found that students who believed stress enhances performance were more likely to ask for detailed feedback after an uncomfortable public-speaking exercise. And seeing stressors as challenges rather than threats invites physiological responses that improve thinking and cause less physical wear and tear.

Humans can respond to stress in several different ways. The best-known is the “fight or flight” response, which evolved as a response to sudden danger. The heart rate increases; the veins constrict to limit the bleeding that might follow a brawl and send more blood to the muscles; and the brain focuses on the big picture, with details blurred.

In less extreme situations, the body and brain should react somewhat differently.

When people perceive they are being challenged rather than threatened, the heart still beats faster and adrenalin still surges, but the brain is sharper and the body releases a different mix of stress hormones, which aid in recovery and learning. The blood vessels remain more open and the immune system reacts differently, too.

Sometimes, though, the wrong response is triggered, and people sitting exams, giving a speech or pitching a business plan react as if to a sudden threat, with negative consequences for both their performance and their long-term health.

Ms Crum believes that attitudes and beliefs shape the physical response to stress.

In 2013 she subjected student volunteers to fake job interviews. Beforehand, they were shown one of two videos. The first extolled the way stress can improve performance and forge social connections; the second emphasised its dangers. In the fake interviews, the participants were subjected to biting criticism. When Ms Crum took saliva samples at the end of the study, she found that those who watched the upbeat video had released more DHEA, a hormone associated with brain growth.

In an earlier study Ms Crum and Shawn Achor, the author of “The Happiness Advantage”, visited UBS, an investment bank, at the height of the financial crisis in 2008.

They split around 400 bankers into three groups. The first watched a video that reinforced notions of stress as toxic, the second watched one highlighting that stress could enhance performance and the third watched no clip at all. A week later the second group reported greater focus, higher engagement and fewer health problems than before; the other two groups reported no changes.

Other scientists have shown that recognising the benefits of stress can cause measurable improvements in performance. In one experiment Jeremy Jamieson, a psy-

The Economist July 23rd 2016 chology professor at the University of Rochester, gathered college students preparing for the Graduate Record Examination (GRE), an entrance test for postgraduate courses. He collected saliva from each of the students to measure their baseline stress response and divided them into two groups. One group was told that stress during practice exams was natural and can boost performance; the other got no such pep talk. The students who received the mindset intervention went on to score higher on a GRE practice test than those who did not. When Mr Jamieson collected their saliva after the exam, it suggested his intervention had not soothed their nerves: they were at least as stressed as those in the control group. A few months later the students reported their scores on the real GRE exam: those who had been taught to see stress as positive still scored better.

“Google images of stress and you’ll see a guy with his head on fire. We’ve internalised that idea,” says Mr Achor. He instead compares stress to going to the gym. You only get stronger if you push yourself beyond what feels easy, but afterwards you need to recover. The analogy suggests that stress at work may be performance-enhancing, but should be followed by rest, whether that means not checking e-mails on weekends, taking more holiday or going for a stroll in the middle of the day.

The well-tempered mind Kelly McGonigal, a psychologist at Stanford University and the author of “The Upside of Stress”, helps people rethink stress by telling them that it is what we feel when something we care about is at stake. She asks them to make two lists: of things that stress them; and of things that matter to them. “People realise that if they eliminated all stress their lives would not have much meaning,” she says. “We need to give up the fantasy that you can have everything you want without stress.”

By changing how their bodies process stress and how they behave, such reframing may help people live healthier lives. In 2012 a group of scientists in America looked back at the 1998 National Health Interview Survey, which included questions about how much stress the 30,000 participants had experienced in the previous year, and whether they believed stress harmed their health. Next, they pored over mortality records to find out which respondents had died. They found that those who both reported high stress and believed it was harming their health had a 43% higher risk of premature death. Those who reported high stress but did not believe it was hurting them were less likely to die early than those who reported little stress.

The study shows correlation, not causation. But since much stress is unavoidable, working out how to harness it may be wiser than fruitless attempts to banish it. 7

Workplace stress

Fuss and bother How firms are easing the strain

T

HE cost of stress is staggering. In Britain, 43% of all working days lost due to ill-health are because of stressrelated conditions. Across Europe the share is even higher. One recent paper in America estimated that work-related stress—which excludes that experienced by the unemployed, students and those working in the home—accounted for between $125 billion and $190 billion in health-care costs annually.

Governments and firms are starting to pay attention. Last year Japan—which has a word (karoshi) to describe death from overwork—flirted with the idea of forcing employees to take more of the vacation to which they are entitled.

France recently passed a law giving workers the “right to disconnect”, which obliges firms with more than 50 staff to draw up rules for handling out-of-hours work e-mails. Google has nap pods in its headquarters; employees can also attend meditation and mindfulness classes. The New York offices of Knewton, an education-technology company, boast ping-pong tables and a large terrace for “knerds” in need of a break.

Travellers at Los Angeles International Airport are greeted by dogs from the airport’s Pets Unstressing Passengers (PUP) programme. On Fridays at Yale Medical School, angsty students can visit Finn the Therapy Dog, whose ancestry includes terrier and poodle. The University of Minnesota has a similar scheme with a range of animals, including Woodstock, a lushly feathered chicken (pictured). Petting animals is known to lower blood pressure and cholesterol.

No feathers flying

The Economist July 23rd 2016 47

Business

Also in this section 48 China’s industrial internet of things 49 SoftBank and ARM 49 The Ultimate Fighting Championship 50 American company earnings 50 The rise of gendered products 51 Schumpeter: Silicon Valley 1.0

For daily coverage of business, visit Economist.com/business-finance

Methane leaks

A dirty little secret Natural gas’s reputation as a cleaner fuel than coal and oil risks being sullied by methane emissions

M

ETHANE is invisible to the naked eye and does not make for good television. So when about 100,000 tonnes billowed out of a natural-gas system in Aliso Canyon, Los Angeles, over 112 days last winter (pictured in infra-red above), it drew relatively little media attention— even though it forced the evacuation of thousands of homes and the plume was big enough to be detectable from space.

Compare that with coverage of the Deepwater Horizon oil spill in 2010, which was the top item of news for weeks in America, much of it focused on the environmental impact on the Gulf coast.

Unsurprisingly, many oil and gas companies would prefer methane leaks to remain out of the public eye, even though their industry now surpasses cow burps as a source of emissions (see chart). Methane is the predominant constituent of natural gas, a fuel that energy companies are embracing over oil and coal as a “bridge” to a post-carbon future and which has been given a new lease on life by America’s shale revolution. When burned, it emits about half as much carbon dioxide as coal and far less sulphur, soot and other pollutants. But greenhouse gases insulate the Earth in different ways. Carbon dioxide stays in the atmosphere for more than 500 years; methane just for 12. But the latter is about 25 times more potent.

The American Petroleum Institute (API), a lobby group, says America is in

“good shape” thanks to natural gas. As it has over time rivalled coal as the main source of power generation, it has helped lower emissions of the main source of global warming. The institute cites data showing that the amount of methane that leaks out ofnatural-gas wells and pipelines crisscrossing America has fallen over the past quarter of a century. “Let’s not get unreasonably concerned about [methane], because the industry has been addressing it,” says the API’s Erik Milito.

Yet even environmentalists who acknowledge a preference for natural gas over coal believe methane leaks could be its fatal flaw. The Environmental Defence Fund (EDF), an American NGO that works with industry to reduce methane emissions, has in recent years deployed

Spewing bad data US methane emissions by source, 2014, % 0 Natural gas & petroleum Livestock digestion Landfills Coal mining Manure management Other Source: EPA

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infra-red cameras along energy firms’ pipelines and beside thousands of oil and gas wells, as well as airborne monitoring kit to gather data. The results suggest methane leaks are significantly higher than had been previously understood.

EDF has found that a disproportionate amount of fugitive emissions from the oil and gas infrastructure comes from a few “super-emitting” sites. In rare cases, like Aliso Canyon, they can take months to plug. More often the culprits may be wellside storage tanks with faulty valves, which may be fixable just with a wrench, but while left unattended billow methane into the air.

Recently, the Environmental Protection Agency (EPA), an American regulator, has introduced its first regulations specifically aimed at capping methane emissions, acknowledging it has underestimated the problem. It has lifted its estimate of the amount of methane that leaked out of the natural-gas and oil supply chain in America in 2013 by about 30%—a massive revision. Steve Hamburg, EDF’s chief scientist, says that still leaves out the “fat-tail” superemissions. He reckons about 2-2.5% of the gas flowing through the American supply chain leaks out, in total.

Get much higher, and that would endanger the argument that natural gas is over all time periods cleaner than coal.

And if natural gas emerges as a rival to petrol as a transport fuel, as European companies such as Royal Dutch Shell strongly hope, such levels would erode the net climate benefit altogether, Mr Hamburg says.

“Switching from coal to gas is always advantageous to the climate over the long term, but the short-term benefits depend on minimising methane emissions,” he says. He has experience ofmethane’s effect at his cabin in the White Mountains of New Hampshire, where global warming 1

48 Business

The Economist July 23rd 2016

2 means that trees now grow in places he

would never have thought possible.

Oil and gas producers acknowledge it is in their interest to curb leaks; it gives them more natural gas to sell. They say they are stepping up monitoring efforts, and have increased the use of “green completions” at shale wells to capture methane emitted at the end of the fracking process, rather than flaring it at the well head. Big European companies appear to take the reputational risk seriously. “The industry realises it needs to get its act together,” says one executive. BP, for instance, has designed a gas project in Oman that should be leak-free.

Italy’s ENI has set publicly available targets for cutting methane emissions.

Some state-owned oil giants, such as Saudi Aramco and Mexico’s Pemex, have joined global efforts to reduce methane emissions. But many reckon firms in Russia, Angola and Nigeria would show up as big emitters if reliable data were collected.

A report last year by the Rhodium Group, a research firm, said large producers such as Iraq, Angola and Libya had never reported methane-emissions numbers to the UN. Without good global data, it will be impossible to get the problem in hand. 7

The industrial internet of things

The great convergence SHANGHAI

China aims to lead the world in connecting the factory

T

HE “internet of things” (IoT) is much hyped. For a decade, a world in which household appliances, packaged goods, clothes, medical devices and much more besides would be connected to the internet via smart chips and capable of sensing and sharing information has been just around the corner. Progress remains slow in the consumer market, despite a few hit products, such as the Fitbit, an activity tracker that connects to smartphones. An industrial form of the IoT, however, may come to fruition much faster.

As the world’s biggest manufacturing power, China is well placed to lead this transition. Which is why this week GE, the world’s biggest industrial company, opened what it calls a “digital foundry” in Shanghai. The centre will help Chinese companies develop and commercialise products for the industrial internet of things, which involves factory machines and industrial goods communicating with each other and their surroundings. It will probably be a much bigger market than the one for consumers. China has millions of factories with billions of machines and it also makes most of the world’s electronics,

Machine language Device-to-device connections, m 2014 2020 forecast 0

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China United States Japan Brazil India Source: GSMA

including many of the sensors and other electronic devices that would form the backbone of such a network. Moreover, the government is keen to upgrade the country’s manufacturing base.

There are already more things connected to each other in China than in any country, with the numbers set to skyrocket further (see chart). IDC, a research firm, forecasts that the overall market for IoT kit of various forms in China will rise from $193 billion last year to $361 billion in 2020.

Accenture, a consultancy, reckons embracing IoT in manufacturing could add up to $736 billion to China’s GDP by 2030.

GE’s new centre (it will soon open a similar one in Paris to tap into the European market) is part ofits efforts to get firms to use Predix, its proprietary software for the industrial IoT. The American company had already signed up China Eastern Airlines and China Telecom, two big stateowned enterprises, and this week Huawei, a Chinese telecoms-equipment giant, also came on board as a partner. GE is not alone in seeing China as a potential hotbed ofthe industrial IOT. Siemens, a German rival, held an event in Beijing earlier this month to trumpet its own technology. HP, Honeywell and Cisco, all big American technology firms, are also rushing in.

Sany side up Chinese firms, however, have their own plans. China Mobile, the largest mobilephone firm, has established its version of a digital foundry: a “cellular IoT open lab”. Li Yue, the company’s chief executive, dreams that he could earn 100 billion yuan ($15 billion) from the IoT with as many as five billion devices connected by 2020.

Chinese firms also have local knowledge. Sany, which makes construction equipment, started connecting machines on its factory floor in 2008. It then put sensors on its diggers and cranes to monitor them in real-time to improve operating efficiency. The company has invested in data analytics and artificial intelligence. He Dongdong, who leads those efforts, brags that unlike foreign multinationals his firm knows how to make affordable kit that

works in “Chinese conditions”. By that he means places where workers are lowskilled, conditions are dirty and operators often push equipment to its limits.

That points to another sort of local advantage. Foreign firms might have fancier kit, but locals know how to make things cheap and cheerful. Huawei’s push into the IoT got a boost in June when a new protocol it helped to develop, known as “narrow band IoT”, was approved as a global standard. The new protocol works with devices that require inexpensive sensors that use little energy.

Still, there are three potential snags to China’s IoT ambitions. Firms, squeezed by both a weak local and global economy, may not be able to afford to connect their machines to the cloud. Sany’s Mr He, however, reckons the downturn will be good for stronger firms as their low-end competitors will be forced out.

Secondly, Chinese factories are less technologically advanced than those in America or Europe, so moving to advanced computer-controlled production and automation could be daunting for some.

Finally there are standards. Despite the new narrow band IoT protocol, there is a lack of overall global standardisation, such as the common GSM protocol that allowed Europe to leapfrog others in mobile telephony. Jagdish Rebello of IHS, a consultancy, argues that a push from Chinese regulators, combined with the country’s massive home market, could lead to domestic standards dominating the global market. Firms elsewhere, and in a variety of different industries from cars to robotics and cloud computing, will have other ideas. Consumers, meanwhile, will continue to wait for the refrigerator that can contact the supermarket to restock itself. 7

The Economist July 23rd 2016 SoftBank and ARM

Everything under the Son Masayoshi Son sets the tone for SoftBank after the exit of his successor

A

S A student, the 58-year-old founder of SoftBank, a Japanese telecoms firm, resolved to dream up one computer-related business idea a day. When Masayoshi Son saw, at that time, a picture of a new Intel chip in a science magazine, he cut it out and kept it with him for years. So it fits that his biggest acquisition should be in semiconductors. On July 18th he said SoftBank would buy ARM Holdings, a British company that designs processing chips, for £24 billion ($32 billion).

After Nikesh Arora, a former Google executive whom Mr Son named as his successor only a year ago, abruptly left SoftBank in June, investors had anticipated a shift in strategy. Mr Arora invested over $3 billion in a smattering of global startups.

Mr Son had seemed to refocus on paying down his firm’s massive net debt, which reached over $80 billion at the end of March, a ratio of four times gross operating profits. Sprint, its struggling American telecoms subsidiary, which it bought for $39 billion in 2013, accounts for about $30 billion of that debt. SoftBank agreed to sell some assets, including a stake in Alibaba, a Chinese e-commerce giant.

But investors who know Mr Son’s audacious ways had been totting up the sums to hazard a guess on his next big deal, says an analyst in Tokyo. Mr Son has topped up ¥2.3 trillion ($21.7 billion) of cash with a bridge loan of ¥1 trillion to buy ARM. Set up in 1990 in Cambridge, ARM is obscure yet fantastically important: the chips in over 95% of all smartphones sold last year are based on its designs, which it licenses to hardware makers including Apple and Samsung of South Korea, earning a royalty for each chip its customers sell. Last year they sold 15 billion ARM-based chips, an increase of 25% from 2014, and more than double the 6 billion sold in 2010.

ARM is now trying to get into designing chips for giant servers, as Intel does. Its model means that, as more of its designs are sold—and as a single chip contains ever more of its processors—royalties should grow. But slowing smartphone sales means it needs to move into other areas, such as cars and machinery. In 2013 it bought Sensinode, a software provider for the “internet of things”, which adds sensors and web connections to everyday objects from toasters to tractors. In South Korea, ARM-based sensors in fish tanks signal nutrient levels to farmers by text message.

The British firm’s high market share and

Business 49 steady cashflow appeals to SoftBank, as tightening regulation in Japan could squeeze profits from its smartphone customers. The big question is how long-term a view it will take with ARM. Ifit is tempted to jack up its royalties—currently just 1-2% of the chip’s selling price—that might upset chipmaker clients. For now, though, Mr Son says he wants to support ARM in “aggressive” investments in technology and engineers; he will start by doubling its headcount in Britain within five years.

That suggests he will support it to become a big player in the internet of things. Mr Son is showing his seriousness on this, argues Oliver Matthew of CLSA, a stockbroker. One of Mr Son’s more restrained forecasts about the future of technology is that by 2040, everyone will own 1,000 devices each connected to the internet.

Big, visionary bets are his stock-intrade. But the premium he is paying for ARM—over 40 times its forecast earnings for 2017—has once again alarmed investors.

So far, SoftBank’s domestic acquisitions have worked well but the record overseas is patchy. Its shares plunged by a tenth on July 19th. Sprint’s shares plummeted too: many worry that ARM will distract Mr Son from reviving it. And “how will they fund ARM’s future development if Sprint fails?” asks one longtime SoftBank watcher.

Mr Son says he can invest in ARM because he is confident he can turn Sprint around. He has taken on more vertiginous levels of debt in the past when he bought Vodafone’s Japanese subsidiary in 2006, and paid off the debt early. Mana Nakazora of BNP Paribas doubts SoftBank will make any more big buys for two or three years, and expects it to focus now on improving its balance-sheet. That was the theory after his last huge investment, in Sprint, too. 7

Niche media

Fight club What the value of a martial-arts promoter says about the media

B

LOODIED bone visibly juts out of his ring finger but Josh Emmett keeps on fighting. At the Ultimate Fighting Championship (UFC), broken bones need not stop the spectacle. Violence sells. And in the case of the UFC, a mixed martial-arts league, it sells for $4 billion—the largest sale of a single sports organisation in history.

For Lorenzo and Frank Fertitta, who bought UFC for just $2m in 2001, this month’s deal is a thumping victory. Back then, mixed martial arts (a free-for-all of boxing, ju-jitsu, wrestling and other disciplines) was banned in New York state and

Their tweets are punchy too branded “human cockfighting” by Senator John McCain. Now, the UFC dominates the field. It claims to be in 1.1 billion homes in 156 countries and to be the world’s largest pay-per-view event provider. It has a $100m annual contract with the Fox cable-TV network in America and boasts a growing digital-streaming platform.

The new owners are a group led by WME-IMG, an American talent agency.

Their executives are thought to be bullish on the future of UFC’s $10 a month digitalstreaming platform, Fight Pass, and future opportunities in Asia. The two may go together. Digital streaming will be central to winning new fans and earning fees from new viewers in China and many other new markets, says Dan Singer of McKinsey, a consulting firm.

Still, $4 billion for a bit offisticuffs might seem rich. This year Comcast bought a whole film studio for $3.8 billion. But the deal signals three trends in sport and media. Live sports are commanding everhigher premiums for broadcast rights, as networks fear losing viewers’ attention to the internet and smartphones. Second, UFC’s rise as a social-media phenomenon shows that it pays to be savvier in this area than other media firms. UFC even gave bonuses to fighters making creative use of Twitter and now has 46m followers across social-media platforms. Lastly, owners and marketers of content are also becoming distributors of it, creating more opportunities to turn athletes into mainstream celebrities.

The only real headache for WME-IMG is that fighters are demanding more. Kajan Johnson, a lower-level UFC fighter, claims his pay has left him “struggling to eat”. Six former combatants are seeking classaction status for a lawsuit that alleges the UFC has restricted competition for fighters by buying up rival leagues. Athletes and owners alike want more bums on seats.

But a (fist-free) tussle over who benefits most from them may ensue. 7

50 Business Corporate earnings

Of populism and profits

The Economist July 23rd 2016 Consumer products

His and hers Companies hungry for profits are playing the gender card

NEW YORK

Investors may be too sanguine

I

F YOU look at the headlines, geopolitical risk is at record highs, with populism and strife in Europe, a coup attempt in Turkey, a tense election in America, the threat of terrorism, and tensions in the South China Sea. Peer at a stock-price screen, however, and everything seems fine. This month the S&P 500 index of big American firms roared to a new high. Benjamin Graham, a famous investor, described America’s stockmarket as a manic depressive. But now it appears to be one of the planet’s last, incorrigible optimists.

Investors are convinced that the outlook for corporate profits has improved.

For the past four quarters, earnings-pershare for the S&P 500 have been falling by about 12% compared with the prior year (see chart). That has reflected the strong dollar, which crimps the value of foreign income, together with a slump at energy and commodity firms. Coca-Cola’s global sales have risen in local-currency terms but declined in dollars; ExxonMobil’s profits have fallen by four-fifths compared with two years ago.

Yet now markets believe these problems are going away. The dollar and the oil price have stabilised and the domestic economy seems to be in a Goldilocks situation for profits—not too hot, not too cold. It is growing just strongly enough to keep demand for products moving along. But wages, or labour costs, so far this year have been rising at an annual rate of only 2-3%.

So America Inc can be slothful but highly profitable. In addition, firms are using high earnings to pay for share buy-backs, which have been running at $165 billion a quarter, and which help to prop up share prices.

A majority of analysts still expect profits to dip for the second quarter but then to rise, and strongly by the end of this year.

Just how sensible is this expectation? One objection is that a tightening labour market may mean that wage pressures rise at last.

Just a 5% rise in wages would, all else being equal, lower profits by about 15%. Yet this is not what the Federal Reserve expects, nor the bond market, which is pricing in a long period of low inflation and interest rates.

A still bigger risk, but one that is harder to quantify, is the longer-term effect of a fraught political climate upon corporate profits. Firms have earnings and cashflow at unusually elevated levels relative to GDP, while the share of output going to workers is depressed. Both sides of the presidential campaign have hit out at big

“G

ENTLEMEN, it’s time for us to be done with women’s cleaning products,” suggests the website for Hero Clean, a line of American products aimed at men that Elizabeth Sweet, a professor at the University of California, Davis, came upon while shopping in California. “No more pastel bottles with puppies, babies and dewy meadows.”

Only a tiny group of products merit distinction by gender. “Anything meant for your genitals,” says another gender expert, Lisa Wade of Occidental College.

Yet needlessly gendered items are proliferating. Q-TIPS now offers “men’s ultimate” cotton swabs for men whose earwax would overwhelm ladylike swabs. A firm in California called Daisy Rock hawks hot pink sparkle-coated “girl guitars” to women. Banana Boat, a sunscreen brand, sells black bottles of sun lotion to men who can’t touch its less masculine orange packaging.

There has been a huge shift towards gendered marketing since the 1950s when even beauty products were often genderneutral, says Ms Sweet. One theory is that because men and women are increasingly doing the same things, such as attending the same universities, doing the same jobs and household duties, marketers see a chance to appeal to an older instinct, for differentiation.

Some firms are even trying to charge

women more for the same products. A 2015 study in New York city found that women’s products cost more two-fifths of the time. But many of the new gendered products are for men. Powerful Yogurt, a food company, has begun producing high-protein yogurt in black tubs.

Mammoth Supply, a New Zealand-based producer of bottled iced-coffee, urges men to embrace their new domesticised reality. “Don’t just clear the leaves: eliminate them. Don’t just do the chores: annihilate them.” Bulldog Skincare peddles moisturisers “built for men”.

Other firms are treading more carefully. Following complaints about genderbased signs last year, Target, an American retailer, removed mentions of it from the kids’ bedding and toy sections. Some firms, such as Johnson & Johnson, a health-care firm, via its Clean & Clear brand, are even embracing transgender themes in their marketing.

Many consumers are resisting the gender card. Reviews on the Amazon page of Bic for Her pens, which are like any other pen except pink and purple, are sarcastic. One reviewer told how his wife, attempting to use his man-keyboard, faints until he revives her with smelling salts. Men may be from Mars and women from Venus, but both seem to agree that when it comes to pens, everyone can share.

firms, which many people feel are benefiting from an economy tilted in their favour.

How might such sentiment translate into lower profits? Hillary Clinton has promised to put pressure on drugs pricing (14% of all profits in America are earned by health-care firms). Her party has also promised a tougher approach on competition policy, which could hurt technology

firms with large market shares. Donald Trump might pursue a protectionist agenda that would be painful for big firms that operate abroad or that rely on imported inputs (about two-fifths of S&P 500 sales are made abroad). Both parties could seek to crack down on generous tax breaks for offshore profits.

Yet investors are shrugging off such concerns, perhaps reckoning campaign promises will be quietly forgotten. For example, analysts expect pharmaceutical firms’ earnings-per-share almost to double by 2018. It may be wishful thinking. The banking sector was the first industry in America to be hit hard by a populist backlash, and it is unlikely to be the last. Its earnings were hammered—banks’ return on equity has halved over the past decade. It is no coincidence that the chief executive now doing most to head off popular discontent hails from banking. Last week Jamie Dimon of JPMorgan Chase announced that 18,000 of its rank-and-file staff would see their pay rise from $10 an hour to $12-17. He may not be the last to make such gestures. 7

Mood swings S&P 500 earnings per share, $ Trailing 12 months

120 100 80 60 40 20 0 1988 90

95

2000

Source: S&P Dow Indices

05

10

16

The Economist July 23rd 2016

Business 51

Schumpeter Silicon Valley 1.0 Cleveland can teach valuable lessons about the rise and fall of economic clusters

W

HEN the Republican Party decided to hold its national convention in Cleveland back in July 2014 no one dreamed that Donald Trump would be the party’s presidential nominee. Yet the city and the man are oddly suited. It is hard to think of a city that better illustrates Mr Trump’s campaign theme of making America great again. For Cleveland is a city that has clearly fallen from greatness. It is also hard to name a city that better illustrates the fears of Mr Trump’s critics. It is clear that the politics of anger and resentment have done nothing but hasten its decline.

Cleveland was the Silicon Valley ofthe second industrial revolution. John D. Rockefeller founded Standard Oil Company there in 1870. Steel barons built mills along the Cuyahoga River and Lake Erie, drawn both by the supply of iron ore and by excellent transport links to the east coast. Immigrants came in their thousands. Charles Brush pioneered electric lighting there; Sidney Short and fellow inventors came out with electric street cars. By 1900 Cleveland was so successful, leading in patent registration and venture capital, that it opened a stock exchange.

The city was also home to one of America’s greatest political machines, put together by a local boy, Mark Hanna, an iron-andsteel magnate turned political Svengali, and his front-man, William McKinley, from nearby in Ohio. McKinley won the presidency in 1896 on a platform of nationalism, protectionism and (qualified) isolationism, and his party held the presidency for all but eight years until 1932. (Karl Rove, George W. Bush’s own Svengali, modelled himself on Hanna, and wrote a biography of McKinley, though Mr Bush’s unpopularity and Mr Trump’s rise suggest that he was less successful than his role model.)

The relics of Cleveland’s greatness can still be seen everywhere. The city boasts one of America’s greatest orchestras. The Lake View Cemetery contains the bones of Rockefeller and those of America’s 20th president, James Garfield. The suburbs are dotted with the palaces of former industrial barons. But they only serve to remind you of how far the place has fallen. Cleveland embodies all the classic signs of rust-belt decline. The centre often looks barren. Crime and begging are a problem. The population has fallen from 900,000 in the 1950s to less than 400,000 today.

Economists from Alfred Marshall on have dwelt on the self-reinforcing characteristics of successful clusters. They can protect

their pre-eminence by producing distinctive cultures (Marshall said that there was something “in the air” in Sheffield that was conducive to steelmaking) and by attracting talent and money.

And they can entrench themselves by investing in robust institutions like universities. The most prominent example of a successful cluster today is Silicon Valley. But there are plenty of others: the City of London in England or the car industry in Stuttgart.

Cleveland is a reminder that decline can be as self-sustaining as success. There are three reasons why clusters fail. One is that they over-specialise in products that are later improved elsewhere. Sheffield stuck to steelmaking even as others learned to make it better and cheaper. A second is that they complacently fail to upgrade their productivity. Detroit succumbed to Japanese carmakers in the 1970s and 1980s because it thought more about providing its cars with ornate fins (and its workers with gold-plated benefits) than it did about their performance. The third is that they suffer from an external shock from which they fail to recover, as could be the case with the City of London in the wake of Brexit.

Naomi Lamoreaux, an economic historian at Yale University, says Cleveland falls into the third category. It led in a wide variety of industries into the 1920s, including cars, chemicals, paints and varnishes, machine tools and electrical machinery as well as iron and steel. It spent money on R&D. But then came a series of external shocks. The Depression destroyed the local financial institutions that had supported Cleveland’s start-ups. Regulations adopted in its wake gave New York’s banks such a competitive advantage that local capital markets withered. The federal government’s wartime policy of dispersing manufacturing industry eroded the city’s industrial base.

Fanning the flames of hate Cleveland’s decline became self-reinforcing. Firms downsized, closed or relocated. The inner city fell prey to crime and dysfunction. The white middle-class moved to suburbia. Politicians responded not with pragmatic ideas for reform but by whipping up anger and resentment, which only hastened white- and business-flight. Dennis Kucinich, the mayor in 1977-79, who much later ran for president, refused to privatise the electric utility and, in 1978, took the city into bankruptcy. A once-proud city was mocked as “the mistake on the lake”. To cap it all, Cleveland paid the price for its earlier successes: by 1969 the Cuyahoga River was so polluted that it caught fire, an event that is still celebrated in one of its local brews, Burning River Pale Ale. The city’s story is also a warning that rebuilding clusters is fiendishly hard. It has had some success by focusing on education and medicine, though not as much as its fellow rust-belt city, Pittsburgh. The Cleveland Clinic is one of America’s great medical institutions. The city’s record with various mega-projects is mixed.

In the early 1990s it spent over $300m on a sports complex for its baseball team, the Indians, and its basketball team, the Cavaliers.

But downtown can still feel like a ghost town at night. More recently the city fathers have built lofts and bicycle paths to attract millennials. But then so has every other city in the country.

Perhaps the most important lesson from Cleveland is that the likelihood that you’re going to remain a top cluster for ever is small. Even if you diversify your risks and invest in your future, as Cleveland clearly did, some unforeseen event might knock you for six. And reversing decline is harder than capitalising on success. Success is a delicate flower that can easily be killed. Failure is a weed that it is almost impossible to exterminate. 7

52

Economics brief Six big ideas

Information asymmetry

Secrets and agents George Akerlof’s 1970 paper, “The Market for Lemons”, is a foundation stone of information economics. The first in our series on seminal economic ideas

I

N 2007 the state of Washington introduced a new rule aimed at making the labour market fairer: firms were banned from checking job applicants’ credit scores.

Campaigners celebrated the new law as a step towards equality—an applicant with a low credit score is much more likely to be poor, black or young. Since then, ten other states have followed suit. But when Robert Clifford and Daniel Shoag, two economists, recently studied the bans, they found that the laws left blacks and the young with fewer jobs, not more.

Before 1970, economists would not have found much in their discipline to help them mull this puzzle. Indeed, they did not think very hard about the role of information at all. In the labour market, for example, the textbooks mostly assumed that employers know the productivity of their workers—or potential workers—and, thanks to competition, pay them for exactly the value of what they produce.

You might think that research upending that conclusion would immediately be celebrated as an important breakthrough. Yet when, in the late 1960s, George Akerlof wrote “The Market for Lemons”, which did just that, and later won its author a Nobel

In this series 1 Akerlof’s market for lemons 2 Minsky’s financial cycle 3 The Stolper-Samuelson theorem 4 The Keynesian multiplier 5 The Nash equilibrium 6 The Mundell-Fleming trilemma prize, the paper was rejected by three leading journals. At the time, Mr Akerlof was an assistant professor at the University of California, Berkeley; he had only completed his PhD, at MIT, in 1966. Perhaps as a result, the American Economic Review thought his paper’s insights trivial. The Review of Economic Studies agreed. The Journal of Political Economy had almost the opposite concern: it could not stomach the paper’s implications. Mr Akerlof, now an emeritus professor at Berkeley and married to Janet Yellen, the chairman of the Federal Reserve, recalls the editor’s complaint: “If this is correct, economics would be different.”

The Economist July 23rd 2016 In a way, the editors were all right. Mr Akerlof’s idea, eventually published in the Quarterly Journal of Economics in 1970, was at once simple and revolutionary. Suppose buyers in the used-car market value good cars—“peaches”—at $1,000, and sellers at slightly less. A malfunctioning used car—a “lemon”—is worth only $500 to buyers (and, again, slightly less to sellers). If buyers can tell lemons and peaches apart, trade in both will flourish. In reality, buyers might struggle to tell the difference: scratches can be touched up, engine problems left undisclosed, even odometers tampered with.

To account for the risk that a car is a lemon, buyers cut their offers. They might be willing to pay, say, $750 for a car they perceive as having an even chance of being a lemon or a peach. But dealers who know for sure they have a peach will reject such an offer. As a result, the buyers face “adverse selection”: the only sellers who will be prepared to accept $750 will be those who know they are offloading a lemon.

Smart buyers can foresee this problem.

Knowing they will only ever be sold a lemon, they offer only $500. Sellers of lemons end up with the same price as they would have done were there no ambiguity. But peaches stay in the garage. This is a tragedy: there are buyers who would happily pay the asking-price for a peach, if only they could be sure of the car’s quality. This “information asymmetry” between buyers and sellers kills the market.

Is it really true that you can win a Nobel prize just for observing that some people in markets know more than others? That was the question one journalist asked of Michael Spence, who, along with Mr Akerlof and Joseph Stiglitz, was a joint recipient of the 2001 Nobel award for their work on information asymmetry. His incredulity was understandable. The lemons paper was not even an accurate description of the used-car market: clearly not every used car sold is a dud. And insurers had long recognised that their customers might be the best judges of what risks they faced, and that those keenest to buy insurance were probably the riskiest bets.

Yet the idea was new to mainstream economists, who quickly realised that it made many of their models redundant.

Further breakthroughs soon followed, as researchers examined how the asymmetry problem could be solved. Mr Spence’s flagship contribution was a 1973 paper called “Job Market Signalling” that looked at the labour market. Employers may struggle to tell which job candidates are best. Mr Spence showed that top workers might signal their talents to firms by collecting gongs, like college degrees. Crucially, this only works if the signal is credible: if lowproductivity workers found it easy to get a degree, then they could masquerade as 1

The Economist July 23rd 2016 2 clever types.

This idea turns conventional wisdom on its head. Education is usually thought to benefit society by making workers more productive. If it is merely a signal of talent, the returns to investment in education flow to the students, who earn a higher wage at the expense of the less able, and perhaps to universities, but not to society at large. One disciple of the idea, Bryan Caplan of George Mason University, is currently penning a book entitled “The Case Against Education”. (Mr Spence himself regrets that others took his theory as a literal description of the world.)

Signalling helps explain what happened when Washington and those other states stopped firms from obtaining job-applicants’ credit scores. Credit history is a credible signal: it is hard to fake, and, presumably, those with good credit scores are more likely to make good employees than those who default on their debts. Messrs Clifford and Shoag found that when firms could no longer access credit scores, they put more weight on other signals, like education and experience. Because these are rarer among disadvantaged groups, it became harder, not easier, for them to convince employers of their worth.

Signalling explains all kinds of behaviour. Firms pay dividends to their shareholders, who must pay income tax on the payouts. Surely it would be better if they retained their earnings, boosting their share prices, and thus delivering their shareholders lightly taxed capital gains?

Signalling solves the mystery: paying a dividend is a sign of strength, showing that a firm feels no need to hoard cash. By the same token, why might a restaurant deliberately locate in an area with high rents? It signals to potential customers that it believes its good food will bring it success.

Signalling is not the only way to overcome the lemons problem. In a 1976 paper Mr Stiglitz and Michael Rothschild, another economist, showed how insurers might “screen” their customers. The essence of screening is to offer deals which would only ever attract one type of punter.

Suppose a car insurer faces two different types of customer, high-risk and lowrisk. They cannot tell these groups apart; only the customer knows whether he is a safe driver. Messrs Rothschild and Stiglitz showed that, in a competitive market, insurers cannot profitably offer the same deal to both groups. If they did, the premiums of safe drivers would subsidise payouts to reckless ones. A rival could offer a deal with slightly lower premiums, and slightly less coverage, which would peel away only safe drivers because risky ones prefer to stay fully insured. The firm, left only with bad risks, would make a loss.

(Some worried a related problem would afflict Obamacare, which forbids American health insurers from discriminating

Economics brief 53 against customers who are already unwell: if the resulting high premiums were to deter healthy, young customers from signing up, firms might have to raise premiums further, driving more healthy customers away in a so-called “death spiral”.)

The car insurer must offer two deals, making sure that each attracts only the customers it is designed for. The trick is to offer one pricey full-insurance deal, and an alternative cheap option with a sizeable deductible. Risky drivers will balk at the deductible, knowing that there is a good chance they will end up paying it when they claim. They will forkout for expensive coverage instead. Safe drivers will tolerate the high deductible and pay a lower price for what coverage they do get.

This is not a particularly happy resolution of the problem. Good drivers are stuck with high deductibles—just as in Spence’s model of education, highly productive

workers must fork out for an education in order to prove their worth. Yet screening is in play almost every time a firm offers its customers a menu of options.

Airlines, for instance, want to milk rich customers with higher prices, without driving away poorer ones. If they knew the depth of each customer’s pockets in advance, they could offer only first-class tickets to the wealthy, and better-value tickets to everyone else. But because they must offer everyone the same options, they must nudge those who can afford it towards the pricier ticket. That means deliberately making the standard cabin uncomfortable, to ensure that the only people who slum it are those with slimmer wallets.

Hazard undercuts Eden Adverse selection has a cousin. Insurers have long known that people who buy insurance are more likely to take risks. Someone with home insurance will check their smoke alarms less often; health insurance encourages unhealthy eating and drinking.

Economists first cottoned on to this phenomenon of “moral hazard” when Ken-

neth Arrow wrote about it in 1963.

Moral hazard occurs when incentives go haywire. The old economics, noted Mr Stiglitz in his Nobel-prize lecture, paid considerable lip-service to incentives, but had remarkably little to say about them. In a completely transparent world, you need not worry about incentivising someone, because you can use a contract to specify their behaviour precisely. It is when information is asymmetric and you cannot observe what they are doing (is your tradesman using cheap parts? Is your employee slacking?) that you must worry about ensuring that interests are aligned.

Such scenarios pose what are known as “principal-agent” problems. How can a principal (like a manager) get an agent (like an employee) to behave how he wants, when he cannot monitor them all the time? The simplest way to make sure that an employee works hard is to give him some or all of the profit. Hairdressers, for instance, will often rent a spot in a salon and keep their takings for themselves.

But hard work does not always guarantee success: a star analyst at a consulting firm, for example, might do stellar work pitching for a project that nonetheless goes to a rival. So, another option is to pay “efficiency wages”. Mr Stiglitz and Carl Shapiro, another economist, showed that firms might pay premium wages to make employees value their jobs more highly.

This, in turn, would make them less likely to shirk their responsibilities, because they would lose more if they were caught and got fired. That insight helps to explain a fundamental puzzle in economics: when workers are unemployed but want jobs, why don’t wages fall until someone is willing to hire them? An answer is that abovemarket wages act as a carrot, the resulting unemployment, a stick.

And this reveals an even deeper point.

Before Mr Akerlof and the other pioneers of information economics came along, the discipline assumed that in competitive markets, prices reflect marginal costs: charge above cost, and a competitor will undercut you. But in a world of information asymmetry, “good behaviour is driven by earning a surplus over what one could get elsewhere,” according to Mr Stiglitz. The wage must be higher than what a worker can get in another job, for them to want to avoid the sack; and firms must find it painful to lose customers when their product is shoddy, if they are to invest in quality. In markets with imperfect information, price cannot equal marginal cost.

The concept of information asymmetry, then, truly changed the discipline.

Nearly 50 years after the lemons paper was rejected three times, its insights remain of crucial relevance to economists, and to economic policy. Just ask any young, black Washingtonian with a good credit score who wants to find a job. 7

54

The Economist July 23rd 2016

Finance and economics

Also in this section 55 Buttonwood: Ageing and debt 56 The Big Mac index 56 Postal Savings Bank of China 57 Another twist in the 1MDB affair 58 Free exchange: The economics of coups

For daily analysis and debate on economics, visit Economist.com/economics

African banks

Subprime savannah LAGOS and NAIROBI

Trouble is stalking many of Africa’s banks

A

FRICA’S financial firms can claim many innovations, from M-Pesa, a pioneering Kenyan mobile-money service, to the life insurance for people with HIV offered

by All Life, a South African firm. To these can be added the first social-media bank run. Chase Bank Kenya, the country’s 11thlargest (unrelated to America’s JPMorgan Chase), was taken over by regulators in April after word of its impending collapse spread on Twitter and WhatsApp, spurring panicked withdrawals.

The run highlighted the risks facing banks in a region that is seen by many investors as one of the industry’s final frontiers. Whereas banks in many rich countries have produced disappointing profits since the financial crisis of 2008, African ones had until recently been reporting stellar growth and juicy returns. Those in Ghana were expanding their loan books at a breathtaking pace of more than 30% a year.

Banks in Mozambique, Zambia and Malawi were not too far behind. And most were making good money, too.

Moody’s, a rating agency, reckons that average return on equity (a standard measure of profitability) ranged from 20-25% in many African countries, making their banks well over twice as profitable as American ones and four or five times more profitable than Europe’s limping lenders.

Yet in many parts of sub-Saharan Africa these mouthwatering profits are turning into losses as a result of falling commodity

prices, slowing economies and, in some cases, weak regulation.

Nigeria, Africa’s biggest economy, seems on the brink of its second banking crisis in less than a decade. On July 4th the central bank dismissed the management of Skye Bank, the country’s eighth-biggest lender by assets, amid concerns that it had failed to keep thick enough buffers of capital to absorb losses on its bad debts. Its share price has plunged by about a quarter since the move. The shares of other Nigerian banks are also sinking.

The central bank insists that “there is… no need for panic withdrawals from any bank.” Yet Skye’s managerial maelstrom harks back ominously to 2009, when the

Africa rising Non-performing loans as % of total loans 20 Angola

†

Ghana Africa*

†

15 10

Kenya 5 Nigeria

Congo

0 2010

11

Sources: IMF; Central banks; Moody’s

12

13

14

15

16

*Excluding South Africa, Congo 2015, unweighted average †Latest official estimate

global financial crisis caused several of Nigeria’s bigger banks to collapse. Back then the central bank replaced the bosses of eight institutions. A state-backed agency known as Amcon was established to swallow up bad loans; the sickliest outfits were either nationalised or sold to other banks.

Today’s sticky issue is oil. During the financial crisis the price of oil slumped only briefly before recovering strongly. Nigerian banks subsequently lent billions to local businessmen to help them buy oil and gas wells. These loans, about 25% of the country’s total, seemed quite safe until the oil price began dropping in mid-2014; it is now less than half what it was then. Militancy in the oil-pumping Niger Delta has only made matters worse.

Afren, an exploration company, went bust last year. Oando, a leading local oil producer, admits “significant doubt” about its ability to repay loans. “The interest is racking up,” says Kola Karim of Shoreline Energy, another local producer, which had to turn off its taps after bandits bombed a pipeline in February. And even firms that are not in the oil business may struggle to service their debts thanks to the economy’s broader malaise: the IMF reckons it will shrink by 1.8% this year.

First Bank, Nigeria’s second-largest by assets, says that 18% of its loans are nonperforming. It may be suffering more than most, since more than 40% of its loans went to oil and gas producers. The central bank says that bad debts in the banking system as a whole have doubled in the past six months, to 10%. Emmanuel Assiak of Africa Capital Alliance, a private-equity firm, thinks the figure is really in the low teens. “A lot of people are saying this is not 2009. Well it’s worse,” says Ronak Gadhia of Exotix, an investment bank. “Back then, they didn’t have the exposure to oil.”

Banks are also under pressure else- 1

The Economist July 23rd 2016 2 where in the region, often for similar rea-

sons. In Ghana non-performing loans have jumped to more than 16% of the total after slumping commodity prices and a plunging currency forced the central bank to ramp up interest rates. It raised them by five percentage points, to 26%, a level at which almost all borrowers will struggle.

Zimbabwean banks hold lots of government bonds that will probably never be repaid. They have only staved off runs by limiting withdrawals.

In Kenya, however, banks face a different set of stresses. Weak regulation, exacerbated by the proliferation ofsmall banks, is

Finance and economics 55 taking a toll. Three banks have been placed into receivership in less than a year by Patrick Njoroge, the respected governor of the Central Bank of Kenya, as a series of ruinous insider-lending scams have come to light. Mr Njoroge alleges that the managing director of one bank siphoned off 38 billion Kenya shillings ($335m) via 20 shell companies over 13 years . The full scale of the heist was discovered a few days after his funeral. At Chase Bank, the victim of the social-media run, directors had signed off on some 8 billion shillings in loans to themselves.

Mr Njoroge seems determined to clean

up Kenya’s banking system. But elsewhere in Africa regulators still seem willing to turn a blind eye to problems. Forcing banks to admit to rising bad debts could lead to painful collapses and to strained public finances if governments have to step in with bail-outs. But ignoring them might be even worse in the long run. As it is, businesses in Africa struggle to obtain enough capital to grow: despite rapid loan growth, most African countries still have low banking penetration. Allowing zombie banks to limp on, too weakened by bad loans to make any new ones, would only worsen Africa’s desperate shortage of credit. 7

Buttonwood Vanishing workers Can the debt-fuelled model of growth cope with ageing populations?

T

HE world is about to experience something not seen since the Black Death in the 14th century—lots of countries with shrinking populations. Already, there are around 25 countries with falling headcounts; by the last quarter ofthis century, projections by the United Nations suggests there may be more than 100.

Such a shift seems certain to have a big economic impact, but there is plenty of debate about what that impact might be.

After the Black Death a shortage of labour eventually led to a sustained rise in real wages. If that trend were repeated, it would come as a big shift after a prolonged period of sluggish wage growth, something that has fuelled political discontent across the rich world.

A new report on the demographic outlook by Berenberg, a German bank, focuses on one important measure: the dependency ratio. This compares the number of children and the elderly with people of working age (those aged 15-64). The higher the dependency ratio, the greater the burden on the workforce. In the world’s biggest economies, America apart, the workforce is set to shrink significantly (see chart).

In many developed countries, the dependency ratio rose after the second world war (thanks to the baby boom), fell in the late 1960s and 1970s as the boomers entered the workforce, and has recently started rising again. That history makes it possible to analyse how economies performed during periods of both falling and rising ratios. Berenberg based its analysis on ten rich countries: America, Australia, Britain, France, Germany, Italy, Japan, Spain, Sweden and Switzerland.

The housing market seems an obvious place to start. You would expect a growing workforce to push house prices higher, as wage-earners seek more space for their

Who will fill the jobs?

Working-age population* 2015=100

FO R E C A S T

120

United States

Japan

European Union

100 80 60

China

40 20

1950

75

2000

25

50

75

Source: United Nations Population Division

2100 *Aged 15-64

families. Sure enough, the authors find that, since 1960, the median increase in real house prices when the dependency ratio was decreasing (ie, when there were relatively more workers) was 2.7% a year. However, when the dependency ratio was increasing (ie, relatively fewer workers), real house prices fell by 0.2% a year.

Similarly, as you might expect, real GDP per person tends to grow faster (2.6%) in years when the dependency ratio is falling than in years when it is rising (1.9%). Having more workers makes it easier for the economy to grow. Inflation also tends to be higher (4.1%) in years when the dependency ratio is falling and lower (2.7%) when the ratio is increasing.

That points to a problem. In recent decades, the developed world has seen a big surge in total debt-to-GDP ratios in both the private and public sectors. People tend to take on debt for two reasons: to maintain their consumption or to buy an asset (for individuals, often a home). This requires a belief on the part of the debtor (and the lender) that, at a minimum, their future incomes and asset prices will not both fall by a lot, so the money can be paid back.

In a world of sluggish growth, low inflation and stagnant house prices, debts become much harder to pay off. Indeed, that has pretty much been the picture since the financial crisis in 2008: debt has been shuffled around a bit (from the private sector to the government) but total debt-to-GDP ratios have not fallen.

The show has been kept on the road by big reductions in interest rates, which have enabled most borrowers to keep servicing their debts. And demography suggests that the era of low interest rates is set to continue. Berenberg finds that, since 1960, real interest rates have tended to rise when the dependency ratio is decreasing and fall when the ratio is rising (as it is now forecast to do).

Low rates are in part a deliberate policy by central banks to stimulate the economy by encouraging people and companies to borrow. But as workers age, they are less likely to want to take on debt. And if an ageing workforce means slower growth, companies won’t want to borrow to invest. So the policy may not work.

Indeed, the Berenberg study found that since 1960, private-sector debt rose almost three times as fast, relative to GDP, in years when the dependency ratio was decreasing than when it was increasing.

The big question is whether economic growth and rising debt levels go hand-inhand, or whether the former can continue without the latter. If it can’t, the future could be very challenging indeed. To generate growth in our ageing world may require a big improvement in productivity, or a sharp jump in labour-force participation among older workers. To date, the signs on productivity are not encouraging and elderly employment ratios have a lot further to go.

Economist.com/blogs/buttonwood

56 Finance and economics

The Economist July 23rd 2016

The Big Mac index

Patty-purchasing parity HONG KONG

The size of the world economy—measured in burgers

I

N THE mall below a McDonald’s restaurant in Hong Kong, excitable children pose for photos next to a statue of the chain’s clownish mascot, Ronald, who lounges on a bench, one yellow glove raised in welcome. He fronts a display of other promotional decor, including a soft drink the size of a man and a box of fries that looms even larger. A video chronicles the chain’s 41 years in Hong Kong, which have been full of menu twists and tweaks: sausage McMuffins, shake-shake fries, chicken McNuggets, salads. At the restaurant upstairs, touchscreen menus now allow choosy customers to build their own burger, adding exotica like grilled champignon, herb aioli and sliced jalapeños or even (heresy!) subtracting the bun.

Innovation and differentiation—the creation of things new and singular—are a boon to economic progress and the bane of economic measurement. It would be much easier to compare economies across borders and time if goods remained much the same, wherever and whenever they were made. Fortunately, amid all the creativity and complexity, the Big Mac re-

The Big Mac index Local currency under(-)/over(+) valuation against the dollar, July 2016, % Forecast GDP in 2016 in Big Macs*, bn

60 40 20 – 0 + 20 40 Switzerland

99

Norway

68 97

Sweden nil

United States†

3,682 409

Brazil France

541

Germany

824

Britain

644

Turkey

214

Japan

1,369

China‡

3,931

Hong Kong

131

India§

941

Indonesia

407

South Africa

142 158

Malaysia World**

na

19,235

*GDP divided by Big Mac price, in local currency †Average of four cities ‡Average of five cities §Maharaja Mac **Based on 59 countries accounting for 94% of world GDP Sources: McDonald’s; IMF; The Economist

Interactive: Compare global currencies over time with our Big Mac index at Economist.com/bigmac

mains something of a constant. It varies rather little from country to country or year to year. Its consistency is part of its appeal to customers. It is also why it appeals to us—as a handy benchmark for judging the strength of currencies and even the size of economies.

To calculate our Big Mac index, we collect the price of the burger (with bun, of course) in 59 countries accounting for 94% of the planet’s output. (In India, we substitute the Maharaja Mac, which is made with chicken rather than beef.) It turns out that some of these burgers are much cheaper than others in dollar terms. In America, a Big Mac costs $5.04 on average.

In Hong Kong, by comparison, the same burger costs the equivalent of $2.50 or so.

There are many potential reasons why Hong Kong’s Big Macs are cheaper than America’s. But one is that Hong Kong’s currency is undervalued.

The Big Mac index thus provides a simple gut-check for judging the competitiveness of currencies. It compares each country’s exchange rate with a hypothetical alternative: the rate that would equalise the price of a Big Mac around the world. In Hong Kong, where the Big Mac costs 19.20 Hong Kong dollars, that hypothetical exchange rate would be 3.81 Hong Kong dollars to the greenback. The real, market exchange rate is much weaker: it takes 7.75 Hong Kong dollars to buy one of the American sort. According to the Big Mac index, then, the Hong Kong dollar is heavily undervalued—by more than half.

Hong Kong is not alone. Judging by the price of burgers, most currencies are undervalued against the dollar. The euro looks 17% too cheap. The yen is undervalued by about 30%. Big Macs also lookstrikingly cheap in many emerging economies, including South Africa (58%) and Malaysia (61%). In fact, only three currencies look overvalued by this measure: Sweden (overvalued by 4%), Norway (9%) and Switzerland (31%).

If most currencies are “too” cheap against the dollar, it follows that the dollar itself must be too expensive. The Big Mac index suggests it has climbed a whopping 56% above fair value on a trade-weighted basis. Does this mean we should expect a dollar crash? No. There are fundamental economic reasons why exchange rates tend to look cheap in developing countries—in particular, poor productivity in both tradable sectors (eg, manufacturing) and non-tradable ones (eg, services). As productivity in manufacturing improves in emerging markets, factory wages will rise, putting upward pressure on wages and prices elsewhere in the economy, even in fast-food chains. That will make their burgers dearer, narrowing the gap with America.

In a more sophisticated version of the Big Mac index, we have taken these funda-

mentals into account. The adjusted index looks at whether a currency is cheap or expensive compared with what you would expect given the country’s level of development. By this measure, the dollar is still overvalued, but by a much smaller margin: roughly 11% on a trade-weighted basis.

The Big Mac index also provides a fun gauge of the size of national economies, a matter of great debate and controversy. If a country spent its entire annual income on Big Macs, how many burgers could it buy?

America’s GDP is forecast to be over $18.5 trillion this year, according to the IMF. That translates into almost 3.7 trillion burgers at a little over five bucks apiece. America thus accounts for a big share of the world total, which will amount to over 19.2 trillion in 2016, by our calculations, based on IMF forecasts (see chart).

Can any other economy rival the home of the hamburger? China’s GDP will be a little over 73 trillion yuan this year, says the IMF, or less than $11.4 trillion. But in China, a Big Mac costs only 18.6 yuan. So its GDP is equivalent to over 3.9 trillion burgers, over 5% more than the American total. Indeed, by this measure, China overtook America back in 2013. At market exchange rates, America’s economy is still far bigger than China’s. But at patty-purchasing parity, their positions have been flipped. 7

Postal Savings Bank of China

A red-letter IPO Shanghai

A creaky, bloated bank will be this year’s star share listing

F

EW companies are able to go public with a valuation of more than $50 billion less than a decade after their founding.

This rarefied group, which mainly consists of tech darlings, is about to admit a surprising new member: a large, lumbering Chinese bank. Postal Savings Bank of China, established in 2007, is on course for an initial public offering (IPO) this year that is expected to be the world’s biggest for nearly two years. Its pitch to prospective investors is also unusual. Far from boasting about how well it is run, it instead emphasises the advantages of scale—which it has so far squandered—to imply that it has vast untapped potential.

Describing Postal Savings Bank as a startup is something of a misnomer. When it launched nine years ago, it was a spin-off from the Chinese postal service, which had doubled as a quasi-bank for 20 years.

As a way of bringing finance to rural areas, the government set up windows at post offices for locals to deposit their savings, a model that lots of other countries had pre- 1

The Economist July 23rd 2016

Finance and economics 57 The 1MDB affair

Thick and fast SINGAPORE

America applies to seize assets linked to a Malaysian state investment firm

Not exactly Silicon Valley 2 viously followed.

In many small villages in China, the postal bank is still the only trustworthy savings institution around. It also provides a remittance network for tens of millions of migrant labourers, letting them send their incomes from far-flung factories back to their families. As of the end of March, Postal Savings Bank had 40,057 outlets nationwide, covering 98.9% of counties, more than any other bank in China. It also had 505m retail customers, more than one in every three citizens.

But it does not do much beyond offering a safe place for customers to put their money. It used to place almost all its assets with the central bank, and so earned a measly profit. The government’s decision to incorporate it as a stand-alone entity in 2007 was the first big step towards improving its performance, opening the door for it to lend more. It still has a long way to go.

Last year its return on assets was just 0.51%, less than half the national average for commercial banks of 1.1%. Corporate governance has also been weak. Tao Liming, head of Postal Savings Bank at its launch, was arrested in 2012 for corruption. He died in custody last month.

Some big investors think it can turn itself round. Last year the bank sold a 17% stake to a consortium that includes UBS, a Swiss bank, and Canada’s biggest pension fund. Its listing, which is likely to take place in September, could bring in as much as $10 billion, boosting its depleted capital cushion. It clearly has room to grow. Its loan-todeposit ratio of 39% is some 30 percentage points lower than its peers’. Low-yielding government bonds still eat up a big share of its assets. It has also yet to take real advantage of its vast client base to sell other financial products, such as insurance.

Yet making the transition to full-fledged

H

when it was discovered that around $700m had entered Mr Najib’s bank accounts shortly before a close election in 2013. (Mr Najib says the money was not related to 1MDB, but was a perfectly legal, personal donation from a Saudi royal, much of which has been returned.

Malaysia’s attorney-general agrees.)

The Justice Department says the assets it is seeking to recover are associated with “an international conspiracy to launder funds misappropriated” from 1MDB. Its filing alleges that between 2009 and 2015 more than $3.5 billion belonging to the firm may have been pinched by “high-level officials of1MDB and their associates”. The complaint provides extensive detail on the deals in question, which it divides into three “phases”, beginning in 2009, 2012 and 2013.

The proceedings now starting in America relate only to the seizure of assets, and do not amount to criminal charges against the individuals alleged to be involved. In the meantime several cases are advancing elsewhere. In May the Swiss financial regulator fined BSI, a private bank which handled some of 1MDB’s money, and launched proceedings against two of its former employees.

On July 21st authorities in Singapore said that they had seized or frozen assets worth S$240m ($175m), half of it belonging to Mr Low or his family, as part of an ongoing probe into transactions linked to 1MDB. The local financial regulator also announced that it would be taking action against three big banks—DBS, UBS and Standard Chartered—for “lapses and weaknesses” in their efforts to prevent money-laundering. With investigations underway in half a dozen countries, expect to hear much more.

commercial bank will be hard. Under-performance tends to be baked into the DNA of postal banks, if privatisations in other countries are anything to judge by. The bank has a responsibility to serve isolated rural communities; it cannot simply cut branches, says Dong Ximiao of the Chongyang Institute for Financial Studies at Renmin University.

Moreover, at the same time as Postal Savings Bank stays yoked to a bricks-andmortar model, technological change is sweeping through the financial system.

Mobile banking is increasingly popular.

Payment apps owned by Tencent and Alibaba, two internet giants, already have at least 500m users between them. Most are

in cities for now, not in the rural heartland of Postal Savings Bank, but it is only a matter of time before the technology spreads farther.

Optimists think the tech groups will work with the bank, not against it. Tencent and Ant Financial, Alibaba’s payments affiliate, were among the group of investors in Postal Savings Bank last year. Its physical presence could help them build deeper relationships with customers. But a more cynical view is that the tech giants were fulfilling their own political duty, currying favour with the government by supporting a state-owned bank whose business model, though important to China’s rural past, will be less relevant to its urban future. 7

AVING smouldered for more than a year, international investigations into 1MDB—a Malaysian state investment firm at the heart of a sprawling financial scandal—are now burning fiercely. On July 20th America’s Justice Department began proceedings to seize more than $1 billion of assets, which it alleged had been purchased with funds siphoned out of the firm. It is the largest single action the department has ever launched.

The goodies concerned include luxury properties, artworks by Van Gogh and Monet, and a jet, according to court filings. Authorities say 1MDB’s money was also spent on gambling and used to make the “Wolf of Wall Street”, a film about a high-living swindler starring Leonardo DiCaprio. It was made by a production company co-founded by Riza Aziz, the stepson of Malaysia’s prime minister, Najib Razak. (A spokesman for the firm, Red Granite Pictures, said neither it nor Mr Riza had done anything wrong.)

Mr Riza is among several people the Justice Department claims are “relevant” to its case. So is Low Taek Jho, a Malaysian tycoon who helped to set up 1MDB, and two former officials at an Abu Dhabi state firm with which 1MDB did business.

Also listed in the complaint (but not named) are four employees of1MDB and a high-ranking Malaysian government official who is described as a relative of Mr Riza and for the moment known only as “Malaysian Official 1”.

1MDB was launched in 2009, the year Mr Najib became prime minister. It was supposed to bring investment to Malaysia by forging partnerships with foreign firms. But by 2014 it was struggling to service debts of more than $11 billion.

Questions about it multiplied last year

58 Finance and economics

The Economist July 23rd 2016

Free exchange Putsch and pull Plots to topple leaders are becoming less common. That’s a good thing for many reasons

T

HE attempt last week to overthrow Recep Tayyip Erdogan, Turkey’s president, was at once surprising and familiar. Few had thought that the armed forces, however disgruntled, would dare to remove an elected leader who enjoys widespread support. But it was only a short while ago that Turkey suffered a coup every ten years or so, on average. The same can be said for coups around the world. They are almost always unexpected: by their nature, they aim to catch the government unawares. Yet they occur often enough. The past three years have seen successful coups in Egypt and Thailand, along with several botched attempts in other countries.

This regularity has yielded a body of research about the causes and consequences of coups, with much of it focused on their economic dimensions. There are no iron laws. Each coup is unique, laced through with political and social complexities.

Still, there are certain patterns.

Start with the basic numbers. Jonathan Powell and Clayton Thyne of the University of Kentucky have built a data set of all coup attempts between 1950 and 2010. By their count, there were 457. Over that time, plotters had almost exactly even odds. Of all the bids to topple leaders, 227, or 49.7%, were successful; 230, or 50.3%, failed. But the figures have changed in recent years. Plotters appear to have honed their craft, scoring a nearly 70% success rate after 2003.

One possibility is that, as in any industry, best practice has spread. (There are suggestions that “Coup d’État: A Practical Handbook”, a study published by Edward Luttwak, has helped would-be putschists.) The basic steps—detain key leaders, take over major media outlets, control traffic arteries—are well known. In this respect, the bungling of the Turkish coup was almost as surprising as the fact that it was attempted in the first place. Yet Turkey also showed that technology is challenging established formulas. Mr Erdogan harnessed social media to rally crowds of supporters and used video-streaming to conduct a live interview with a TV station.

Coups have also become less common over the years. Their heyday was the mid-1960s, when nearly 15 took place every year.

In the 2000s that fell to less than five a year. The Turkish coup was the first attempted this year. There are many possible explanations for the decline in coups, but one is economic: the world has become richer. Looking at a sample of121 countries, John Londregan and Keith Poole, then of Carnegie Mellon University, con-

An affront to prosperity too Effects of a successful coup Cumulative change in growth in GDP per person, percentage points

20 Autocracies

Maximum

Minimum Maximum

10 +

0 –

10 Democracies Minimum

0

1

2

3

4

5

6

7

8

9

Years after coup Source: Erik Meyersson

10 11 12 13 14 15

20 30

cluded in 1990 that coups were 21 times more likely to occur in the poorest than in the wealthiest. Using another group of countries, Paul Collier and Anke Hoeffler of Oxford University found in 2007 that the risk of coups fell by about 27% as the level of income per person doubled.

By the same token, growth rates matter. Raising it by one percentage point reduces the probability of coups by 4.4%. The corollary is, of course, that slower growth raises the risk. There is no automatic threshold. Just look at North Korea or Zimbabwe, where the economies have been disastrous for years without soldiers defenestrating their leaders. But it is axiomatic that so long as an economy is thriving, coups are far less likely. In the case of Turkey most attention has been placed, rightly, on the army’s discomfort with Mr Erdogan’s tightening grip and his embrace of Islam in a once fiercely secular state. Yet it is also noteworthy that growth over the past decade has disappointed and that reformists have been sidelined in recent months.

Coup de graphs What happens to growth after a putsch? One opinion occasionally voiced is that coups might be helpful, allowing no-nonsense leaders to dispense with endless politicking and push through smart policies. That view was heard in Egypt in 2013, and again in Thailand in 2014. But this is unlikely, according to Erik Meyersson of the Stockholm Institute of Transitional Economics, who has looked at hundreds of failed and successful coups. Failed coups have little discernible impact on a country’s growth; after shortterm volatility, it quickly returns to its previous trend. Successful coups, however, do have a real impact—but only in previously democratic countries. In such places, coups lower the growth of income per person by as much as 1.3% a year over a decade (see chart). As a result, incomes eventually end up more than a tenth lower in post-coup democracies. In countries with autocratic rulers, in contrast, coups make little difference in the long run.

Coups are also associated with a range of other economic pathologies, particularly in democracies. There is a reduction in social spending, perhaps because the elite that toppled the previous leaders now seek to enrich themselves and their cronies. Financial stability also tends to deteriorate as governments rack up greater debts. Impaired legitimacy makes it harder to collect taxes, and the confidence of foreign investors seeps away.

Mr Meyersson’s explanation of why democracies fare so much worse is simple: coups are much more of a wrenching change for them. In authoritarian countries, with no mechanism for transferring power, coups are part of the natural order of things. In democracies—even imperfect ones such as Thailand or nascent ones such as Egypt—coups represent a fundamental rupture, altering the course of their development.

From this standpoint, the failure of Turkey’s coup bodes well for the economy. Whatever illusion of stability the generals might have offered, the economic costs would have been severe (to say nothing of the anger that would have welled up in society). Yet Turkey may be one case where the effects of a failed coup are much the same as those ofa successful one. This is not shaping up to be a victory for Turkish democracy. Rather than reinforcing Turkey’s democratic institutions, Mr Erdogan is purging his enemies, real and perceived, and entrenching his own rule. Putsches can come in many forms. 7 Economist.com/blogs/freeexchange

The Economist July 23rd 2016 59

Science and technology

Also in this section 61 Atomic data storage 61 Smarter sutures

For daily analysis and debate on science and technology, visit Economist.com/science

The 21st International AIDS Conference

Rallying the troops Durban

AIDS workers face setbacks, both epidemiological and financial. But they are about to be handed new weapons to carry on the fight

V

ETERANS of the war on AIDS wear the medal stamped “Durban” with pride. It was in that city, in 2000, that the most effective of the International AIDS Conferences was held. The field’s bigwigs agreed that everything possible should be done to make the antiretroviral (ARV) drugs that had been invented a few years earlier available to all who needed them, and began to create the institutions that would distribute them.

In retrospect, it sounds an obvious thing to do. But in those days ARVs were costly, and ways of getting them to people in poor countries nearly non-existent. The ramp-up therefore took time, and deaths from AIDS continued to rise. According to UNAIDS, the United Nations agency charged with combating the disease, they peaked at 2m a year in 2005. Since then, though, they have almost halved, to around 1.1m a year. That is fewer than the 1.5m who die from viral hepatitis, a fact that would have astonished the delegates to Durban in 2000.

No good deed, however, goes unpunished. In the poorest countries, which are often those with the biggest problem, ARV programmes still depend on foreign subsidies. But as the perception of crisis has passed, political attention has wandered.

Correction: In last week’s article on fMRI scanning (“Computer says: oops”) we quoted the lead author of the paper in question as saying that as many as 3,000 fMRI papers could “simply be wrong”. That should have read “could be affected”. Sorry.

A report published on July 15th by the Kaiser Family Foundation, an American charity, in conjunction with UNAIDS, showed that in 2015, for only the second time since 2002, international aid for AIDS was down (see chart). That made for a gloomy backdrop to the AIDS conference’s return to Durban. But it also gave urgency to its two main themes—prevention and cure.

We interrupt this transmission...

AIDS is costly to fight because ARVs only suppress HIV’s reproduction; they do not eradicate it from someone’s body. Those infected are therefore on the drugs for life.

This means preventing transmission is crucial not only for humanitarian reasons, but also for financial ones. As the number of infected people rises, so does the bill for treating them. Moreover, unlike death rates, rates ofnew infection seem, after several years of falling, to have levelled off. A recent study published in the Lancet said they have not fallen for the past five years (see chart on next page). Another, from UNAIDS and based on different data, suggested recent drops were caused solely by falling rates of transmission between mothers and their children, rather than the adult-toadult sort.

One change since 2000 is that prevention has become a scientific endeavour.

Then, the best advice was sexual fidelity and condoms. It is still good advice, but other options are now available. Circumcision is one example. Research suggests that

parting with his foreskin reduces a man’s risk of getting infected by up to 60%, because the foreskin is rich in the sorts of cells in which HIV reproduces. Prophylactic circumcision has become an established medical procedure in many African countries. But levelling the playing field between the sexes requires techniques that women can use, too. Linda-Gail Bekker, the incoming president of the International AIDS Society, which organises the AIDS conferences, thinks two such technologies are imminent. One is available to both sexes, while the other is in the hands of women alone.

The universal sort is called oral pre-exposure prophylaxis (PrEP). Oral PrEP, which involves taking an antiviral drug combination called Truvada in anticipation of risky intercourse, was in the air at the last AIDS conference, held in 2014.

Now, although it has so far been licensed in only about half a dozen countries, it is taking off. UNAIDS estimates 60,000 people around the world are on oral PrEP. Gilead Sciences, Truvada’s makers, reckon that between 2012, when America approved oral PrEP, and the end of 2015, 80,000 people in America alone had used it at some point. 1

Waning interest?

International HIV assistance from donor countries, constant 2014 $bn 9

6

3

0 2002

05

10

Source: Kaiser Family Foundation

15

60 Science and technology 2

UNAIDS sees an opportunity here—perhaps one as big as that offered by ARVs in 2000. Michel Sidibé, the agency’s boss, reckons that if oral PrEP is focused on those facing the highest risk, such as prostitutes, the rate of new infections would start falling again. UNAIDS, which loves targets, suggests aiming to have 3m people on oral PrEP by 2020. That sounds ambitious. But ifthe UNAIDS figure for current users is correct, a little more than doubling the number every year would get there.

The second technique involves silicone rings laced with a drug called dapivirine.

These rings, developed under the aegis of the International Partnership for Microbicides (IPM), another charity, sit at the top of the vagina, slowly releasing a pharmacological payload designed to stop the reproduction of any viruses that do find homes in the vaginal wall. At the moment, they last a month, but a three-month version is under development.

Two trials which reported earlier this year—one in South Africa and Uganda, and the other in those places plus Malawi and Zimbabwe—suggest the rings work. Follow-up data released at the conference confirm this. A ring’s efficacy is, unsurprisingly, related to how much a woman actually uses it. But for the most diligent it reduced the risk of becoming infected by 75%, compared with control volunteers who did not use such a ring at all. More studies have just been launched, and if all goes well the IPM hopes governments will start approving the rings by 2018.

The best form of prevention, though, would be a vaccine. Here the news is less good. Researchers have been hunting for a vaccine almost since HIV was first discovered, in 1983. The closest they have come was a trial in Thailand in 2009. That vaccine had an efficacy of 31%, which was too low to license it for general use.

Undeterred, Dr Bekker has run a small trial to prove the safety of a new version of the Thai vaccine, adapted to combat the strain of HIV most common in South Africa and also given a better adjuvant—a booster chemical that promotes a vaccine’s efficacy. The results came out in May and signalled the all-clear for a larger trial, with 5,400 participants, that will begin in November. If the tweaked vaccine has an efficacy of 50% or more, then it is likely to become the first actually approved for use.

Don’t mention the “C” word The search for a full-on cure for AIDS is as long-standing as the search for a vaccine and has proved, so far, equally futile. Indeed, the “C” word is now going out of fashion. Many researchers prefer to talk of “remission”, as cancer doctors do. By that they mean some treatment, possibly needing to be repeated every few months, that lets patients stop taking ARVs. The problem faced by all attempts at ei-

The Economist July 23rd 2016

Down but not out Number of new HIV infections worldwide, m High Estimate Low

3.5 3.0 2.5 2.0 1.5 1.0 0.5 0

1980 85

90

95 2000 05

10

15

Source: The Lancet

ther a cure or remission is that HIV hides away in certain inactive body cells by integrating its genes into the host cell’s chromosomes. Until such a cell starts translating those genes into new viruses, the infection remains invisible both to ARVs and to the immune system. For decades, researchers have been trying to flush HIV out of its hiding places by activating these cells and then eliminating them—a strategy called “shock and kill”. But shock and kill has, so far, yielded no treatment. So other approaches are coming to the fore.

One is to abandon the idea of waiting for the virus to come out and instead go in and get it. That is the method adopted by Monique Nijhuis of the University Medical Centre Utrecht, in the Netherlands. She uses CRISPR-Cas9, a potent new gene-editing technique, to hunt down and eliminate DNA sequences found in HIV but not the human genome, thus wrecking the viral genes inside their host chromosomes.

Dr Nijhuis’s technique works well in cell cultures, though it has yet to be tested in animals, let alone people. But another approach is starting, tentatively, to be so tested. This encourages the immune system to attack infected cells (including those where HIV is latent) more aggressively.

AIDS and cancer are different sorts of diseases, but they share an important feature. Both are able to outwit the immune system. This suggests to some that the way to deal with them is to give the immune system a bit of help. In the case of AIDS one approach is to try bolstering it, by injection, with extra antibodies known to have at least some effect on HIV. Individually, these do little good. But Anthony Fauci, head of America’s National Institute of Allergy and Infectious Diseases, and one of AIDS research’s oldest hands, suggested that they might be used, as ARVs are, in combinations of three or four that attack different parts of the virus.

Another way the immune system might be boosted—and one that is already employed to treat cancer—is to use drugs

called checkpoint inhibitors. To stop immune responses getting out of hand, and harming the person they are supposed to protect, evolution has created various molecular “checkpoints” that slow things down. A checkpoint inhibitor neutralises one of these, speeding things up again.

Testing such drugs on those infected with HIV is not as simple as it sounds. Disinhibiting the immune system is risky. It could end up damaging healthy cells. People whose HIV is controlled by ARVs are not in immediate danger, so it would be unethical to put them at such risk. But this does not stop doctors using inhibitors to treat cancer patients who also happen to be HIV-infected, since the primary purpose is clinical, not experimental. And, as Olivier Lambotte of the Hôpital Bicêtre, just outside Paris, told the meeting, that is precisely what is happening, in three small trials which began this year.

Sadly, even if one or more of these approaches does work, it will be a long time before it makes a dent in the epidemic.

Hence the worry about the slackening of funding in the face of growing numbers of infected—let alone aspirations to offer ARVs to at least 90% of those so diagnosed and to roll out oral PrEP. But, huff and puff as people may, there is unlikely to be much more money in the immediate future.

Things will therefore have to change.

David Wilson, who directs the World Bank’s AIDS programme, has several ideas to cope with belt-tightening. One is better targeting of existing cash, for example by identifying HIV hotspots within countries.

That, in turn, means collecting better data.

Such an approach would reap huge rewards, he argues, reducing budgets by 20-40%. And he thinks the worst-hit countries should do more to help themselves, and could raise more money if they put their minds to it—though they cannot yet be expected to do everything.

These are good ideas, and should be pushed. But Dr Wilson also reckons that there needs to be a move away from the feeling that AIDS is exceptional, and thus requires an exceptional response. In the past, it certainly did. But, he says, HIV is now familiar enough that its treatment can be integrated ever more closely into routine health care, to the benefit of both.

That may be premature, for AIDS does remain exceptional. Its association in the public mind with prostitutes, drug users and gay men (in many places where AIDS is rampant, homosexual acts are illegal) means treating it as just another disease is still a long way off. At the same time, and despite the lack of money and the plateauing of infection rates, the progress that has been made since 2000 against something unknown to medical science 36 years ago is impressive. With the new tools now available, and with but a little more willpower, AIDS can surely be beaten. 7

The Economist July 23rd 2016 Data storage

Atoms and the voids Individual atoms offer ultra-dense information storage

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HAT if “we can arrange the atoms the way we want; the very atoms, all the way down”? So asked the physicist Richard Feynman in an influential 1959 lecture called “There’s Plenty of Room at the Bottom”. This manipulation would mean that information, like text, could be written using atoms themselves. Feynman predicted that the entire “Encyclopædia Britannica” could be written on the head of a pin.

Three decades later, a group of scientists at IBM managed exactly that. They were able to write the firm’s name using 35 xenon atoms resting on a sheet of nickel— the first demonstration of precise atomic placement. Individual atoms, though, tend to jiggle around. They jiggle less at lower temperatures, so to keep the atoms in place, the researchers cooled them to -269oC, just 4oC above absolute zero, the coldest temperature physically possible.

This was so costly that writing more than three letters did not make sense.

Now a team of researchers led by Sander Otte at Delft University ofTechnology, in the Netherlands, have done better, potentially paving the way for large-scale storage at the atomic level. Instead of three letters, they managed to store an entire paragraph of text (about 1 kilobyte of data). And the memory they used proved stable, in later experiments, at temperatures of -196oC. That may not sound particularly balmy, but it can be achieved with liquid-nitrogen cooling, which is much cheaper than the liquid helium used by IBM. The team stored their information not by writing letters with atoms, as IBM did, but in a binary code. They covered a sheet of copper with chlorine atoms, a process in

There is indeed plenty of room at the bottom

Science and technology 61 which the chlorine atoms naturally form a lattice above the copper. But the team used only enough chlorine to cover five-sixths of the copper surface. The lattice therefore contained plenty of “vacancies”—spaces in which chlorine atoms could be present, but were not. Thanks to the bonds between the atoms, the lattice proved to be much more stable than the lone atoms used by IBM. The team used pairs of one atom and one vacancy each to encode bits of information. They were able to write and rewrite the memory by sliding the atom within each pair back and forth. To do this, they used the probe of a scanning tunnelling microscope (STM), the same device IBM had used in their experiment 26 years earlier. Eight bits were arranged together to form one byte, which is enough to encode a single letter in the standard computer scheme used to represent text.

The pockmarked lattice was stable enough that the team was able to build 1,016 atomic bytes in an area that measured just 96 nanometres by126 (an HIV virus, for comparison, is about 120nm across). That works out to an information density of 78 trillion bits per square centimetre, which is hundreds of times better than the current state of the art for computer hard drives.

The high density achieved by this kind of atomic storage could—some day—expand the memory capacity of phones, computers and data centres. But two further problems must be solved. It would help if the atoms could be made stable at room temperature. And, for now at least, the process is achingly slow. Dr Otte reports read and write speeds of 1-2 minutes per 64 bits. He reckons he could boost those speeds drastically, to about a million bits per second. But that is still thousands of times slower than modern hard drives.

Still, it is an impressive illustration of the advancing state of the art. And what did Dr Otte choose to inscribe on his atomic tablet? Naturally, two paragraphs of Feynman’s speech. Apparently, we can arrange the atoms the way we want. 7

Medical technology

All sewn up Turning surgical sutures into sensors

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EARABLE and implantable medical gadgets are a promising technology. By continuously collecting information from patients they make it easier to diagnose and treat whatever the problem may be. But most of the sensors in such devices have to lie flat against the body. That limits what they can do.

Now a team of researchers are trying to use one of humanity’s oldest technologies to do better. As they report in Microsystems & Nanoengineering, Sameer Sonkusale at Tufts University, in Massachusetts, and his colleagues, propose to turn threads, of the sort spun to make clothes, into sensors.

Thread has many advantages. It is cheap, flexible and mostly tolerated by human bodies. Most pertinently, doctors have plenty of experience, via the practice of suturing, of sewing it into bodily tissues. Doing that with smart thread would allow a more detailed overview of what is happening than any skinmounted sensor could.

Turning yarn into sensors requires clever chemistry. Electrodes for recording mechanical or chemical activity can be created by covering the threads with conductive ink. Sensors designed to measure physical strain—useful in monitoring wound healing—can be made by coating stretchy fibres with carbon nanotubes and silicone. The electrical resistance of those fibres changes as they are placed under strain. By running a small electric current through the thread, Dr Sonkusale and his team can, therefore, measure the forces surrounding it. A related technique can be used to make sensors sensitive to acidity.

Another useful property of some fibres is wicking, in which liquids travel along the fibre via a bit of physics called capillary action. The researchers found that specially treated cotton made a good wick for the interstitial fluid that surrounds most tissues. A smart suture could siphon tiny amounts of that fluid to sensors elsewhere, allowing doctors to keep a continuous and unintrusive eye on their patient’s biochemistry.

So far Dr Sonkusale and his team have tested their technology only in rodents. But it seems to work as expected. One possibility for human trials might be in diabetic patients, who must keep a close eye on any wounds they suffer, as they often resist healing. That can lead to amputations. A few choice stitches could save a limb.

62

The Economist July 23rd 2016

Books and arts

Also in this section 63 Vietnam, a history 64 Murder in South Africa 64 Charlotte Wood’s fiction 65 Diane Arbus’s photography

For daily analysis and debate on books, arts and culture, visit Economist.com/culture

Chinese politics

The people’s pope

Two books explore the meaning of Xi Jinping

T

HERE are few political questions to which the answer will have greater bearing on the lives of such a large number of people in the coming years as this: what sort of leader is Xi Jinping? Since Mr Xi emerged in 2010 as heir-apparent to the general-secretaryship of the Chinese Communist Party, and tookon the job two years later, the question has exercised the minds of analysts even more than is normal when someone new takes over in China.

As recently as the mid-2000s, Mr Xi was still little-known. His glamorous folk-singing wife was far more famous. The somewhat liberal leanings (by the party’s highly illiberal standards) of Mr Xi’s late father, a party grandee, provided one of the few available clues. It has proved highly misleading. Mr Xi has presided over the toughest crackdown on dissent in years.

One way of understanding China’s leader is suggested by the title of a new book: “CEO, China”. Yet as the author, Kerry Brown, a veteran British China-watcher, makes clear, Mr Xi is far more than merely the chief executive of a colossal economy.

He compares Mr Xi’s role to that of the pope: “The general secretary, armed with doctrinal infallibility, like the pope, is a rule-giver, spiritual nurturer and voice of doctrinal purity and correctness,” he writes. Pope Francis, he notes, is battling to instil a renewed sense of mission into a Catholic church “that has lost touch with

CEO, China: The Rise of Xi Jinping. By Kerry Brown. I.B. Tauris; 262 pages; $28 and £20 Chinese Politics in the Era of Xi Jinping.

By Willy Wo-Lap Lam. Routledge; 323 pages; $52.95 and £34.99 its spiritual roots, tarnished its legitimacy and become consumed by material power”. This, he says, is “eerily similar” to Mr Xi’s struggle to revamp his party.

It is somewhat easier, however, to understand how the pope wants to reform the church than it is to make out how Mr Xi intends to change the party, and his country. He says that market forces should play a decisive role, but does that mean he wants to topple state-owned enterprises from the commanding heights of the economy? His wish to purge the party of the egregious corruption that has permeated it at every level seems evident: his campaign against graft has been the most sustained and wide-ranging of any waged by a Chinese leader since the party seized power in 1949. But does he want to introduce checks and balances that would make it harder for corruption to take root?

He stresses the importance of rule of law, but does he mean that courts should operate independently from the party, even in cases that involve challenges to the party’s

rule? Many observers have lost hope that the answers to any of these questions might be affirmative.

Willy Wo-Lap Lam, another experienced China-watcher based in Hong Kong, appears to have little doubt. His richly detailed book, “Chinese Politics in the Era of Xi Jinping”, describes Mr Xi as more “a disciple of Mao” than of Deng Xiaoping, the leader who began opening China to the outside world in the late 1970s. Mr Lam says Mr Xi has no interest in political or ideological liberalisation, having “learned the lessons” of the vicissitudes experienced by party liberals such as his father, who was imprisoned by Mao. Mr Xi has “totally ruled out” any option other than orthodox socialism, he writes.

But so great is the secrecy surrounding the highest echelons of power in China that it is impossible to know for sure. Mr Lam’s book came out in 2015 and covers less than two years of Mr Xi’s rule. Notably it does not extend as far as a meeting of the party’s Central Committee in October 2014, which emphasised the importance of the rule of law and the state constitution—an unusual focus of interest at such a gathering, and an intriguing one given the Chinese leader’s seeming disdain for both.

Mr Xi may in the end turn out to be more of a reformer than his frequent hardline rhetoric, his hammering of civil society and his tiptoeing round all-powerful state firms may suggest. A dwindling band of optimists pin their hopes on a crucial party congress late next year, at which Mr Xi will preside over sweeping leadership changes and set out the party’s goals for the remaining five years of his rule (assuming he accepts the norm of a ten-year limit on the general-secretaryship). Having placed more of his allies in key positions, Mr Xi may begin to do what he has said he 1

The Economist July 23rd 2016

Books and arts 63

2 wants to do: let market forces hold sway

and put “power in a cage” of impartial law.

In his crisp and provocative account, Mr Brown suggests that analysts may be wrong to set much store by Mr Xi’s individual will. “The party is the power in China,” he writes. Mr Xi is “only powerful through it, operating within the limits it sets. On this basis, he is no Mao.” The party believes in the creation of a “strong, rich, stable” and respected country, says Mr Brown. The emotional power of this goal is what confers power upon Mr Xi (who describes it as the “Chinese dream”); unlike Mao, he cannot enforce discipline through terror or repression, the author argues. Mr Xi, he says, is a “servant” of the party’s ambition to restore China to the greatness it once enjoyed. It could “easily go badly” for him if sufficient numbers of his colleagues were to decide that he is taking the country in the wrong direction.

If Mr Brown is right, this may explain why Mr Xi, for all his seeming strength, appears to vacillate. Making China a respected global power will require the development of a more attractive political system. But Mr Xi is transfixed by a fear of unrest, and so clamps down ruthlessly on dissent. He acknowledges that making China rich and strong will require tough economic reforms. But these may trigger strikes and protests as state firms are closed or slimmed down, so he errs repeatedly on the side of caution. Failure to reform may eventually cause even greater instability, many analysts believe. But if Mr Xi agrees with them, he appears to think that on his watch, at least, repression will ensure that the party is obeyed. Given that the main mission entrusted to him by the party is an impossible one—keeping a one-party dictatorship in place for ever—he has few good options. 7

South-East Asian history

Striving for unity Vietnam: A New History. By Christopher Goscha. Basic Books; 524 pages; $35. Allen Lane; £30

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HAT do people think of when they see the word Vietnam? In America the name conjures images of a brutal, grinding military loss which, until President George W. Bush’s ill-fated decision to invade Iraq in 2003, made American leaders rightly hesitant to engage in wars of choice for ideological reasons. For young Europeans Vietnam has become an essential stop on the circuit of backpacking around Asia, offering pleasant weather, cheap accommodation, great food and just

Spiritual nature enough exoticism to give bragging rights at university and just enough tourist infrastructure to make travelling reasonably comfortable. Investors appreciate its cheap labour, long coastline, numerous ports and pro-business policies—all assets that will grow increasingly important as Chinese labour costs rise.

But Vietnam, today, is not the frontrunner in any of those categories: China still draws more investment, Thailand more tourists and the ongoing Iraq fiasco more opprobrium. Ask the average Westerner to name a great Vietnamese artist, musician or writer—or a politician not named Ho Chi Minh—and you would probably get a blank stare in response.

French politicians and writers in the 19th and 20th centuries saw Vietnam as a land first to subjugate and then to administer.

Contemporary Western historians all too often see it simply as a victim of colonialism: a country to be pitied and ennobled, and with which greater powers had their way, rather than as a polity that has done what any other polity does: make the best of suboptimal situations.

Christopher Goscha’s thorough and thoughtful new history of Vietnam counters these simple portrayals with large and welcome doses of complexity. The area known today as Vietnam, he convincingly argues, was not just a blank mass awaiting modernity and the French (not necessarily in that order). Numerous political entities battled for influence, particularly in the fertile region along the Red river, which runs from Kunming (today in the southern Chinese province of Yunnan) into the Gulf of Tonkin, which sits between northern Vietnam and Hainan.

The Han Dynasty subsumed northern

Vietnam into Imperial China in around 110BC. Chinese administrators waxed lyrical about the Red river area’s benefits as a trading post. Over the millennium of Chinese rule, what Mr Goscha calls a “SinoViet or Sinitic elite” emerged; not until the 20th century did quoc ngu, as Vietnam’s contemporary Latinate alphabet is known, displace the Chinese and indigenous character-based language as the standard written script. The Chinese influence on Vietnam still persists, notably in the Mahayana Buddhism which today is practised by many ethnic Vietnamese, and in Vietnam’s distinctly Confucian political and education systems. But Ngo Quyen routed the Chinese in 939AD, renaming the territory Dai Viet, or “Greater Viet”.

Dai Viet rulers then embarked on a grandiose imperial expansion; indeed, one of the signal achievements of Mr Goscha’s work is the attention he pays to pre-European South-East Asian imperialism. The French were just one of many groups to conquer and colonise the territory known today as Vietnam. They may not even have been the most successful. The Dai Viet used military might and Confucianist statecraft and administration to push the Viet empire southward, in order to “respectfully bring the Mandate of Heaven, and do the work of striking and killing those cruel people”. They then did what kings around the world had done: they invented a mythical past to justify their conquests. Viet generals known as the Nguyen pressed even farther southward, bringing their state with them. In the early 19th century Viet emperors declared themselves rulers over a unified (if fractious) state that included parts of modern-day Vietnam, 1 Laos and Cambodia.

64 Books and arts 2

Thus when the French established their first colonial base of Cochin-China in 1862, they did not build a state so much as layer a French veneer onto an already functioning one. The Nguyens’ extensive land-registry records made it easy to collect property taxes; the French also drew revenue from state monopolies on alcohol, gambling, opium and rice production. Much as the British did in their South Asian possessions, the French adroitly exploited local grievances, propped up pliable rulers and developed an ethnic-Vietnamese colonial elite—all, of course, with the threat of violence in the background. The French conquest of Indochina was driven less by a civilising mission than by mercantile interests, particularly rubber, rice and coffee, all made into profitable exports by “cheap, mainly ethnic Viet sweat”.

After the first world war, anti-French pressure grew until Ho Chi Minh, whom Mr Goscha depicts less as a communist ideologue than as a crafty statesman, declared independence on September 2nd 1945. Decades of war followed. Today Vietnam, like China, has a booming economy, and remains communist in name only. The ruling party, as Mr Goscha notes in his shrewd final chapter, has subtly shifted its raison d’être “from defending ‘class struggle’ and ‘proletarian internationalism’ to promoting economic prosperity and inclusive nationalism for all social groups”. Ho would understand. He might even approve. 7

South Africa

Time of death We Are Not Such Things. By Justine van der Leun. Spiegel & Grau; 544 pages; $28. Fourth Estate; £14.99

I

N AUGUST 1993, a little less than a year before the end of apartheid, South Africa was on edge. Political violence was claiming close to 100 lives a week, even as negotiators were guiding the country into postapartheid democracy. Most of these killings took place in the townships, densely packed areas to which black people were confined by the laws of the time.

Yet occasionally violence spilled over, igniting fears among the country’s white population, which still controlled the police and army, that ending racial rule would lead not to the “rainbow nation” promised by Nelson Mandela but to outright racial war. Few killings ignited such fears as that of Amy Biehl, a young American student who was a Fulbright scholar and an anti-apartheid activist. Biehl died after she unwittingly drove into a protest in

The Economist July 23rd 2016 Australian fiction

The way of the world The Natural Way of Things. By Charlotte Wood. Europa; 208 pages; $17. Allen & Unwin; £12.99

A

T THE start of this unsettling novel by Charlotte Wood, who was born in New South Wales in 1965, two Australian women awake drugged and imprisoned, wearing “bizarre olden-day costume”.

Soon the full horror of Ms Wood’s contemporary fable becomes clear. Yolanda and Verla, along with eight others, have been made to disappear, victims of a conspiracy to silence women who inconvenience powerful men.

A haunting parable of contemporary misogyny, “The Natural Way of Things”, which earlier this year won the Stella prize for fiction by Australian women, is “The Handmaid’s Tale” for our age of sensational media and reality television.

Like Margaret Atwood’s dark vision of religious dictatorship, it is a preview of what could happen to women who rock the boat, resisting predation or asserting their own sexual freedom.

This is a tale of captivity, with all its tedium and desperation. Yet the remote desert prison, surrounded by dark bush and a vast bowl of sky, provides a kind of solace. Trapped alongside the minions of the faceless corporation that has spirited them away, the women and their captors struggle to survive. The “natural way of things” refers not just to male domination but to deeper, more sustaining bonds between humans and nature.

Like the surreal prison itself, Ms Wood’s writing is direct and spare, yet capable of bursting with unexpected beauty. Kookaburras “dazzled the darkness with their horrible noise”; Verla is “mesmerised by pairs of seed pods nestled at the base of a grass tree: hot orange, bevelled, testicular”. A rabbit trap is “a drooping bouquet of rusted steel”. Yolanda, scarred by gang rape, becomes a hunter, driven ever deeper into her ani-

a township on the outskirts of Cape Town.

A large crowd of angry young men chanting “One settler, one bullet”, surrounded her car and pelted it with stones. When she ran from the vehicle her attackers chased her through the streets, cornered her and killed her.

Because of Biehl’s skin colour, nationality and idealism, her death attracted the world’s attention in a way that the daily toll of black deaths had not, and came to represent the senselessness of political

mal self; Verla, whose “crime” was sleeping with a cabinet minister, realises that even her education and privilege will not protect her. Their groping towards mutual understanding is the novel’s heart: “Yolanda and Verla hold themselves apart, for survival. This is their bond.”

The most chilling aspect of Ms Wood’s premise is its plausibility. Nowadays, women who denounce sexism are routinely attacked on social media; the novel’s more savage forms of punishment logically extend the ways in which they can be bullied and silenced. The very absence of the corporate captors makes the horror worse. No one will come; no one cares. The sly and devastating ending makes the point: Ladies, you have been warned.

violence in South Africa. Yet her killing came to stand for much more, too. Four men were convicted of her murder after a contentious trial in which they alleged they had been tortured into confessing. In 1997, after the men had applied for amnesty to the Truth and Reconciliation Commission, Biehl’s parents supported their claim, becoming in turn powerful symbols of South Africa’s attempts to put its violent past behind it. Embracing those who had killed their daughter, Biehl’s parents 1

The Economist July 23rd 2016

Books and arts 65

2 employed two of those convicted through

a foundation established in her memory.

Yet much of this narrative is challenged in a deeply researched and thought-provoking book, “We Are Not Such Things”,

by Justine van der Leun, an American writer who spent years tracking down most of those involved. Her somewhat wordy writing—part whodunnit and part travelogue—weaves together the accounts of policemen, prosecutors and those convicted with some penetrating insights.

Guided by, among others, a former liberation fighter who found Buddhism in prison, the author tugs at the threads of the official account. She finds that one of South Africa’s most celebrated examples of reconciliation has not put to rest the country’s painful past for either victims or perpetrators of violence. Among those she meets are the other two men who were convicted, discovering that they were afterwards embittered that they too were not hired by the Amy Biehl Foundation, an institution that they feel they helped create through killing the American student.

Her most puzzling discovery relates to Easy Nofemela, who was found guilty of the murder and subsequently granted amnesty and hired by the foundation. Yet the author finds evidence suggesting he was not even at the scene of the crime. This is an engaging take on a murder that might have derailed democracy. 7

American photography

Exposed NEW YORK

A new show at the Met traces the short, hard life of a visual master

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HEN Diane Arbus (she pronounced it Deeyan) died in 1971, she joined a pantheon of distraught, creative women, including Sylvia Plath, Marilyn Monroe, Judy Garland, Janis Joplin, Frida Kahlo and Kay Sage, who all died prematurely. Like Mark Rothko a year before, she slit her wrists and overdosed on pills. Arbus’s suicide increased public awareness of her work, but it masked her delight at trying to capture quite what it means to be human.

Arbus started in 1946 as a stylist, working in close partnership with her husband Allan, photographing fashion advertisements for Russek’s, her father’s Fifth Avenue department store. Later the Arbuses branched out into editorial photography for fashion magazines. Their work, mostly done in their studio with large-format cameras, was competent, but lacked both the clarity and the compositional fireworks of a Richard Avedon or an Irving Penn.

Shuttered up...

Burned out after a decade of styling ideas for Christmas presents and reversible bunny-fur jackets, Arbus left to do her own thing, quipping later that she preferred to photograph people in their own clothes.

She grew up in a family ofrich fashion merchants, but had no use for fashion herself.

One biographer insists that she preferred not to use make-up or deodorant. What she always wore was a camera: her shield, licence and admission ticket into strangers’ homes and lives.

A new show at the Metropolitan Museum ofArt’s Breuer gallery has been hung to allow the visitor to focus carefully on each photograph. Jeff Rosenheim, the freewheeling curator, presents the works without any thematic or chronological consistency, which means one has to focus on each print and develop one’s own narrative, seeking out what in every picture appealed to Arbus.

A useful approach is to note how the photographer’s technique, approach and subject matter developed. The earlier pictures were taken with hand-held cameras with 35mm film and available light.

The camera was held at eye level, and promoted direct eye-to-eye contact.

In late 1956 and over the next two years, Arbus took classes with Lisette Model, known for her close-up, biting street caricatures. She pushed Arbus towards a more crisp, close-in and confrontational approach. By 1962, eschewing her earlier grainy style and looking for more definition, Arbus began using a Rolleiflex twinlens reflex camera with a larger square film format. It was held at waist-level, looking up to her subjects. Her images, sometimes made using a tripod and flash, became sharper and more tightly composed.

Early on, Arbus staked out places with a

lot of people. Her initial pictures were simple, passing encounters. Often her subject would be confused about why she wanted to photograph them. Their querulous, hostile or annoyed faces recur in her work from the late 1950s. Arbus had a taste for whimsy—a night view of a drive-in screen showing a projected image of a bright sun shining through the clouds, or quirky film props, such as rocks on wheels, stored in a back lot at Disneyland.

Arbus was 38 before she saw herself as a professional. She moved from depicting random incidents with strangers to seeking out visually interesting human tribes— twins and triplets, midgets, circus performers, nudists, the blind, transvestites, freaks and the mentally ill—by entering their worlds. Jack Dracula, a legendary tattoo man (pictured below), was a favourite subject. She used her considerable intelligence, charm and an intense interest in others to get the poses she wanted. Her pictures, taken in bedrooms and backstage dressing rooms, are evidence of her ability to gain trust and acceptance from those whom society might find repellent, and who in turn distrusted society themselves.

While risqué at the time, her choice of subjects was not without precedent. Nearly a century before, Edgar Degas had painted inhabitants of his own demimonde: prostitutes, ballet dancers, jockeys, chanteuses. As with the early Impressionists Arbus’s work was met initially with disapproval; at her first show spit had to be wiped every day off the pictures. In this age of ever-present selfies, the novelty of street photography has faded, as has the shock value of tattoos, piercings, crossdressing and gender reassignment. Viewers today are more open to Arbus’s images—and far less likely to spit. 7

...vamping for the camera

66

Courses

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The Economist July 23rd 2016

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67

EXPRESSION OF INTEREST (EOI) CASH BASED TRANSFERS The United Nations World Food Programme (WFP) is the world’s largest humanitarian agency fighting hunger worldwide. Each year, on average, WFP feeds more than 80 million people in more than 80 countries. In addition to distributing food, WFP also assists its beneficiaries through Cash Based Transfers (CBT). Examples of CBT include physical cash, mobile money, and electronic vouchers. In 2015, WFP CBT reached 10 million beneficiaries in 54 countries with a budget of USD 1.5 billion, continuing the upward trend of market based approaches within WFP’s operations.

WFP intends to identify qualified organizations capable of providing WFP with comprehensive CBT solutions (including but not limited to payment services, mobile money, e-cards/vouchers, and payment aggregation) to fulfil WFP’s beneficiary needs in diverse CBT contexts.

The solutions should meet WFP’s guiding principles including beneficiary centricity, cost efficiency, effectiveness, scalability, reliability, security, flexibility, transparency, auditing facility, and implementation speed.

This EOI’s in-scope countries are (others may be added at a later stage): List one: Cook Islands, Fiji, Kiribati, Republic of Marshall Islands, Federated States of Micronesia, Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu.

List two: Afghanistan, Bangladesh, Bhutan, Cambodia, India, Indonesia, Iran, DPR Korea, Lao PDR, Malaysia, Maldives, Mongolia, Myanmar, Nepal, Pakistan, Philippines, Singapore, Sri Lanka, Timor-Leste, and Vietnam.

WFP hereby invites interested organizations to obtain the related Request for Information (RFI) documentation by writing to rbb.rfi@wfp.org and return the completed RFI questionnaire to WFP no later than 23:59 GMT on 21 August 2016. The RFI results will be evaluated by WFP and organizations meeting WFP’s criteria may be invited to participate in a future competitive tender (at WFP’s sole discretion).

[WFP reference TH16NF01-RFI]

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Africa Agriculture and Trade Investment Fund Deadline: 19 August 2016 at 15:00 CET. The Africa Agriculture and Trade Investment Fund (aatif.lu) is an innovative public-private partnership established with the objective to realise Africa’s agricultural potential for the benefit of the poor by improving food security and providing additional employment and income to farmers, entrepreneurs and labourers. The Fund provides patient and responsible financing to efficient agricultural value chains and facilitates the transfer of knowledge to increase productivity and add value locally.

In light of the approaching expiration of the term of the investment management mandate with Deutsche Bank AG, the Board of AATIF has decided to invite eligible investment management firms to submit a prequalification bid.

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The Economist July 23rd 2016

The purpose of this call for expressions of interest is to develop a short list of candidate companies that will be invited to tender for a) full investment management services and/or b) distribution services.

Investment managers are free to form a consortium with other firms and consultants to ensure that the required know-how, technical expertise and experience are available to them.

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68

The Economist July 23rd 2016

Economic and financial indicators Economic data % change on year ago

Economic data product Gross domestic latest

qtr* 2016†

Industrial production latest

United States +2.1 Q1 +1.1 +1.8 -0.7 Jun Statistics on 42 economies, +6.2 plusJuna +7.4 +6.6 China +6.7 Q2 look GDP forecasts Q1 at +1.9 +0.5 -0.4 May Japan closer+0.1 +1.8 +1.5 +1.4 May Britain +2.0 Q1 +2.4 +1.4 +0.9 Apr +1.1 Q1 Canada +2.2 +1.5 +0.5 May Euro area +1.7 Q1 -0.7 +1.3 +2.4 Apr Austria +1.6 Q1 +0.9 +1.3 +2.3 Apr Belgium +1.5 Q1 +2.6 +1.4 +0.5 May France +1.3 Q1 +2.7 +1.5 -0.4 May Germany +1.6 Q1 -1.9 -0.6 +2.9 May Greece -1.3 Q1 +1.0 +0.9 -0.6 May Italy +1.0 Q1 +1.8 +1.5 +1.1 May Netherlands +1.5 Q1 +3.1 +2.8 +4.0 May Spain +3.4 Q1 +1.6 +2.3 +8.6 May Czech Republic +2.7 Q1 +2.7 +1.1 +6.2 May Denmark -0.1 Q1 +4.0 +1.0 -0.1 May Norway +0.7 Q1 -0.4 +3.3 +6.0 Jun Poland +2.5 Q1 na -0.8 +1.8 Jun Russia -1.2 Q1 Sweden +4.2 Q1 +2.0 +3.5 +1.7 May +0.4 +1.0 +1.0 Q1 Switzerland +0.7 Q1 na +3.4 +7.0 May Turkey +4.8 Q1 +4.3 +2.7 +4.8 Q1 Australia +3.1 Q1 -1.8 +1.5 -0.3 Q1 Hong Kong +0.8 Q1 +9.6 +7.5 +1.2 May India +7.9 Q1 na +5.0 +7.5 May Indonesia +4.9 Q1 na +4.3 +2.7 May Malaysia +4.2 Q1 -1.5 May Pakistan +5.7 2016** na +5.7 +4.5 +5.8 -1.2 May Philippines +6.9 Q1 +0.8 +1.4 +0.9 May Singapore +2.2 Q2 +2.1 +2.5 +4.3 May South Korea +2.8 Q1 +3.1 +0.5 +1.9 May Taiwan -0.7 Q1 +3.8 +2.8 +2.6 May Thailand +3.2 Q1 -2.7 -0.9 -2.5 Oct Argentina +0.5 Q1 -1.1 -3.5 -7.7 May Brazil -5.4 Q1 +5.3 +1.6 -2.0 May Chile +2.0 Q1 +0.6 +2.2 +4.5 May Colombia +2.5 Q1 +3.3 +2.3 +0.4 May Mexico +2.6 Q1 -8.4 -13.9 na Venezuela -8.8 Q4~ na +3.0 -15.8 May Egypt +6.7 Q1 Israel +2.1 Q1 +1.7 +2.2 +0.8 May Saudi Arabia +3.5 2015 na +0.9 na -1.2 +0.4 +3.8 May South Africa -0.2 Q1

Current-account balance Consumer prices Unemployment latest 12 % of GDP latest 2016† rate, % months, $bn 2016† +1.0 Jun +1.9 Jun -0.4 May +0.5 Jun +1.5 May +0.1 Jun +0.6 Jun +2.2 Jun +0.2 Jun +0.3 Jun -0.7 Jun -0.4 Jun nil Jun -0.8 Jun +0.1 Jun +0.3 Jun +3.7 Jun -0.8 Jun +7.5 Jun +1.0 Jun -0.4 Jun +7.6 Jun +1.3 Q1 +2.6 May +5.8 Jun +3.5 Jun +1.6 Jun +3.2 Jun +1.9 Jun -1.6 May +0.8 Jun +0.9 Jun +0.4 Jun — *** +8.8 Jun +4.2 Jun +8.6 Jun +2.5 Jun na +14.0 Jun -0.8 Jun +4.1 May +6.3 Jun

+1.4 +2.0 -0.1 +0.7 +1.6 +0.3 +1.1 +1.6 +0.3 +0.4 -0.2 +0.1 +0.4 -0.4 +0.5 +0.8 +3.1 -0.6 +7.2 +1.0 -0.5 +7.5 +1.4 +2.6 +5.3 +4.0 +2.2 +3.7 +1.8 -0.8 +1.2 +1.1 +0.2 — +8.5 +3.9 +7.7 +2.9 +495 +12.1 -0.5 +4.7 +6.4

4.9 Jun 4.1 Q2§ 3.2 May 4.9 Apr†† 6.8 Jun 10.1 May 6.1 May 8.4 May 9.9 May 6.1 Jun 23.3 Apr 11.5 May 7.6 May 19.8 May 5.2 Jun§ 4.3 May 4.6 Apr‡‡ 8.8 Jun§ 5.4 Jun§ 7.6 May§ 3.3 Jun 9.3 Apr§ 5.8 Jun 3.4 Jun‡‡ 4.9 2013 5.5 Q1§ 3.5 Apr§ 5.9 2015 6.1 Q2§ 1.9 Q1 3.6 Jun§ 4.0 May 1.2 May§ 5.9 Q3§ 11.2 May§ 6.8 May§‡‡ 8.8 May§ 4.0 May 7.3 Apr§ 12.7 Q1§ 4.8 May 5.6 2015 26.7 Q1§

-473.1 Q1 +284.7 Q1 +158.7 May -161.9 Q1 -47.6 Q1 +392.0 May +10.5 Q1 +6.5 Mar -20.9 May‡ +305.9 May +1.3 Apr +47.7 May +62.0 Q1 +20.4 Apr +2.7 Q1 +17.5 May +29.3 Q1 -2.7 May +38.4 Q2 +28.2 Q1 +71.9 Q1 -27.2 May -62.3 Q1 +11.9 Q1 -22.1 Q1 -18.2 Q1 +7.0 Q1 -2.5 Q1 +6.7 Mar +54.8 Q1 +105.2 May +74.8 Q1 +40.1 Q1 -15.0 Q1 -29.5 May -4.7 Q1 -16.9 Q1 -30.5 Q1 -17.8 Q3~ -18.3 Q1 +14.7 Q1 -59.5 Q1 -13.4 Q1

-2.6 +2.8 +3.4 -5.0 -3.1 +3.0 +2.3 +1.2 -0.5 +8.1 -0.2 +2.1 +9.9 +1.3 +1.1 +6.5 +7.0 -0.9 +3.4 +5.6 +9.0 -4.7 -4.3 +3.0 -1.2 -2.4 +2.7 -0.8 +3.1 +19.5 +7.3 +13.3 +7.1 -2.3 -1.0 -2.3 -6.0 -2.9 -3.1 -6.6 +4.0 -8.6 -4.2

Budget Interest balance rates, % % of GDP 10-year gov't 2016† bonds, latest

Currency units, per $ Jul 20th year ago

-2.9 -3.5 -5.0 -4.0 -2.5 -1.9 -1.6 -2.8 -3.3 +0.6 -4.6 -2.6 -1.5 -4.3 -0.6 -2.8 +3.0 -2.9 -4.1 -0.4 +0.2 -1.7 -2.2 nil -3.8 -2.1 -3.4 -4.6 -0.8 +0.7 -1.1 -1.0 -2.6 -4.4 -8.1 -2.5 -2.6 -3.0 -24.3 -11.5 -2.5 -13.1 -3.3

6.68 107 0.76 1.30 0.91 0.91 0.91 0.91 0.91 0.91 0.91 0.91 0.91 24.6 6.76 8.49 3.97 63.4 8.59 0.99 3.04 1.34 7.76 67.2 13,113 4.03 105 47.1 1.36 1,141 32.0 35.0 14.9 3.24 651 2,929 18.5 9.99 8.88 3.86 3.75 14.3

1.55 2.67§§ -0.22 0.98 1.12 -0.01 0.20 0.24 0.21 -0.01 8.04 1.25 0.09 1.19 0.39 0.15 0.96 2.93 8.51 0.17 -0.55 10.13 1.92 1.02 7.27 6.96 3.58 8.03††† 4.10 1.75 1.42 0.68 2.03 na 11.82 4.39 7.72 5.95 11.73 na 1.69 na 8.80

6.21 124 0.64 1.30 0.92 0.92 0.92 0.92 0.92 0.92 0.92 0.92 0.92 24.9 6.87 8.17 3.78 57.1 8.63 0.96 2.65 1.35 7.75 63.5 13,345 3.81 102 45.3 1.37 1,148 31.1 34.1 9.15 3.19 645 2,749 15.9 6.31 7.83 3.82 3.75 12.3

Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. ~2014 **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. ***Official number not yet proved to be reliable; The State Street PriceStats Inflation Index, June 36.96%; year ago 26.70% †††Dollar-denominated bonds.

The Economist July 23rd 2016

Markets % change on Dec 31st 2015 Index one in local in $ Markets Jul 20th week currency terms United States (DJIA) 18,595.0 +1.2 +6.7 +6.7 China (SSEA) 3,169.6 -1.1 -14.4 -16.8 Japan (Nikkei 225) 16,681.9 +2.8 -12.4 -1.2 Britain (FTSE 100) 6,729.0 +0.9 +7.8 -3.6 Canada (S&P TSX) 14,533.6 +0.3 +11.7 +19.1 Euro area (FTSE Euro 100) 1,006.9 +1.4 -8.0 -6.8 Euro area (EURO STOXX 50) 2,966.9 +1.4 -9.2 -8.0 Austria (ATX) 2,222.3 +4.0 -7.3 -6.0 Belgium (Bel 20) 3,431.3 +1.2 -7.3 -6.0 France (CAC 40) 4,379.8 +1.0 -5.5 -4.3 Germany (DAX)* 10,142.0 +2.1 -5.6 -4.3 Greece (Athex Comp) 569.7 +1.8 -9.8 -8.5 Italy (FTSE/MIB) 16,763.8 +1.4 -21.7 -20.7 Netherlands (AEX) 452.2 +1.7 +2.3 +3.7 Spain (Madrid SE) 862.2 +1.3 -10.7 -9.5 Czech Republic (PX) 882.1 +6.8 -7.8 -6.5 Denmark (OMXCB) 877.5 +0.8 -3.2 -1.6 Hungary (BUX) 27,573.5 +1.4 +15.3 +17.4 Norway (OSEAX) 689.4 +0.6 +6.2 +10.7 Poland (WIG) 46,504.8 +3.3 +0.1 -0.3 Russia (RTS, $ terms) 946.7 -0.6 +8.6 +25.1 Sweden (OMXS30) 1,386.6 +2.2 -4.2 -6.0 Switzerland (SMI) 8,197.4 +0.7 -7.0 -5.6 Turkey (BIST) 74,902.8 -7.9 +4.4 +0.2 Australia (All Ord.) 5,565.9 +1.7 +4.1 +7.0 Hong Kong (Hang Seng) 21,882.5 +2.6 -0.1 -0.2 India (BSE) 27,915.9 +0.4 +6.9 +5.2 Indonesia (JSX) 5,242.8 +2.1 +14.1 +20.0 Malaysia (KLSE) 1,669.6 +0.6 -1.4 +5.2 Pakistan (KSE) 39,098.8 +0.1 +19.1 +19.0 Singapore (STI) 2,945.7 +1.2 +2.2 +6.8 South Korea (KOSPI) 2,015.5 +0.5 +2.8 +5.6 Taiwan (TWI) 9,007.7 +1.7 +8.0 +10.8 Thailand (SET) 1,510.0 +2.2 +17.2 +20.7 Argentina (MERV) 15,931.8 +5.2 +36.5 +18.3 Brazil (BVSP) 56,578.1 +3.6 +30.5 +59.3 Chile (IGPA) 20,273.3 +1.3 +11.7 +21.5 Colombia (IGBC) 9,930.3 +1.0 +16.2 +25.9 Mexico (IPC) 47,505.3 +2.7 +10.5 +3.0 Venezuela (IBC) 12,497.8 +3.4 -14.3 na Egypt (Case 30) 7,503.4 -0.7 +7.1 -5.6 Israel (TA-100) 1,279.2 +1.3 -2.7 -1.9 Saudi Arabia (Tadawul) 6,630.6 -0.9 -4.1 -4.0 South Africa (JSE AS) 52,837.9 nil +4.2 +13.2

Economic and financial indicators 69

GDP forecasts for 2016 The IMF has cut its forecast for world economic growth in 2016 for the fourth time in a row; it now expects GDP to increase by a mere 3.1%. The Brexit vote in Britain explains some of the drop, although it may have only a muted impact on non-European economies. Growth in the euro area has been revised upwards, thanks to unexpectedly strong firstquarter GDP growth, but it would have been even higher were it not for Brexit.

China’s GDP may also expand at a faster pace, albeit still within its target of 6.5-7%. A forecast of slower growth in Japan is partly due to the yen’s recent appreciation. Nigeria’s economy is now expected to contract as a result of lower oil receipts and power-supply problems.

Other markets Other markets Index Jul 20th United States (S&P 500) 2,173.0 United States (NAScomp) 5,089.9 China (SSEB, $ terms) 351.4 Japan (Topix) 1,330.8 Europe (FTSEurofirst 300) 1,345.1 World, dev'd (MSCI) 1,707.3 Emerging markets (MSCI) 870.8 World, all (MSCI) 412.8 World bonds (Citigroup) 948.7 EMBI+ (JPMorgan) 798.6 Hedge funds (HFRX) 1,177.3§ Volatility, US (VIX) 11.8 CDSs, Eur (iTRAXX)† 69.5 70.0 CDSs, N Am (CDX)† Carbon trading (EU ETS) € 4.7

GDP, % change on a year earlier Month forecast made:

4

April 2016

2 – 0 + 2

July 2016

4

6

8

India China World United States Britain Germany Euro area Italy Japan Russia Nigeria Brazil Source: IMF

The Economist commodity-price index % change on Dec 31st 2015 one in local in $ week currency terms +1.0 +6.3 +6.3 +1.7 +1.6 +1.6 -0.6 -15.2 -17.6 +2.3 -14.0 -3.1 +1.4 -6.4 -5.2 +0.8 +2.7 +2.7 +1.7 +9.6 +9.6 +0.9 +3.4 +3.4 -1.5 +9.1 +9.1 -0.7 +13.4 +13.4 +0.2 +0.3 +0.3 +13.0 +18.2 (levels) -3.8 -9.9 -8.7 -1.6 -20.8 -20.8 -2.1 -43.4 -42.7

Sources: Markit; Thomson Reuters. *Total return index. †Credit-default-swap spreads, basis points. §July 19th.

Indicators for more countries and additional series, go to: Economist.com/indicators

2005=100

% change on

The Economist commodity-price indexone one Dollar Index All Items Food Industrials All Nfa†

Jul 12th

Jul 19th*

month

year

139.6 162.8

138.8 159.4

-1.0 -5.3

-2.2 -3.5

115.5

117.5

+5.8

-0.4

122.9 112.3

125.9 113.9

+5.0 +6.2

+5.7 -3.1

192.2

+10.6

+15.8

156.8

+1.3

-2.9

1,330.7

+4.7

+20.1

44.7

-8.9

-11.5

Metals Sterling Index All items 192.6 Euro Index All items 148.8 Gold $ per oz 1,342.4 West Texas Intermediate $ per barrel 46.8

Sources: Bloomberg; CME Group; Cotlook; Darmenn & Curl; FT; ICCO; ICO; ISO; Live Rice Index; LME; NZ Wool Services; Thompson Lloyd & Ewart; Thomson Reuters; Urner Barry; WSJ. *Provisional †Non-food agriculturals.

70

Obituary Johnny Barnes and Datta Phuge

Clothed with happiness Johnny Barnes, Bermuda’s “greeter”, and Datta Phuge, “the Gold Man of Pune”, died on July 9th and 14th respectively, aged 93 and 48

I

N THE city of Pune in Maharashstra, in 2012, Datta Phuge conceived a desire to display something no one else had. Something, that is, made of pure gold. As founder-floater of the Vakratunda Chit Fund, a slightly slippery credit society, he had any amount of gold in his possession or on his body: rings, bracelets, coins, mobile phone.

He was in the habit of wearing 7kg of it a day, here and there. He had given a heap to his wife Seema, who began to find it a little boring to wear. But since gold was his passion and his chief way of showing how happy and fortunate he was, he wanted to flaunt it still more.

After chatting it over with his friends at Ranka Jewellers, he ordered a shirt made almost wholly of gold. It comprised 100,000 spangles and 14,000 gold flowers fixed to white velvet cloth, so that it could be folded away like any other shirt. Accessories were provided, also of 22-carat gold: necklaces, cuffs and a belt. Altogether, the outfit weighed 9.5kg. It took 15 craftsmen from West Bengal, working 16-hour days, more than two weeks to create it. And it cost 1.27 crore rupees, or $250,000.

Almost 13,000km away, across two oceans in Bermuda, Johnny Barnes in 1986 also decided to put on a prodigal display.

He would stand at the Crow Lane roundabout in Hamilton, where most of the

rush-hour traffic came past, and tell each passing motorist how sweet life was and how much he loved them. His days had long overflowed with happiness, in his garden and in his jobs as a railway electrician and a bus-driver, where he had taken up the habit of waving and smiling to anyone who passed as he ate his lunchtime sandwiches. He had lavished joy on his wife Belvina, “covering her with honey”, as he put it. But there was plenty left over.

For 30 years he went to the roundabout every weekday morning. He would rise at around 3am, walk two miles to his post, stay for six hours shouting “I love you!”, smiling and blowing kisses, and then walk home again. He was there in the heat, his wide-brimmed straw hat keeping off the sun, and there in the rain with his umbrella. Only storms deterred him and eventually, the creakings of old age. Over the years, he transmitted his radiant happiness to drivers hundreds of thousands of times.

Both Mr Barnes and Mr Phuge were taken for madmen at the start; but they justified themselves partly by the ambient culture. In India, Mr Phuge explained, everyone loved gold, and in Maharashtra they loved it even more. Politicians went laden with it and, as a man of political ambition himself, he hoped the shirt might get him noticed nationally. That was why he

The Economist July 23rd 2016 wore it not just to functions or events, but also when going casually around the town, causing a small sensation. For Mr Barnes, his extravagant love of Hamilton’s commuters came partly from Bermudans’ habit of saying “Good morning” anyway, partly from his genuine joy in the life God had blessed him with, and partly from the switching his mother had given him when he failed, as a child, to greet an old lady. Every day ever since, he had tried to spread happiness to as many people as possible.

Fame came rapidly. Mr Barnes was hailed as an icon of Bermuda, and in 1998 a statue of him was put up near the roundabout. Tourists from Africa and America came to be photographed with him and to buy his dollar postcards; he once waved to the Queen of England. Mr Phuge was on all the Marathi TV channels modelling his shirt, but also had BBC reporters and Canadians lining up at his front door; they were, his wife said, “even more sought-after than royals”. Both men were credited with powers to make gold, or happiness, increase.

Mr Barnes, a Seventh-Day Adventist, often prayed with his visitors beside the road, and his rare absences were taken as bad omens. Mr Phuge (who always wore with his shirt a giant “Om” in crystals on a thick chain of gold) was believed to have the Midas touch, and was asked to bless houses.

Both men hugely enjoyed the attention.

There were naysayers, of course. Those who were not so lucky, or in a bad mood, resented these continuous demonstrations of good fortune. Gentle Mr Barnes was condemned as a traffic hazard, and once had a bucket of water thrown over him. Mr Phuge was more justifiably attacked as a shady money-lender, parading in his gold while local farmers starved— and indeed while he, too, was deep in debt.

When he strolled out in his shirt his heavily armed “boys” went too, to protect him.

Drawing the moral On the night of July 14th, on his way to a party—but not, apparently, in the shirt—he was stoned to death by “friends” to whom he owed money. Nothing could have been further from the peaceful death of Johnny Barnes, in ripe old age and in the firm conviction he was heading home. The moral of the tale seems almost too easy to draw: the selfish flaunter of happiness, weighed down by gold, came to an awful end, while the selfless one, wearing his prodigious love so lightly, was praised and lamented.

Both men, though, left behind a deficit of magic. After Mr Phuge died, no one could find the wonderful gold shirt. It was not in the house, nor at Ranka Jewellers; rumour had it that a creditor from Mumbai had taken it away. As for Mr Barnes, people searched up and down, far and wide, for the true secret of his happiness; for that, too, had disappeared with him. 7

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