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Obama to business: stop whining China’s Chechnya Making a mess of world trade Undersea gliders AUGUST 9TH– 15TH 2014

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How Koreans got cool

The sex business How technology is liberating the world’s oldest profession


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Contents 7 The world this week Leaders 9 Prostitution A personal choice 10 Trade and protectionism No more grand bargains 10 China’s far west A Chechnya in the making? 11 Reforming Leviathan Mandarin lessons 12 Mexico’s reforms Keep it up On the cover The internet is making the buying and selling of sex easier and safer. Governments should stop trying to ban it: leader, page 9. How new technology is shaking up the oldest business, pages 17-20. The secret world of sex in Iran, page 43 The Economist online Daily analysis and opinion from our 19 blogs, plus audio and video content, debates and a daily chart Economist.com/blogs

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Volume 412 Number 8899 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, Hong Kong, Johannesburg, Lima, Los Angeles, Mexico City, Moscow, New Delhi, New York, Paris, San Francisco, São Paulo, Singapore, Tokyo, Washington DC

Letters 14 On assisted suicide, Gaza, business, Panama’s hats, the Big Mac Briefing 17 Prostitution and the internet More bang for your buck Britain 21 Building in London Bodies, bombs and bureaucracy 22 Reusing old offices New digs 22 Scotland’s TV debate Bravo, Darling 23 Boris Johnson The blond bombshell 23 Lady Warsi Unilateral action 24 Law and the armed forces Under siege 25 The Welsh language Dragonian measures 26 The British diaspora And don’t come back

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Europe Turkey’s election Erdogan’s next act Germany’s president A new German gospel Russia and the West How to lose friends War crimes in Kosovo A country awaits

30 Italy’s economy Shrinking again 30 Italy’s parliament Pampered workers United States 31 Barack Obama’s message to business Stop whining 32 Presidents and growth Timing is everything 33 Congressional elections Immovable incumbents 33 Colorado politics Ground war 34 Gun control Bullets to the head 34 Streetcars and urban renewal Rolling blunder 36 Regional accents Mind that drawl, y’all 37 Lexington The George H.W. Bush revival

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The Americas Cuba’s foreign relations Rekindling old friendships Brazil’s election campaign A scripted telenovela NAFTA’s junior partners Frenemies Bello Argentina after the default

Middle East and Africa 41 The Gaza war Will the ceasefire hold? 42 Gaza and the Arab world A collective shrug 42 Iraq’s civil war America is asked back 43 Sexual mores in Iran Throwing off the covers 44 Science in Africa On the rise 44 Ethiopia and its press The noose tightens

Obama and business The president tells CEOs to stop calling him unfriendly to business, page 31

China’s Chechnya An iron fist in Xinjiang is fuelling an insurrection. The leadership in Beijing must switch tactics: leader, page 10. New episodes of violence and repression have heightened tensions in the region, page 49

Gaza After a month of horrendous bloodshed, both sides are looking for ways of stopping it. But it will be hard to turn a ceasefire into a more durable settlement, page 41. The Gazans’ plight has aroused less sympathy in other Arabs than usual, page 42

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The Economist August 9th 2014

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47 World trade The WTO’s approach to negotiating free trade needs radical change: leader, page 10. India’s torpedoing of the latest trade talks leaves no one better off, page 58. New techniques show the damage done by subsidies at the heart of global trade, page 62

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Asia Thailand Peace, order, stagnation Malaysian politics What’s Malay for gerrymandering? India’s civil-service exams The unlevel field Japan’s economy Feeling the pinch Banyan Truth and justice: Cambodia and beyond

China 49 Unrest in Xinjiang Spreading the net 50 Alcohol consumption A growing problem International 51 Civil-service reform Modernising the mandarins 52 Women in politics Treating the fair sex fairly 52 Ebola Fear and loathing

Failed bids When big merger deals fail, life rarely goes back to normal, page 53. In praise of Warren Bennis, the man who invented corporate leadership: Schumpeter, page 57

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Seagliders A determined effort to understand the Arctic is going on, in the sea and on the ice, page 64

Business Mergers and acquisitions Coming unstuck Bernie Ecclestone Free for $100m Travel websites David v two Goliaths Unilever In search of the good business Schumpeter Warren Bennis, leadership’s leading light

60 European banking tests Exam nerves 61 Hong Kong’s finances Going with the flow 61 Ghana and the IMF Time for thrift 62 Free exchange Trade’s hidden subsidies Science and technology 64 Arctic science A glide-path to knowledge 65 Science in Japan Stress test 65 HIV and MS Antithesis, synthesis? 66 Cometary science Rosetta’s stone Books and arts 67 Revolution and war in Ukraine I witness 68 Artificial intelligence Clever cogs 68 America’s bureaucracy Sins of commissions 69 South Korea’s soft power Soap, sparkle and pop 70 New American theatre A 21st-century “Seagull” 70 Inside al-Qaeda There and back again 72 Economic and financial indicators Statistics on 42 economies, plus our monthly poll of forecasters Obituary 74 Peter Hall Town planner

Korean cool How a not-hitherto-hip country became the tastemaker of Asia, page 69

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The Economist August 9th 2014 7

The world this week Politics

A three-day ceasefire in Gaza between the Islamists of Hamas and the Israeli army started on August 5th. Negotiations to extend it and to open the way to a more comprehensive settlement got under way in Cairo. Before the lull the death toll had exceeded 1,800 Palestinians, three-quarters of them civilian, according to the UN; Israel lost 64 soldiers, two civilians and a Thai worker. As fighting between assorted militias continued in Tripoli, Libya’s capital, and in Benghazi, the country’s second city, a newly elected parliament met in Tobruk, a comparatively stable city in the east. In the past two weeks, most foreign embassies and international missions, including the UN, have evacuated their staff. Barack Obama hosted some 50 African heads of government or state at a three-day summit in Washington, where business and security topped the agenda ahead of human rights. Zimbabwe’s Robert Mugabe and Sudan’s Omar al-Bashir were not invited.

the spread of the disease, which has afflicted mainly Sierra Leone, Guinea and Liberia; at least one death has been recorded in Nigeria.

and in two other executions about the drugs used to kill the prisoner. Missouri uses a different combination of drugs from those other cases.

Absolution Pope Francis reinstated an American-born priest in Nicaragua who had been suspended from the clergy by the Vatican in 1985 for joining the left-wing Sandinista government. Father Miguel d’Escoto Brockmann was president of the UN General Assembly in 2008-09.

Florida’s holidaying lawmakers were recalled to discuss a judge’s order to redraw the state’s congressional-district boundaries. The judge found that black voters in north Florida had been lumped into one district so that surrounding seats would favour the Republicans.

A news magazine in Brazil claimed that executives at Petrobras, the state oil firm, had been given questions in advance of a hearing by senators investigating a scandal surrounding the purchase of a Texan refining company. Dilma Rousseff, Brazil’s president, who was the chairwoman of Petrobras at the time, has spent much of the year batting away questions about the deal.

Dog days America’s Congress broke up for the summer, but not before Republicans in the House passed a border-security measure that would increase deportations of recent Central American migrants. The Senate is to discuss its own bill. Congress also provided Israel with $225m to replenish its Iron Dome missile-defence system. The House authorised the bill by 395-8. The vote in the Senate was unanimous. US executions per year Scheduled

A two-week-old ceasefire in the Central African Republic collapsed, as conflict resumed between fighters tied to Muslim and Christian militias. French troops trying to hold the ring were attacked. Governments in west Africa began deploying troops and taking other measures to contain an outbreak of Ebola that has claimed at least 900 lives in the past few months. The World Health Organisation held an emergency meeting to agree to additional steps to halt

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Source: DPIC

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Missouri executed a murderer by lethal injection, the first prisoner to be put to death in the United States since a botched execution in Arizona last month. The man’s lawyers had requested a stay citing concerns in the Arizona case

The fifth column An Afghan soldier shot dead an American general at a military complex in Afghanistan. Major-General Harold Greene was the most senior American officer to be killed by hostile fire in either Afghanistan or Iraq. Separately, two Afghan officers thought to be working for the Taliban killed 11 policemen in southern Afghanistan. After three years of hearings a UN-backed tribunal in Phnom Penh sentenced two senior leaders of the Khmers Rouge to life imprisonment for crimes against humanity committed during the regime’s rule in Cambodia between 1975-79. Nuon Chea, “Brother Number Two” to Pol Pot, and Khieu Samphan, the head of state at the time, are in their 80s and the only survivors of the Khmers Rouges’ leadership. An earthquake of 6.1 magnitude killed around 600 people in a remote region of the south-western province of Yunnan in China. A ferry capsized in a river in Bangladesh. More than 130 passengers were reported missing and are likely to have drowned. The authorities charged the owners with culpable homicide.

Closer and closer The Ukrainian government said its soldiers will not try to storm Donetsk, a big rebelheld city in the east of the country, which they have encircled. The separatist fighters called again on Russia to

send troops to their aid and helped themselves to cars and food from residents and businesses in the area. The UN reported that on average 1,000 people are fleeing the conflict zone every day. NATO said that as many as 20,000 Russian troops were massing on the border with Ukraine. Vladimir Putin issued a decree to ban food imports to Russia from countries which have imposed sanctions. Italy slipped into recession for the third time since 2008 according to its statistics agency. The economy contracted by 0.2% between April and June after shrinking by 0.1% in the previous quarter.

On a day of remembrance of the 100th anniversary of the outbreak of the first world war, British and Belgian royals as well as the heads of state and government from France, Belgium and Germany gathered in commemoration at Cointe in Belgium. They also attended a twilight ceremony at St Symphorien cemetery in nearby Mons, which holds the graves of both British and German soldiers. In the “war to end all wars” 17m soldiers and civilians were killed. In Britain Boris Johnson, the Conservative mayor of London, ended months of speculation by confirming that he is looking to stand for Parliament at the next election, rekindling talk of challenges to David Cameron’s leadership. Mr Johnson once joked that his chances of becoming prime minister were about as good as “the chances of finding Elvis on Mars”. Bookies have shortened the odds considerably on the former event happening. 1


The Economist August 9th 2014

8 The world this week

Business

Rupert Murdoch gave up on an $80 billion bid for Time Warner, just three weeks after news broke that his 21st Century Fox group had proposed it. Time Warner rejected Mr Murdoch’s advances and shored up its defences to thwart any hostile attempt by the media tycoon to appeal directly to shareholders. One factor behind Mr Murdoch’s rare defeat was the relative performance of the share prices since the bid was made public: Time Warner’s had soared, while 21st Century Fox’s had fallen.

Sprint hurdles Mr Murdoch was not the only one to have a huge potential merger fail this week: Sprint abandoned its effort to buy T-Mobile US amid stiff resistance from regulators to combining America’s third- and fourth-largest mobile-telecoms operators. Sprint is owned by Softbank of Japan. Its billionaire boss, Masayoshi Son, had hoped a merger would provide a much-needed spurt of growth for Sprint. Telefónica of Spain offered to buy GVT, a Brazilian telecoms firm, for €6.7 billion ($9 billion). GVT’s owner, Vivendi, a French conglomerate, scrapped a sale of its subsidiary last year as none of the bids matched the asking price of €7 billion. Telefónica already controls Vivo, GVT’s bigger rival in Brazil. Gannett became the latest media company to spin off its publishing arm, which includes USA Today among its newspaper titles, from its TV and digital operations.

Hewlett-Packard raised the stakes in its dispute with the former management of Autonomy by directly accusing Mike Lynch, Autonomy’s former boss, and Sushovan Hussain, its former chief financial officer, of fraud. HP bought Autonomy in 2011, but wrote down the value of the British software company by $8.8 billion a year later. Responding to the accusation of fraud, a spokesman for Messrs Lynch and Hussain described HP’s claims as “breathless ranting”.

Reversion on inversion Walgreens decided to stay put in America. The pharmacy chain had been considering relocating to lower-taxed Switzerland after taking full control of Alliance Boots (which owns Boots chemists in Britain), but decided that it was not in the long-term interests of shareholders. Acquiring the 55% of Alliance Boots it did not already own will cost Walgreens around $15 billion. In the week that Bank of America was preparing to pay fines in excess of $16 billion for mis-selling mortgage-backed securities, its shareholders received some good news when the Fed said that it had no objections to the bank’s revised capital plan. This al-

lows BofA to increase its dividend for the first time since the financial crisis. Regulators at America’s Federal Reserve and Federal Deposit Insurance Corporation sharply criticised the “living wills” submitted by 11 big banks in which they explain how they would unwind their businesses if they go bust. The FDIC described the plans as “not credible”. The banks will resubmit their ideas; if the regulators are still unhappy they could impose fines or force a sale of parts of a bank. The chairman of HSBC, Douglas Flint, took a swipe at regulators for making “unprecedented” demands on banks that, he said, had increased red tape and deterred managers from pursuing necessary risks. Around 10% of HSBC’s staff now work in risk and compliance. The bank reported a $9.5 billion profit for the first six months of the year. Banco Espírito Santo was rescued by the Portuguese government. The €4.9 billion ($6.6 billion) bail-out came with stringent conditions that left the bank’s shareholders and junior bondholders bearing the losses from its exposure to debt in its parent companies.

BMW’s net profit in the second quarter grew by 27% compared with the same period a year earlier, to €1.8 billion ($2.4 billion). The maker of premium cars was boosted in part by strong demand for its vehicles in China. Meanwhile, Mercedes-Benz, a division of Daimler, confirmed that it was co-operating with competition authorities in China after its offices in Shanghai were reportedly raided. The investigation is thought to centre on the pricing of spare parts for its luxury cars. India’s central bank left its main interest rate unchanged at 8%, a disappointment to businesses that had hoped the recent easing of inflation would lead to a cut.

A chequered case Bernie Ecclestone, the boss of Formula One motor racing, ended his trial on bribery charges in Germany by agreeing to pay a $100m settlement. He had been accused of paying off an official at a bank that was selling its stake in F1, which he denies. Criminal cases can be resolved this way in Germany; this is the largest sum of its kind to be paid. Other economic data and news can be found on pages 72-73


The Economist August 9th 2014 9

Leaders

A personal choice The internet is making the buying and selling of sex easier and safer. Governments should stop trying to ban it

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TREET-WALKERS; kerb-crawlers; phone booths plastered with pictures of breasts and buttocks: the sheer seediness of prostitution is just one reason governments have long sought to outlaw it, or corral it in licensed brothels or “tolerance zones”. NIMBYs make common cause with puritans, who think that women selling sex are sinners, and do-gooders, who think they are victims. The reality is more nuanced. Some prostitutes do indeed suffer from trafficking, exploitation or violence; their abusers ought to end up in jail for their crimes. But for many, both male and female, sex work is just that: work. This newspaper has never found it plausible that all prostitutes are victims. That fiction is becoming harder to sustain as much of the buying and selling of sex moves online. Personal websites mean prostitutes can market themselves and build their brands. Review sites bring trustworthy customer feedback to the commercial-sex trade for the first time. The shift makes it look more and more like a normal service industry. It can also be analysed like one. We have dissected data on prices, services and personal characteristics from one big international site that hosts 190,000 profiles of female prostitutes (see pages 17-20). The results show that gentlemen really do prefer blondes, who charge 11% more than brunettes. The scrawny look beloved of fashion magazines is more marketable than flab—but less so than a healthy weight. Prostitutes themselves behave like freelancers in other labour markets. They arrange tours and take bookings online, like gigging musicians. They choose which services to offer, and whether to specialise. They temp, go part-time and fit their work around child care. There is even a graduate premium that is close to that in the wider economy. The invisible hand-job Moralisers will lament the shift online because it will cause the sex trade to grow strongly. Buyers and sellers will find it easier to meet and make deals. New suppliers will enter a trade that is becoming safer and less tawdry. New customers will find their way to prostitutes, since they can more easily find exactly the services they desire and confirm their quality. Pimps and madams should shudder, too. The internet will undermine their market-making power. But everyone else should cheer. Sex arranged online and sold from an apartment or hotel room is less bothersome for third parties than are brothels or red-light districts. Above all, the web will do more to make prostitution safer than any law has ever done. Pimps are less likely to be abusive if prostitutes have an alternative route to market. Specialist sites will enable buyers and sellers to assess risks more accurately. Apps and sites are springing up that will let them confirm each other’s identities and swap verified results from sexual-health tests. Schemes such as Britain’s Ugly Mugs allow prostitutes to circulate online details of clients to avoid. Governments should seize the moment to rethink their

policies. Prohibition, whether partial or total, has been a predictable dud. It has singularly failed to stamp out the sex trade. Although prostitution is illegal everywhere in America except Nevada, old figures put its value at $14 billion annually nationwide; surely an underestimate. More recent calculations in Britain, where prostitution is legal but pimping and brothels are not, suggest that including it would boost GDP figures by at least £5.3 billion ($8.9 billion). And prohibition has ugly results. Violence against prostitutes goes unpunished because victims who live on society’s margins are unlikely to seek justice, or to get it. The problem of sex tourism plagues countries, like the Netherlands and Germany, where the legal part of the industry is both tightly circumscribed and highly visible. The failure of prohibition is pushing governments across the rich world to try a new tack: criminalising the purchase of sex instead of its sale. Sweden was first, in 1999, followed by Norway, Iceland and France; Canada is rewriting its laws along similar lines. The European Parliament wants the “Swedish model” to be adopted right across the EU. Campaigners in America are calling for the same approach. Sex sells, and always will This new consensus is misguided, as a matter of both principle and practice. Banning the purchase of sex is as illiberal as banning its sale. Criminalisation of clients perpetuates the idea of all prostitutes as victims forced into the trade. Some certainly are—by violent partners, people-traffickers or drug addiction. But there are already harsh laws against assault and trafficking. Addicts need treatment, not a jail sentence for their clients. Sweden’s avowed aim is to wipe out prostitution by eliminating demand. But the sex trade will always exist—and the new approach has done nothing to cut the harms associated with it. Street prostitution declined after the law was introduced but soon increased again. Prostitutes’ understandable desire not to see clients arrested means they strike deals faster and do less risk assessment. Canada’s planned laws would make not only the purchase of sex illegal, but its advertisement, too. That will slow down the development of review sites and identity- and health-verification apps. The prospect of being pressed to mend their ways makes prostitutes less willing to seek care from health or social services. Men who risk arrest will not tell the police about women they fear were coerced into prostitution. When Rhode Island unintentionally decriminalised indoor prostitution between 2003 and 2009 the state saw a steep decline in reported rapes and cases of gonorrhoea. Prostitution is moving online whether governments like it or not. If they try to get in the way of the shift they will do harm. Indeed, the unrealistic goal of ending the sex trade distracts the authorities from the genuine horrors of modern-day slavery (which many activists conflate with illegal immigration for the aim of selling sex) and child prostitution (better described as money changing hands to facilitate the rape of a child). Governments should focus on deterring and punishing such crimes—and leave consenting adults who wish to buy and sell sex to do so safely and privately online. 7


The Economist August 9th 2014

10 Leaders Trade and protectionism

No more grand bargains The World Trade Organisation’s whole approach to negotiating free trade needs radical change

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HERE is a fine line between laudable perseverance and a In force stubborn refusal to admit that 300 change is needed. Those run200 ning the World Trade Organisa100 tion (WTO) risk falling into the 0 latter category. On July 31st an 1970 80 90 2000 10 14 agreement to lubricate trade by streamlining customs rules worldwide collapsed. Narendra Modi, India’s new prime minister, refused to sign the deal, painstakingly thrashed out in Bali last year, because the WTO would not change its rules to let him expand food subsidies. The spat raises a new question-mark over Mr Modi: sound economics was the most respectable bit of his chequered CV. But it also shows that the WTO needs radical reform to survive. India is hardly the only protectionist when it comes to agriculture. Rich countries are the worst culprits. Japan’s tariffs—778% on rice and 328% on sugar—aim to block trade completely, insulating its small and inefficient producers from competition. The European Union’s common agricultural policy soaks up 40% of its budget. But Mr Modi has run away from reform. India’s food subsidies are massive, costing around 1% of GDP. They lead to huge stockpiles of unwanted, rotting produce, and fan pervasive corruption (see page 58). Giving poor families cash or food stamps would be better at helping the neediest while minimising waste—as Brazil, for example, has demonstrated. That is permitted under WTO rules. Mr Modi should be working to change the subsidy regime instead of scuppering a deal that would have benefited India. So blame Mr Modi. But it was the job of Roberto Azevêdo, the WTO’s director-general, to iron out such differences between members. Indian dissatisfaction with the WTO rules was allowed to build until it broke the Bali agreement—just as has happened before with other developing countries, even Regional trade agreements

though the new emerging powers have most to gain from the stagnant “Doha round” of trade-liberalisation talks. The WTO’s troubles run deeper still. Its core belief in the value of global trade liberalisation is shared by this newspaper. But the way the WTO pursues this goal, by seeking grand bargains covering many industries, is not working. In theory it should promote dealmaking: Europe, say, will let in more South American farm produce in return for being able to sell more cars to South America. In practice, rioting French farmers don’t care whether Renault’s sales rise in Brazil. Attempts to strike comprehensive pacts have caused deadlock. The Doha talks have dragged on for almost 13 years. The last big trade round was concluded in 1994, before the WTO was created. Dead as a Doha As the WTO has stumbled on, year after year, a “spaghetti bowl” of regional and bilateral trade agreements has filled the gap. This tangle of treaties, often with mutually incompatible rules, makes global pacts ever harder to reach. It also makes the bit of the WTO that works best—mediating between countries in trade disputes—less relevant. So Mr Azevêdo should ditch the all-encompassing deals to pursue a number of modest ones covering specific industries: seek a deal on cotton, for instance, not one lumping together various bits of farming with customs facilitation (as in the Bali proposal). He should aim to get each done in a matter of months. In each case, if consensus is not reached, a “coalition of the willing” should be allowed to sign up and start reaping the benefits. The foot-draggers would be allowed to join later. This would cut gamesmanship of the sort Mr Modi has just displayed. It would be a drastic departure from the way the WTO has done business. But two decades of sustained failure is too long. Don’t let the best be the enemy ofthe good. Better to have some small trade deals than none at all. 7

China’s far west

A Chechnya in the making An iron fist in Xinjiang is fuelling an insurrection. China’s leadership must switch tactics

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HE Uighurs have never been particularly comfortable in China. Xinjiang, the region where these Turkic Muslims once formed the vast majority, came unwillingly into the Chinese empire. Rebels in parts of it even set up independent republics; a short-lived one was snuffed out by the Communist Party in 1949. Since then the regime in Beijing, 1,000 miles (1,600km) to the east, has sought to keep Xinjiang quiet. The policy is not working. The presidency ofXi Jinping risks sinking into a quagmire of ethnic strife. This could be China’s Chechnya.

Over the past few decades the party has used several tactics to assert control. First it encouraged massive migration of Han Chinese into Xinjiang from other parts of China. Later it poured money into infrastructure and beefing up industry; the jobs thus created have gone overwhelmingly to Hans, who now make up more than 40% of the province’s 22m people. In tandem the party has adopted a hard line towards the merest hint of dissatisfaction on the part of the Uighurs. Discontent is spilling into the open, nonetheless. The past few days have been the bloodiest in Xinjiang since clashes in the provincial capital, Urumqi, left around 200 dead in 2009. It appears that nearly 100 people died in the violence. The dead include 59 alleged terrorists gunned down by police near 1


The Economist August 9th 2014 2 Kashgar, the main city in southern Xinjiang, where the Ui-

ghurs are concentrated (and where the economy is weakest). These Uighurs had apparently attacked police stations and Han Chinese. Two days later a pro-government imam was stabbed to death outside the city’s main mosque (see page 49). Whenever violence flares up, the government’s rhetoric is uncompromising and usually focused on the dangers of jihadism. In May, following a spate of attacks by Uighurs on government and civilian targets in Xinjiang and in other parts of China, Mr Xi demanded “walls made of copper and steel” and “nets spread from the earth to the sky” to catch the “terrorists”. The party blames such attacks on Islamist militancy seeping across the border from Central and South Asia—notably from Afghanistan and Pakistan. It likes to claim that Uighurs live in harmony with the Han Chinese (“tightly bound together like the seeds of a pomegranate”, as Mr Xi puts it). The tragedy is that the government could end up proving itself right—by making jihadism the core of the Uighurs’ militancy. For now the violence is fuelled principally by a welter of home-grown grievances and is strikingly amateurish: rarely are the perpetrators armed with anything more than knives. But in recent months the violence has been morphing, spreading beyond the region itself and taking on some of the hues of jihadism elsewhere—through suicide-attacks and indiscriminate killing of civilians. Such acts are unspeakable. But there is evidence that China’s heavy-handed approach in Xinjiang is radicalising a oncetolerant culture. Uighur activists abroad say the latest violence near Kashgar had nothing to do with terrorism, for instance; instead it was sparked by police efforts to enforce government bans against fasting during Ramadan. From Sudan to the West Bank, the evidence is clear: once re-

Leaders 11

ligion enters any conflict, it becomes harder to settle. The parallel with Chechnya should scare Mr Xi. What started out as a nationalist uprising in Russia’s north Caucasus region in the 1990s was met by a brutal clampdown, which in turn spawned a violent Islamist movement. Since then Chechnya has been both a jihadist breeding-ground and a running sore for Russia. About turn There are hints that Mr Xi understands the problem. In May he convened a rare meeting of party bosses to discuss Xinjiang. That gathering recognised the need to boost employment among Uighurs, especially in southern Xinjiang. After the meeting state-owned enterprises in Xinjiang were told they had to hire at least a quarter of all staff from Uighur and other minorities. Education for Uighurs is another priority: work has just begun on Kashgar’s first full-scale university. Such steps are necessary, but still not enough. Uighurs’ religious traditions should be respected, so that all Muslims are allowed to visit Mecca, not just those approved by the government. Education in the Uighur language could also be encouraged, as well as its use in workplaces. Mr Xi should disband the Xinjiang Production and Construction Corps, which runs a vast network of Han-dominated settlements. And China should give up persecuting moderate Uighurs, who hardly embrace jihadism but are still angry about the government’s repressive measures. Amid the carnage of the past few days, the authorities announced they had formally charged a prominent Uighur economist, Ilham Tohti, with separatism. “Fewer and fewer people dare to speakout” about ethnic policies in Xinjiang, Mr Tohti has lamented. If Xinjiang’s Uighurs are not to fall prey to extremists, Mr Xi must allow people like Mr Tohti to speak out, not lock them away. 7

Reforming Leviathan

Mandarin lessons Governments need to rethink how they reward and motivate civil servants HE French call them hauts fonctionnaires, the Germans Beamte im höheren Dienst and the British, somewhat more economically, know them as “mandarins”. The senior echelons of civil services are a powerful arm of the state. They implement the reforms dreamed up by politicians, and design public services ranging from welfare systems to prisons. Compared with private-sector bosses, the bureaucrats who manage the public sector tend to be less well paid but have more cushioned lives, with more secure jobs and far less pressure to improve productivity. Now the mandarins face change (see page 51). There has long been taxpayer fury when big projects go awry. Berlin’s new airport is three years overdue and predicted to cost €6 billion ($8.1 billion), three times the original estimate. But voters, and thus politicians, are especially intolerant of civil-service inefficiency nowadays. One prompt is austerity. Another is technology, which is changing not only how public services are delivered—think of “massively open online courses” in education—but also the way they can be measured.

T

Social networks enable users to grumble about hospital waiting-times and mathematics results. Perhaps the biggest pressure is the passing of time: private-sector workers are incredulous as to why civil servants should escape the creative destruction that has changed other offices around the world. The reform of the public sector is a huge project, but people are at the centre of it. Government is a service industry, and there is a basic talent problem. A few civil services—Singapore’s is the obvious example—compete with the private sector for the best graduates. But elsewhere even elite departments, such as the US Treasury and Britain’s Foreign Office, struggle (or lose high-flyers quickly). The mandarins and their political masters need to change tack. Too many civil servants, especially in continental Europe, swirl around a bureaucratic Gormenghast but rarely leave it. Nearly four-fifths of German senior public servants have been in public administration for more than two decades. The French state under François Hollande is governed by a caste of unsackable functionaries, resistant to reform. One reason many officials become stuck is their generous pension deals: making pensions portable should be a priority. But career 1 structures also must adapt.


The Economist August 9th 2014

12 Leaders 2

Most civil services still tend to be gerontocracies, where age and seniority are synonymous. New Zealand has dismantled the system of rigid hierarchies and pay-grades that spawned the likes of the phlegmatic Sir Humphrey in the BBC comedy “Yes Minister”. Instead, it appoints departmental chief executives in its ministries, who sign contracts to meet specific targets and can be dismissed if they fail. Singapore’s civil servants are frequently sent out to private-sector jobs. Britain has appointed a senior figure from the oil business to run the agency that deals with large-scale state projects. The idea is that private-sector experience in areas such as contract management and negotiation can help avoid disasters like Berlin’s airport. All this appeals to right-wing politicians. But the corollary of better performance is higher pay. The British government’s chief operating officer announced this week that he is leaving for a lucrative commercial job. Singapore, which runs a far leaner government than America, pays its best people $2m a

year. No Republican congressman would tolerate that, which is foolish. The cost of higher salaries is offset by saving money on costly consultants to mop up failing projects. There is one area where less change would be useful. To plan careers, you need a long-term strategy—and democracy throws up change every election. In Britain health-care officials talk about successive “re-disorganisations”. One reason for authoritarian Singapore’s success is that its voters have miraculously always chosen the party founded by Lee Kuan Yew since he took control in 1959. Voters elsewhere are less obliging. New Zealand has tried to counter this by boosting the powers of a state-services commissioner, whose duties include one of lasting “stewardship”. That could be a useful model for elsewhere—especially America, where too many senior positions are filled by political appointees (who then take months to get confirmed by Congress). Mandarinates have their faults, but somebody needs to keep Leviathan working. 7

Mexico’s reforms

Keep it up Enrique Peña Nieto has achieved a lot. Now his government needs to maintain the momentum

F

EW governments can truly claim to be radical. The administration of Enrique Peña Nieto is on its way to joining this rare breed. The Mexican president came to office in late 2012, promising big changes to the way the country was run. The legislative phase of this reform process is now complete. Next comes implementation. Much has been done in the past 20 months. Mexico has the lowest tax take in the OECD as a percentage of GDP: a fiscal reform has started to broaden its sources of revenues. Measures to shake up the telecoms and broadcasting industries last month prompted América Móvil, the monopolistic telecoms firm owned by Carlos Slim, the world’s richest man, to announce it will divest assets to avoid antitrust pricing regimes. Teachers will face more scrutiny, banks more competition. No reform matters more than the liberalisation of Mexico’s hidebound energy sector. The state has controlled the hydrocarbons industry since it was nationalised in 1938. Pemex, the state oil firm, is a cash cow for the government—it contributes a third of revenues—but it is poorly managed and its production levels have been steadily declining. Industrial electricity prices are almost 80% higher than those in the United States. Mexico’s Congress this week approved secondary laws that will throw the country’s deepwater and shale fields open to foreign investment. The electricity industry will also be liberalised. Lower energy prices ought eventually to result. Mr Peña is not the only one who deserves credit for these achievements. So does Mexico as a whole. Its political classes have largely co-operated in pushing through the reforms, many of them requiring constitutional changes. Its people have reacted with maturity to the dismantling of a taboo around foreign investment in Mexico’s natural resources. The country has handed its northern neighbours a lesson in nonpartisan governance.

Mr Peña’s job is nowhere near complete, however. First, he has to find a way of pepping up a sluggish economy, which is expected to grow by 2.4% this year. The reforms’ costs have materialised faster than their benefits: regulatory uncertainty, higher taxes and denser accounting rules have all taken a toll on consumption and investment. The best way to revive growth quickly is to spend money on infrastructure. Billions have been promised, little has actually happened. Shovels hitting soil would help confidence—provided the projects are not boondoggles. Obvious priorities include new natural-gas pipelines and a new airport for Mexico City. Many a slip Second, the government has to ensure that the fruits of change are shared by all Mexicans. The reforms of President Carlos Salinas in 1988-94 were discredited because their benefits seemed to accrue only to a privileged few. Membership of NAFTA helped Mexico to attract foreign direct investment but did not close the income gap with Canada and America (see page 39). Previous attempts to evaluate teachers failed to root out the worst ones. Mr Peña will need to do better. Independent regulators will be essential to fostering real competition across the economy. The energy reforms present a particular test. Mexico has scant experience of running tenders and awarding licences; and the most seasoned people are locked up inside Pemex, the institution whose interests are most threatened by the changes. Letting the foreigners in to staff the energy regulators, as well as to explore the country’s natural resources, may be the answer. Even if these problems are solved, big ones will remain. Productivity among small businesses fell by 6.5% a year between 1999 and 2009, according to McKinsey, a consultancy. It will not be easy to encourage tiddlers into the formal economy, where they can concentrate on growing bigger rather than staying under the radar. But if the president can keep up the momentum during the last four years of his term, Mexico will have been changed greatly for the better. 7


14

Letters No easy way to die SIR – Your call to legalise assisted suicide for the terminally ill was based on three false assumptions (“Easeful death”, July 19th). First, suicide is not victimless, as it always leaves scars among family and friends, often to their later surprise and regret; second, imminent death can rarely be predicted accurately; and third, psychiatric assessment is not infallible. Moreover, although expert palliative care and modern pain control can ease emotional and physical suffering, neither is consistently available or applied. In an era when health systems are looking for stringent cost controls and society is ageing, it is unlikely that patients and their doctors will resist pressures to “go gentle”. Religious and secular moral objections to suicide arise from thousands of years of grappling with the reality. HAMILTON MOSES Former chief physician The Johns Hopkins Hospital PAUL MCHUGH Professor of psychiatry Johns Hopkins School of Medicine Baltimore SIR – The main argument against a change in the law is that it would compromise patient safety. You mentioned a system of necessary safeguards to protect the vulnerable, but exactly what this might entail is not at all clear. Even most proponents of assisted suicide admit that such a system would not be foolproof. For example, someone who is in depression may ask for their life to end only to change their mind on a return to normal mood. And some may feel that they ought to seek death in order to relieve the burden they might impose on their family or society. Although the pleas of those who seek to have their lives terminated at a time of their own choosing are truly heartrending, the permissions they seek for themselves would jeopardise the lives of us all. In any democratic society, where a perceived benefit to a few

The Economist August 9th 2014 might imperil the safety of many, the law must side with the many. A change in the law would not be a slippery slope but a precipice over which we would jump into danger. PROFESSOR PETER DAVIES Liverpool Heart and Chest Hospital SIR – So you think that politicians “should reflect society, not lead it” and listen to the opinion polls. If that was the case then the death penalty would have been restored in Britain decades ago. The government’s prime consideration should be to promote the common good. The old and vulnerable need to be protected from self-serving relatives and easy-going doctors. JOHN BIGNELL London SIR – It is important to distinguish what most people think of as “suicide” from the self-administration of lifeending medications. In the states of Oregon and Washington, if two doctors agree that an adult is within six months of dying, competent to make medical decisions, informed of all the options without coercion, and is able to selfadminister the medicine, then one of those doctors may prescribe life-ending drugs for the patient to ingest. This is “aid in dying” and legally it is not deemed to be “suicide”. The death certificates of those who die in this manner list the terminal illness as the cause of death. For someone to assist in another person’s true suicide remains illegal in Washington. “Assisted suicide” is a term that frames the issue differently and wields a stigma on the dying; true suicide rightly deserves that stigma. Politicians must respond to the palliative needs of the terminally ill. We should give people the option of ending their life in the presence of loved ones and in their own time, rather than having to endure an unknown period of misery. ROBERT WOOD Volunteer medical director Compassion and Choices of Washington Seattle

A Shakespearean tragedy SIR – You do a noble job dispassionately sifting through the rubble to exhume the casus belli of the most recent crisis in Gaza (“Stop the rockets, but lift the siege”, July 26th). Yet given the futility of this decades-old vendetta between the Levantine Montagues and Capulets, I question the importance assigned to whose slingshot fired first—or the sequence of Hamas’s rockets and Israel’s blockades—if the net result continues to remain an endless and profuse bloodletting. Does it matter, in other words, that the chicken came before the egg if they both end up on the farmer’s breakfast table? So long as the status quo of one is predicated on the status woe of the other, ancient grudges will, as the Bard foretold, forever break to new mutiny. Sadly, their conflict won’t end with rockets and blockades, intifadas or Iron Domes: first hearts must open, and minds must change. JUSTIN WILLIAMS Toronto Obama and business SIR – Barack Obama is “the least business-friendly president for decades” you claim (“America’s lost oomph”, July 19th). Really? It is under this president’s administration that trillions of dollars in quantitative easing and other programmes have been used to prop up asset prices and provide cheap money to the markets. The Dow Jones Industrial Average closed at 7,949 on January 20th 2009, Mr Obama’s inauguration day. Last month it broke through the 17,000 barrier. Detroit’s carmakers were saved and made more efficient through a government-supported plan. Foreign carmakers in America have increased their capacity to export elsewhere. Other manufacturers are returning from China. And, lest you forget, the president based his Obamacare reforms on the private-insurance market, rather than go all out for a government-controlled healthcare system.

You can accuse Mr Obama of many things, but withholding support for business is not one of them. JEREMY THOMAS Boston SIR – George W. Bush was one of the most “business friendly” presidents America has ever had. He even had an MBA. Yet by the time he finished his two terms big banks were ruined, the financial system had collapsed and small businesses were going to the wall. SALLY FLORES Miami Hat tip SIR – Don’t despair, there is a true Panama hat (“Hold onto your headwear”, July 19th). Handmade sombrero pintados are made in the provinces of Coclé, Herrera, Los Santos and Veraguas. Compared with the Montecristi “Panama” hat (which is made in Ecuador) the Panamanian Painted Hat is sturdier with a wider brim that gives better protection against the tropical sun. The brims can be positioned upwards or downwards to indicate the wearer’s marital status, if he is in mourning, or even the timing of the harvest. There is a Painted Hat festival every October based in the picturesque town of La Pintada. ERNEST MAST Playa Blanca, Panama Taking heat on the meat SIR – I couldn’t help but notice that your latest Big Mac index introduced the piece as “Our flame-grilled guide to currencies” (“A basket of sliders”, July 26th). McDonald’s cooks its burgers on an electric griddle; it is Burger King that flamegrills its patties. Perhaps you were enjoying a Whopper while writing the article. TANNER CHAIKEN Sydney 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

15

UNITED NATIONS

The Norwegian Refugee Council (NRC) in cooperation with the

United Nations Department of Political Affairs is seeking candidates for the

Standby Team of Mediation Experts with the following areas of specialization:

• • • • • •

Security Arrangements (Ceasefres, DDR and SSR) Constitution Issues Power-sharing Gender and Inclusion Natural Resources/Wealth-sharing Mediation Process Design (Facilitation and Dialogue)

The UN Department of Political Affairs, under its Policy and Mediation Division, maintains a Mediation Support Unit (MSU) which serves as a repository for expertise on peacemaking and provides support to UN envoys and partners engaged in mediation. MSU, in collaboration with the Norwegian Refugee Council, operates a Standby Team consisting of eight full-time senior mediation experts. The team functions as a rapid response mechanism and provides expert thematic advice available to the UN and its partners across the world. The Standby Team of Mediation Experts is currently under the administrative responsibility of the Norwegian Refugee Council. The team’s expert positions are full-time one-year appointments. The experts are based in their respective countries of residence and deploy to the feld on short notice. The appointments include competitive remuneration commensurate with level of experience required. The United Nations reserves the right to change the thematic composition of the team depending on its requirements at the time of recruitment. Qualifed applicants with French and/or Arabic language skills are strongly encouraged to apply. For details on the above vacancies (only online applications are accepted): http://goo.gl/il4Yri By submitting an application, candidates agree that their details may be shared between UN DPA and NRC for recruitment purposes. Interviews will be held in Oslo in November 2014. Contract start date: 23 February 2015. Application closing date: 14 September 2014 The Norwegian Refugee Council (NRC) is an independent, humanitarian non-governmental organisation which provides assistance, protection and durable solutions to refugees and internally displaced persons worldwide. NRC specialises in fve programme areas: Shelter, Food Security, Water, Sanitation and Hygiene (WASH), Education, and Information Counselling and Legal Assistance. NRC has 4 000 employees and operates in 25 countries. In addition, NRC runs one of the world’s largest standby rosters – NORCAP - with 700 professionals, ready to be deployed on 72 hours notice when a crisis occurs.

The Economist August 9th 2014


Digital highlights Visit economist.com for news, blogs, audio, video, interactive graphics and debates Links to all the stories below can be found at: economist.com/dh79

How a tattoo affects your job prospects Bikers, sailors and rock stars once had a monopoly on tattoos. Now these indelible artworks can be found on one in five adults in America. What happens when these people look for work? Have tattoos in the workplace lost their taboo? Watch our video.

From our blogs Asia: Where’s the protest?

Despite widespread fears of another disaster, Japan’s anti-nuclear lobby is surprisingly ineffectual. It could achieve more if it modernised its approach United States: Urbane development

City mayors across America are becoming ever more important. But to what extent do their political ideologies reflect that of their constituents? Technology: A tinkerer’s charter

America’s digital copyright law, designed to protect intellectual property, is hampering innovation. It must be updated and clarified to work properly

An interview with the president The Economist interviewed Barack Obama aboard Air Force One last week. Mr Obama gave his thoughts on foreign policy, China, Russia and the White House’s treatment of business. We publish the recording and transcript of the interview in full

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Briefing Prostitution and the internet

More bang for your buck

How new technology is shaking up the oldest business

F

OR those seeking commercial sex in Berlin, Peppr, a new app, makes life easy. Type in a location and up pops a list of the nearest prostitutes, along with pictures, prices and physical particulars. Results can be filtered, and users can arrange a session for a €5-10 ($6.50-13) booking fee. It plans to expand to more cities. Peppr can operate openly since prostitution, and the advertising of prostitution, are both legal in Germany. But even where they are not, the internet is transforming the sex trade. Prostitutes and punters have always struggled to find each other, and to find out what they want to know before pairing off. Phone-box “tart cards” for blonde bombshells and leggy señoritas could only catch so many eyes. Customers knew little about the nature and quality of the services on offer. Personal recommendations, though helpful, were awkward to come by. Sex workers did not know what risks they were taking on with clients. Now specialist websites and apps are allowing information to flow between buyer and seller, making it easier to strike mutually satisfactory deals. The sex trade is becoming easier to enter and safer to work in: prostitutes can warn each other about violent clients, and do background and health checks before taking a booking. Personal web pages allow them to advertise and arrange meetings online; their clients’ feedback on review sites helps others

to proceed with confidence. Even in places such as America, where prostitution and its facilitation are illegal everywhere except Nevada, the marketing and arrangement of commercial sex is moving online. To get round the laws, web servers are placed abroad; site-owners and users hide behind pseudonyms; and prominently placed legalese frames the purpose of sites as “entertainment” and their content as “fiction”. The shift online is casting light on parts of the sex industry that have long lurked in the shadows. Streetwalkers have always attracted the lion’s share of attention from policymakers and researchers because they ply their trade in public places. They are more bothersome for everyone else— and, because they are the most vulnerable, more likely to come to the attention of the police and of social or health workers. But in many rich countries they are a minority of all sex workers; just 10-20% in America, estimates Ronald Weitzer, a sociologist at George Washington University. The wealth of data available online means it is now possible to analyse this larger and less examined part of the commercial-sex market: prostitution that happens indoors. It turns out to be surprisingly similar to other service industries. Prostitutes’ personal characteristics and the services they offer influence the prices they charge; niche services attract a premium;

The Economist August 9th 2014 17

WARNING: We rarely feel the need to alert readers to explicit content. But our discussion of the online sex trade requires frank language, and some may find the topic distasteful.

and the internet is making it easier to work flexible hours and to forgo a middleman. Websites such as AdultWork allow prostitutes, both those working independently and those who work through agencies and brothels, to create profiles through which customers can contact them. They can upload detailed information about themselves, the range of services they provide, and the rates they charge. Clients can browse by age, bust or dress size, ethnicity, sexual orientation or location. Other websites garner information from clients, who upload reviews of the prostitutes they have visited with details of the services offered, prices paid and descriptions of the encounters. On PunterNet, a British site, clients describe the premises, the encounter and the sex worker, and choose whether to recommend her. Such write-ups have enabled her to build a personal brand, says one English escort, Michelle (like many names in this article, a pseudonym), and to attract the clients most likely to appreciate what she offers. TrickAdvisor We have analysed 190,000 profiles of sex workers on an international review site. (Since it is active in America, it was not willing to be identified for this article. A disclaimer on the site says the contents are fictional; we make the assumption that they are informative all the same.) Each profile includes customers’ reviews of the worker’s physical characteristics, the services they offer and the price they charge. The data go back as far as 1999. For each 1


18 Briefing Prostitution and the internet

The Economist August 9th 2014 1

Going down Average price of an hour with a female prostitute Worldwide, 2014 $ 350 300 250 2006

07

08

09

10

11

12

13

14*

Selected cities, adjusted for cost of living compared with New York, 2012-14†, $ 160 180 200 220 240 260 280 300 320 340 360 380 Vancouver Los Angeles Chicago San Tokyo Tokyo‡ Montreal London Paris Houston Detroit Atlanta Seattle Francisco Prague

Amsterdam

New York Toronto Miami Sydney

Cleveland Washington

information available, with prices corrected for inflation. Some of those featured may appear under more than one name, or also workthrough agencies. The data cover 84 cities in 12 countries, with the biggest number of workers being in America and most of the rest in big cities in other rich countries. As this site features only women, our analysis excludes male prostitutes (perhaps a fifth of the commercial-sex workforce). Almost all of those leaving reviews are men. The most striking trend our analysis reveals is a drop in the average hourly rate of a prostitute in recent years (see chart 1). One reason is surely the downturn that followed the 2007-08 financial crisis. Even prostitutes working in places that escaped the worst effects have been hit. Vanessa, a part-time escort in southern England, finds that weeks can go by without her phone ringing. Men see buying sex as a luxury, she says, and with the price of necessities rising it is one they are cutting back on. Even when she offers discounts to whip up interest, clients are scarcer than they were. In places where the job market slumped, the effect is more marked (whether prostitution is legal may affect prices, too, but the wide variation between American cities shows that this is not the only factor). The cost of an hour with an escort in Cleveland, Ohio, where unemployment peaked at 12.5% in 2010, has tumbled. Large-scale migration is another reason prices are falling. Big, rich cities are magnets for immigrants of all professions, including sex workers. Nick Mai of London Metropolitan University has studied foreign sex workers in Britain. He has found that as they integrate and get used to the local cost-of-living, their rates tend to rise. But where the inward flow is unceasing, or where the market was previously very closed, immigrants can push prices down. Since the European Union enlarged to include poorer eastern European coun-

Boston

*Year to August †Based on the last time prostitutes’ profiles were changed ‡Small sample

Sources: International prostitution website; Economist Intelligence Unit

2 individual we have used the most recent

Shanghai

tries, workers of every sort have poured into their richer neighbours. By all accounts prices have been dropping in Germany as a result of the arrival of new, poor migrants, says Rebecca Pates of the University of Leipzig. Sally, a semi-retired British escort who runs a flat in the west of England where a few “mature” women sell sex, says English girls are struggling to find work: there are too many eastern European ones willing to accept less. Twenty years ago most prostitutes in Norway were locals who all aimed to charge about the same, says May-Len Skilbrei, a sociologist at Oslo University. Today, with growing numbers of sex workers from the Baltic states and central Europe, as well as Nigerians and Thais, such unofficial price controls are harder to sustain. Inexperience is another reason newcomers to prostitution may underprice themselves, at least at first. Maxine Doogan, an American prostitute and founder of the Erotic Service Providers Union, a lobby group, learnt her trade from a woman who worked for years in a brothel in Nevada, the only American state where prostitution is legal. The older woman taught her what to regard as standard or extra, and how much to charge. When Ms Doogan started out, in 1988, standard services (vagi-

nal sex and fellatio) cost $200 an hour, the equivalent of $395 today. But some of those starting out now still charge $200, she says, or offer extra services, including risky ones such as oral sex without a condom, without charging an appropriate premium. The shift online has probably boosted supply by drawing more locals into the sex trade, too. More attractive and better-educated women, whose marital and job prospects are therefore better, are more likely to consider sex work if it is arranged online. Indoor sex work is safer than streetwalking, and the risk of arrest is lower. Rented flats or hotel rooms are more discreet than brothels, so family and friends are less likely to identify the new source of income. Anonymity becomes a possibility, which lessens the fear of stigma. Creating an online profile separates the decision to take up the work from parading for punters. Meanwhile, broader social change may be reducing demand—and thus, prices. Free, no-strings-attached sex is far easier to find than in the past. Apps such as Tinder facilitate speedy hookups; websites such as Ashley Madison and Illicit Encounters, adulterous ones. Greater acceptance of premarital intercourse and easier divorce mean fewer frustrated single and married men turning to prostitutes. Dearer for johns Our analysis shows how a prostitute’s hourly rate varies according to the nature of the services she provides and her reported physical characteristics. As in other bits of the economy, clients who seek niche services must pay more. Sex workers who offer anal sex or spanking earn on average $25 or $50 more per hour, respectively (see chart 2). Those who will accept two male clients at once or do threesomes with another woman command a larger premium. Appearance matters a great deal. The customers who reported encounters to the website we analysed clearly value the stereotypical features of Western beauty: women they describe as slim but not scrawny, or as having long blonde hair or full breasts, can charge the highest hourly rates (see chart 3, next page). Hair that is 1 2

Service industry Average hourly mark-up for an hour with a prostitute compared with hourly rate without specific services 2012-14*, $ Details reported by clients

0

Total hourly average for most expensive service, $

20

40

60

80

100

120

Two women†

355

Multiple men

358

spits

swallows

Ejaculate in mouth

312

Oral sex

280

Kiss

with condom heavy

without condom spanking

S&M Anal sex Source: International prostitution website

294 299 281

*Based on the last time prostitutes’ profiles were changed

†Per woman


The Economist August 9th 2014

Briefing Prostitution and the internet 19

2 bleached too unconvincingly to be de-

scribed as blonde attracts a lower premium, but is still more marketable than any other colour. For those not naturally well endowed, breast implants may make economic sense: going from flat-chested to a D-cup increases hourly rates by approximately $40, meaning that at a typical price of $3,700, surgery could pay for itself after around 90 hours. The 12% share of women featured on the site who are described both as athletic, slim or thin, and as being at least a D-cup, suggests that quite a few have already taken this route. A prostitute’s rates also vary according to her ethnicity and nationality. What attracts a premium in one place can attract a penalty in another. According to our analysis, in four big American cities and London, black women earn less than white ones (see chart 4). We had too few data from other cities for a reliable breakdown by ethnicity. But Christine Chin of the American University in Washington, DC, has studied high-end transnational prostitutes in several countries. In Kuala Lumpur, she found, black women command very high rates and in Singapore, Vietnamese ones do. In Dubai, European women earn the most. What counts as exotic and therefore desirable varies from place to place, and depends on many factors, such as population flows. Local markets have other quirks. According to the site we analysed, an hour with an escort in Tokyo is a bargain compared with one in London or New York. Yet a cost-of-living index compiled by the Economist Intelligence Unit, our sister organisation, suggests that Tokyo is the most expensive city overall of the three. The apparent anomaly may be because escorts who appear on an English-language review site mostly cater to foreigners, who are not offered the more unusual—and expensive—services Japanese prostitutes provide for locals. These include the bubble baths and highly technical massages of Sopurando (“Soapland”), a red-light district in Tokyo, which can cost ¥60,000 ($600) for a session and involve intercourse (although that is not advertised). A degree appears to raise earnings in the sex industry just as it does in the wider labour market. A study by Scott Cunningham of Baylor University and Todd Kendall of Compass Lexecon, a consultancy, shows that among prostitutes who worked during a given week, graduates earned on average 31% more than non-graduates. More lucrative working patterns rather than higher hourly rates explained the difference. Although sex workers with degrees are less likely to work than others in any given week (suggesting that they are more likely to regard prostitution as a sideline), when they do work they see more clients and for longer. Their clients tend to be older men who seek longer sessions and

3

Looks matter Average price of an hour with a female prostitute by appearance*, Hair colour

Build

worldwide, 2012-14†, $

Hair length

Bust size

300

300 Athletic

280

Very long

Thin Other

260

Blonde

Skinny Average

240

D and above

280

Below shoulders

Bleached Brown Red Other Black

260

Shoulder length

C B A

Chin length

Flat

240

Baby fat 220

200

220

Flabby Heavy Very fat

200

180

180 Source: International prostitution website

*As described by clients

intimacy, rather than a brief encounter. How much brothels and massage parlours use the internet depends on local laws. America’s legal restrictions mean that they keep a low profile, both offline and online. In Britain, where brothels are illegal though prostitution is not, massage parlours advertise the rotas and prices of their workers online but are coy about the services rendered. By contrast Paradise, a mega-brothel in Germany, boasts a frank and informative website. But it is independent sex workers for whom the internet makes the biggest difference. Mr Cunningham has tracked the number of sex workers in American cities on one review site. In the decade to 2008, during which online advertising for commercial sex took off, the share describing themselves as independent grew. For prostitutes, the internet fulfils many of the functions of a workplace. It is a “break-room and hiring hall”, says Melissa Gira Grant, the author of “Playing the Whore: The Work of Sex Work”. Online forums replace the office water-cooler. Women exchange tips on dealing with the everyday challenges of sex work; a busy thread on one forum concerns which sheets stand up best to frequent washing. A mother in Scotland asks how other

†Based on the last time prostitutes’ profiles were changed

prostitutes juggle child care and selling sex, given that bookings are often made at short notice so babysitters are hard to arrange. Another contributor who is thinking of having children asks how much other women saved before taking time off to have a baby, and whether the new calls on their time meant they earned less after giving birth. One reply points out that prostitution is easier than many other jobs to combine with motherhood: it pays well enough to cover child-care costs, and can be fitted around school holidays, plays and sports days, and children’s illnesses. Women who are considering entering the industry often seek advice online from those already in it before making up their minds. Melanie, who earns £65,000 ($109,000) a year, says that she is considering selling sex on the side for a few months to pay off debts. She asks which agency to use and how to get the highest rate. But she also worries that a stint selling sex would harm her future career. Experienced sex workers respond that anonymity will be easier to preserve if she works independently, rather than through an agency, and warn her that she is entering a crowded market. The stress of living a double life should not be underestimated, they cau1 tion, and it will not be easy money. 4

Pluses and minuses Black

Average price of an hour with a female prostitute in selected cities

White

2012-14*, by ethnicity, $

150

200

250

300

350

400

New York London Washington Miami Atlanta Source: International prostitution website

*Based on the last time prostitutes’ profiles were changed


20 Briefing Prostitution and the internet 2

Many of those contributing to such discussions hold other jobs, often part-time, and tout the merits ofa steady source ofadditional income and something innocuous to put on a CV. Sarah says her escort work means she can pay for her daughter’s dance and music lessons, which would be unaffordable on just her “civvy job”. Some husbands and boyfriends know about their wives’ and girlfriends’ work, or even act as managers, drivers and security. Other women keep what they do a secret from those closest to them. Advertising and booking clients online give prostitutes flexibility about where to work. They can “tour”, using their own home pages or profiles on specialist websites to advertise where they will be and when. In densely populated Britain, where prostitutes work in most places, tours allow those who normally serve small towns to visit cities crammed with potential customers. In Norway, says Ms Skilbrei, prostitutes are concentrated in the main cities, so a tour is a chance to satisfy pent-up demand in small towns. The freelancers, part-timers and temps the internet is bringing to the sex trade are likely to help it absorb demand shocks. In 2008 the Republican and Democratic national conventions were held in Minneapolis and Denver respectively. Around 50,000 visitors flocked to each city. Another study by Mr Cunningham and Mr Kendall found that the numbers of advertisements for sex on the now-defunct “erotic services” section of Craigslist, a classifiedadvertising site, were 41% higher in Minneapolis and 74% higher in Denver around the conventions than expected for those days of the week and times of year. Health and safety Sex work exposes those who do it to serious risks: of rape and other violence, and of sexually transmitted infections. But in this industry, like many others, the internet is making life easier. Online forums allow prostitutes to share tips about how to stay safe and avoid tangling with the law. Some sites let them vouch for clients they have seen, improving other women’s risk assessments. Others use services such as Roomservice 2000, another American site, where customers can pay for a background check to present to sex workers. Both sides benefit since the client can demonstrate trustworthiness without giving credit-card details or phone numbers to the prostitute. Sites that are active in restrictive jurisdictions must be careful not to fall foul of the law. In June the FBI shut down MyRedBook, an advertising-and-review site with a chat section for sex workers. Its owners face charges of money laundering and facilitating prostitution. American police sometimes use such sites to entrap prostitutes. As they wise up to this, sex workers

The Economist August 9th 2014 are using sites that allow them to verify clients’ identities to help them avoid stings. But that adds unnecessary hassle and distracts from what should be most important: staying safe. “Screening for cops [is now] the priority over screening for rapists, thieves, kidnappers,” says Ms Doogan. In Britain, Ugly Mugs runs an online database that prostitutes can use to check punters’ names and telephone numbers. In America the National Blacklist, a “deadbeat registry”, allows them to report men who are abusive or fail to pay. Other women can check potential clients by names, telephone numbers, e-mail addresses and online aliases. Though not specifically aimed at sex workers, apps such as Healthvana make it easy for buyer and seller to share verified results in sexual-health tests. Moving online means prostitutes need no longer rely on the usual intermediaries—brothels and agencies; pimps and madams—to drum up business or provide a venue. Some will decide to go it alone. That means more independence, says Ana, a Spanish-American erotic masseuse who works in America and Britain. It also means more time, effort and expertise put into marketing. “You need a good website, lots of great pictures, you need to learn search-engine optimisation…it’s exhausting at times,” she says. Others will still prefer to have a manager or assistant to take care of bookings and social media. “[Nowadays] you have people hitting you up on Twitter, Facebook, your website, and e-mail,” says Ms Doogan. Eros.com, an international listings site, allows prostitutes to tell clients whether they are currently available. But it means going online every hour or two, which is a chore. And online advertising is not cheap. Ms Doogan used to spend 10% of her income on print adverts; she spends far more on online ones because with so many people advertising, returns are lower. Checking customers’ bona fides also takes time. Meanwhile some traditional forms of

Leaving the streets behind

prostitution are struggling. In the decade to 2010 the number of licensed sex clubs in the Netherlands fell by more than half, according to a study for Platform31, a Dutch research network. Much of the decline will have been offset by the growth of sex work advertised online, it reckons. Many prostitutes would rather work from private premises than in a club or for an agency, says Sietske Altink, one of the authors. Dutch municipalities often bar such work—but the option of finding clients online makes such rules harder to enforce. That shift will make the sex industry harder for all governments to control or regulate, whether they seek to do so for pragmatic or moralistic reasons, or out of concern that not all those in the industry are there by their own free will. Buyers and sellers of sex who strike deals online are better hidden and more mobile than those who work in brothels, or from clubs or bars, points out Professor Weitzer of George Washington University. Ireland has banned the advertising of sexual services since 1994. The prohibition has achieved almost nothing, says Graham Ellison, a sociologist at Queen’s University in Belfast. Websites simply moved to other jurisdictions. The closure of those such as MyRedBook may prompt American ones to do the same; as they grow more specialised, the excuse that they merely host classified advertisements is wearing thin. In the long term there will always be people who, for whatever reason, want to hire a prostitute rather than do without sex or pick up a partner in a bar. As paid-for sex becomes more readily and discreetly available online, more people will buy it. A greater awareness may develop that not all sex workers are the victims of exploitation. The very discretion—and the hidden nature of such prostitution—may also mean that the stigma persists. But, overall, sex workers will profit. The internet has disrupted many industries. The oldest one is no exception. 7


The Economist August 9th 2014 21

Britain

Also in this section 22 Living in the office 22 Darling 1, Salmond 0 23 Boris on manoeuvres 23 Why Lady Warsi walked 24 The army’s legal tangle 25 A new kind of Welsh 26 Britain’s unloved expats Bagehot is on holiday

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

London’s costly construction

Bodies, bombs and bureaucracy

Why building in the world’s most popular city is so difficult and expensive

C

ROSSRAIL, a new underground railway line, is the main engineering marvel near Tottenham Court Road station in London. Few passers-by realise that another immensely complex construction project is under way nearby. At Rathbone Place, an old postal sorting office is being demolished to make way for a new block of offices and apartments. The entire building must be removed through one narrow exit onto busy Oxford Street. Beneath the site lies a disused underground railway once run by Royal Mail, which must not be disturbed. Even as your correspondent visits, the developer, Great Portland Estates, discovers an ancient electricity cable buried under the foundations. Much of central London is being knocked down and rebuilt. Some 7m square feet of office space is due to be added this year—the most since 2003. Relative to the existing stock, more offices are going up in the capital than in any western European or North American city. Yet building offices (and homes) near the middle of the capital is shockingly expensive. Even before the cost of land is considered, it costs roughly a fifth more than erecting similar stuff in New York or Hong Kong, according to Turner and Townsend, a consultancy firm. The challenges at Rathbone Place help to explain why. London’s history throws up many problems. Unexploded bombs dropped by the Luftwaffe still turn up surprisingly often, as do interesting medieval bodies. The

opening ofBloomberg’s new headquarters in the City was held up by the discovery of thousands of Roman artefacts, including a rare phallic good-luck charm. London’s underground networks—including the Tube, but also sewers, various government tunnels and oddities such as the Royal Mail railway—must be negotiated. The city’s medieval street pattern means that buildings cannot always have straightforward 90-degree corners. Narrow streets make moving vehicles and machinery around construction sites far more expensive than in other cities. Typically, construction begins with a small crane, which lifts in vehicles and in turn erects a bigger tower crane. These cranes cannot operate from roads or overhang existing

Topping out Office construction cost, 2013 $’000 per square metre

Above 20 storeys

0

1

London São Paulo New York Hong Kong Munich Singapore Source: Turner and Townsend

20 storeys or below

2

3

4

5

buildings, which explains why so many of the ones in London are elaborate, multijointed things. Sometimes they must be custom-built. The planning system then adds all sorts of expensive complexities. In Westminster more than 75% of land is covered by 56 conservation areas protecting the historic appearances of streets, right down to the colour of paint on doors. At another Oxford Street site, Great Portland Estates must lift up an old façade and scoop out the rest of the building from behind it. During this process, neighbouring buildings must be protected—not only structurally but also from noise and dust. Taller buildings are trickier still. They must not block designated views of various landmarks, which explains why some of the skyscrapers in the City of London are oddly shaped. The curious wedgeshaped Leadenhall Building, known as “the cheesegrater”, is intended to protect a view of St Paul’s Cathedral from a pub in Fleet Street. The design also means that the building cannot have a central concrete core, as in most skyscrapers. Instead, the floors are held up by an innovative steel exoskeleton. This makes for a thrilling journey up the building’s glass lifts. But it does add somewhat to the cost. Developers have adapted to these constraints as best they can. Construction is modelled by computers long before the first crane is installed. Each day’s work is planned almost to the minute and materials delivered when they are needed, much like the “just-in-time” methods long used in car factories. Many parts are brought in ready made: fully 85% of the Leadenhall Building was manufactured in the Midlands and Northern Ireland. But the sheer complexity of building in the capital makes for a small, specialised industry with high barriers to entry. Outsiders who try to negotiate London’s plan- 1


The Economist August 9th 2014

22 Britain 2 ning system often get in trouble, notes Toby

Courtauld, Great Portland’s boss. Getting projects approved requires more than mugging up on planning regulations: plenty of rules are unwritten, while political objections can be unpredictable. Incumbent developers know the vagaries of the system. Newcomers do not. All this raises costs, which are passed on to business tenants. And the slowness of building in the capital means that offices are often finished at the wrong time, at the low point in an economic cycle: a slump in construction starts three years ago means supply will crash next year. Putting up buildings is far quicker and easier in other

cities, such as Birmingham and Manchester, and also in London suburbs such as Croydon. But developers persist with inner London anyway. Office rents and land values are high enough to support even some outrageously complicated projects. Leasing office space in the West End is twice as expensive as in Madison Avenue in New York. For all that the city’s skyline is dominated by cranes, were developers given free rein much more of central London would be being rebuilt. For firms struggling with high rents, that is frustrating. For Londoners who live and work next to construction sites, it may come as some consolation. 7

Architecture

New digs What to do with old offices

T

HE first surprising thing about the Qbic hotel, a hip budget outfit for young visitors to London, is that although it is advertised as being in Shoreditch, it is in fact in Whitechapel. The second surprise is the rooms. Each has a prefabricated removable pod combining bed, bathroom and television. Some have no windows. This is because the hotel is located in what was an empty 1960s office block. The conversion took just a few months and cost far less than putting up a new hotel, says Julie Fawcett, the firm’s managing director. As new offices go up in London and elsewhere, older ones often sit empty. Across the country, 10% of office space is unoccupied. Even at the fringes of central London, it is possible to find eyesores: take BT’s Keybridge House in Vauxhall, a 15-storey block of empty grey metal. These old offices cannot easily be renovated: they lack the air-conditioning systems, electronics and open spaces that businesses now want. But entrepreneurs, artists and—above all—residential developers are bringing them back into use. In Sevenoaks in Kent, an office block once used by an insurance firm has been turned into a temporary home for the newly opened Trinity free school. The former headquarters of the Co-operative Group in Manchester has been taken over by the Castlefield Gallery, an organisation that offers spaces to artists. In Hull, another block has become a temporary theatre. In Croydon, where a quarter of office space was empty last year, an old building has been turned into an incubator for internet startups. Local planning rules can make it extremely expensive to demolish unwanted buildings and erect new ones in their place; reusing them is much cheap-

er. And the tax regime encourages it. Since 2007 the owners of empty buildings have had to pay full business rates after just three months. But charitable occupiers can get an 80% discount. So landlords have a strong incentive to find do-gooders able to use empty space. “Everyone wins, except the local treasury”, says Kwong Lee, director of the Castlefield Gallery. But the fastest-growing use for old offices is as homes. Since last year it has been possible to convert blocks into housing without getting full planning permission from the local authority. And developers seem to have seized the opportunity to do so more than most expected. According to Knight Frank, an estate agent, in May around 3m square feet of space was under conversion. An earlier survey estimated that 2,250 applications to convert offices had been made by January, including 784 in London. The government had estimated that just 140 properties per year would be affected. Such is the extent of Britain’s housing shortage that living at the office is becoming a reality.

Scotland’s TV debate

Bravo, Darling A masterclass in upstaging rabble-rousers

A

CROSS the West, mainstream politicians are fretting over the rise of rightwing populism. In America they face the Tea Party, in Italy the likes of Beppe Grillo and in Britain the UK Independence Party (UKIP). Such opponents are often lacking in rigorous, properly costed policies, but they do a nifty line in slogans and anti-elite bluster and have stormed ahead in recent elections. What to do about them? Alistair Darling, a bone-dry Scottish Labour MP and former chancellor, improbably seems to have hit on a formula. In a televised debate on August 5th he took on Alex Salmond—Scotland’s rabble-rousing pro-independence first minister—ahead of the referendum on Scottish secession on September18th. He won convincingly. His first weapon was wit. The first minister is a jocular fellow and many expected Mr Darling to look dour by comparison. In the event he was rather funny. Mr Salmond’s complaint that Scotland did not vote for the Tory-led government in Westminster was answered by the revelation, eyebrow raised, that Mr Darling had not voted for the first minister, either. “Oh, come on,” he sighed with pantomimed exasperation whenever Mr Salmond prevaricated. Mr Darling, a former lawyer, was also rigorous, not allowing his opponent’s vague assurances to go unchallenged. He hassled the first minister to outline a “plan B” in case London refuses to allow Scotland to share the pound, as unionist politicians have vowed. He was not distracted by Mr Salmond’s fudges, ridiculing his claim that Scotland could use sterling informally. By contrast, the first minister unfathomably used his allotted time to air petty grievances about the conduct of the pro-union campaign. Finally, the former chancellor exuded optimism and energy. Not dwelling on whether Scotland could make it alone, he concentrated on the current and future merits of the union. He answered questions fluently and quickly, interjecting when Mr Salmond stalled. David Cameron should pay heed. In televised debates ahead of next year’s general election, the prime minister may clash with Nigel Farage, UKIP’s likeable leader. In what amounted to a dry run, Nick Clegg, the deputy prime minister and head of the Liberal Democrats, took on Mr Farage over Britain’s EU membership in April. Hesitant and reedy, he lost badly. Mr Darling has blazed a more promising trail. 7


The Economist August 9th 2014

London’s mayor

The blond bombshell Boris Johnson finally admits he wants to rejoin Parliament

I

N 2001 Boris Johnson, now the mayor of London, then a mere journalist, made his second attempt to get elected to Parliament. His chosen seat was Henley, a wealthy town in South Oxfordshire. In a memoir, Mr Johnson recalled the questions he was asked at his Conservative Party selection hearing: “There was schools, and hospitals, and there was Europe. And Europe, and Europe, and Europe.” At one point the local party chairman became so frustrated he begged for questions on another topic. On August 6th Mr Johnson announced that he is once again hoping to return to Parliament, in 2015. “I might as well be absolutely clear”, he said, before explaining, wholly implausibly given his rock-star status in the Conservative Party, that he might fail to find a seat to contest. And, once again, he delivered his views on the European Union. Mr Johnson’s decision to run, though widely anticipated, has implications for London’s politics and for the May 2015 general election. Most of all, however, it hints at the colossal bust-up over Europe that awaits the Conservative Party. The immediate question to be answered is where Mr Johnson will stand. He has committed to serving his full term as mayor of London, which ends in 2016. That promise could probably be broken, but not immediately, which rules out any seat outside London. Rumours swirl that he will contest the safe suburban seat of Uxbridge

Britain 23 and South Ruislip, where the incumbent MP, Sir John Randall, is due to retire. Mr Johnson’s decision to re-enter Parliament will cheer the Labour Party in London. Their local political machine in the capital is much stronger than the Conservatives’. Mr Johnson’s combination of charisma and effective electioneering, especially in the suburbs, helped him to wrest the mayoralty out of Labour’s hands. The Conservatives will find it difficult to find a candidate strong enough to keep it. The national political implications of Mr Johnson’s return are more mixed, and mostly affect the Conservatives. His decision to stand as an MP will mean he can be somewhat more involved in the party’s 2015 general-election campaign. And he is, as David Cameron put it, a “star player”. The mayor has a unique ability to win over the liberal young as well as older voters tempted by the populist UK Independence Party. The Conservative Party’s chief election strategist, Lynton Crosby, knows well the breadth of Mr Johnson’s appeal: he ran both of his mayoral campaigns. Yet Mr Johnson could also create problems for the prime minister, particularly over Europe. In his speech, the mayor ostensibly backed David Cameron’s policy ofrenegotiating Britain’s place in the union before putting it to a referendum, arguing that the country would be best off staying in a reformed, free-trading EU. But he also came up with a wholly implausible wishlist of reforms, such as scrapping the common agricultural policy, reforming the free movement of labour to limit immigration and scrapping the EU’s commitment to “ever closer union”. Were this sort of thing to prove impossible, he breezily added, Britain would be fine on its own, outside the union. The country is in a “win-win” situation, he claimed. In sharp contrast, Mr Cameron has steadfastly refused to set out any of his aims for a renegotiation or to say under what circumstances he would advocate Britain leaving the EU in the referendum he has promised. If the Conservatives win next year’s general election, Mr Johnson might fire up expectations among MPs and party members that Mr Cameron cannot meet. Already the party is split between those who mostly want to leave the European Union and those, like the prime minister, who under most circumstances would like to stay in. Mr Johnson, who is popular among Tory MPs, could tip the debate one way or the other. Another possibility, of course, is that Mr Cameron loses the 2015 election and resigns as leader of the Tory Party. In that event, Mr Johnson will be able to stand for the leadership, using his considerable appeal to Eurosceptics to beat out the other candidates. Conservative politics still revolves around the issue of Europe. And Europe, and Europe, and Europe. 7

Lady Warsi

Unilateral action Israel’s bombardment of Gaza cleaves Westminster

H

ELL hath no fury like an ambitious politician scorned. Such has been the Conservative response to Lady Warsi’s resignation on August 5th. To judge by comments from anonymous MPs—and the subtext of senior ministerial responses— the departing Foreign Office minister was incompetent. Upon realising that she could not expect further promotion, she stormed off in a fashion calculated to damage David Cameron. This is mostly unfair. Stellar competence is not always a prerequisite for ministerial office in Britain. And Lady Warsi was hardly a prominent troublemaker. She championed Mr Cameron’s bid to lead the Tory Party in 2005 and was rewarded first with a shadow ministerial job and then, in 2010, with the party chairmanship. A northern Muslim woman, she embodied his bid to make the party look more like the country. But grumbling about her steadily grew, particularly after allegations of expenses abuses in 2012, and MPs lobbied unsuccessfully for her defenestration in last month’s ministerial reshuffle. The trigger for her resignation, however, appears to have been the one she cited: the government’s “morally indefensible” refusal to condemn Israel over its bombardment of the Gaza Strip. Even more than Syria, the conflict has divided opinion in Westminster. A handful of Labour MPs and most Conservatives appear to have concerns 1

Happier times


The Economist August 9th 2014

24 Britain 2 about the conflict to varying degrees, but

have stopped short of condemning Israel— including Mr Cameron, George Osborne, the chancellor, and Philip Hammond, the foreign secretary. Speaking to Binyamin Netanyahu, Israel’s prime minister, by phone on July 21st, Mr Cameron stressed his backing for proportionate measures against Hamas. He and his senior colleagues have not explicitly accused Israel of overstepping the mark. In contrast, most of the Labour Party and almost all Liberal Democrats consider the offensive disproportionate. After Lady Warsi’s resignation Nick Clegg, the Lib Dem leader, said Britain should suspend arms-export licences to Israel. Ed Miliband, Labour’s leader, has accused Mr Cameron of “silence on the killing of hundreds of innocent Palestinian civilians.”

But growing numbers of Tories share these concerns, too, and are uncomfortable with the prime minister’s closeness to Mr Netanyahu. Lady Warsi claims that a colleague had contacted her in tears over the matter. Some have been bombarded with letters from constituents. On July 31st Margot James, a popular MP, called for the government to “rethink” its stance. Worryingly for Mr Cameron, those Conservatives most concerned by his stance on Israel tend to be those (like Ms James) keenest on multilateral foreign policies—in short, the pro-Europeans. If, as he has pledged to do in a second term, he puts Britain’s EU membership to a referendum, his party will be split. The prime minister will rely on these folk to help him make the case for Britain to remain in the union. He can ill afford to lose them. 7

Soldiers and human rights

Lawyers to right of them, lawyers to left of them The army increasingly feels under legal siege

B

RITAIN’S armed forces are used to being under attack. Scarcely a year has passed since the second world war when they have not been engaged in operations overseas of one kind or another. They are also used to feuding with the Treasury over money. But over the past decade they have increasingly faced a foe of a different kind. Arising from the conflicts in Iraq and Afghanistan, an unprecedented number of cases have been brought against the Ministry of Defence (MoD) in British courts under human-rights laws. Senior officers fear these could dent military efficiency. So far there have been two public inqui-

ries, more than 200 judicial reviews and more than 1,000 damages claims made against the MoD on human-rights grounds. The cost of these legal challenges so far is around £85m ($145m), over half of which has gone on inquiries into the killings of Baha Mousa and Al-Sweady by British troops in Iraq in 2003 and 2004. The bill could rise substantially. Other cases are still winding their way through the courts, and lawyers say that there is a stack of other claims yet to be considered. In May the International Criminal Court, responding to a complaint by Phil Shiner of Public Interest Lawyers, announced that it was

launching a preliminary examination of 60 alleged cases ofunlawful killing and 170 of mistreatment of Iraqis by British troops. Many of the legal challenges come from former enemy combatants and their relatives. But another class of case, known as “duty of care” lawsuits, which are brought by the families of soldiers who have died on active service or during training, is also absorbing much time and money. Many relate to deaths that might have been avoided had better kit been provided, such as body armour, tougher vehicles or equipment to prevent “friendly-fire” accidents. In a landmark decision in June last year, the Supreme Court unanimously held that soldiers operating overseas enjoy the protection of the Human Rights Act. Being subject to British authority and control, they are within British jurisdiction, the court decided (this was in line with a 2011 ruling by the European Court of Human Rights in the case of Al-Skeini, an Iraqi detainee). By a majority vote, the court also narrowed the principle of “combat immunity”—the legal assumption that it would be unfair to hold someone negligent for decisions taken in the heat of battle—by saying it should not to apply to procurement decisions or pre-combat planning. Much will depend on the fate of the continuing civil cases that are going forward in consequence of the Supreme Court’s ruling. But commanders already worry that judges have inserted themselves into the chain of command, making the army less flexible and speedy. “People are unsettled that actions they take in a time-sensitive environment without complete information will be second-guessed by people who have all the wisdom of hindsight,” says a general. One explanation for the legal barrage is the activism triggered in 1998 by the incorporation into English law of the European Convention on Human Rights (ECHR) through the Human Rights Act. Another is that, since the Falklands War, Britain has taken to bringing home the bodies of soldiers killed in action, which makes military deaths subject to civilian coroners’ inquests. In 2004 the use of narrative verdicts became widespread, allowing coroners to comment critically on the conduct of operations. The rules that have long regulated war, known as International Humanitarian Law and the Law of Armed Conflict, are increasingly entangled with human-rights law. The tangle is even worse as a result of the kind of military operations Britain has engaged in since the 2001 terrorist attacks on America. In Iraq it was an occupying power; in Afghanistan it is part of an international coalition intervening on behalf of a foreign government under the terms of a UN Security Council resolution. In both conflicts, British troops often found themselves doing “hard policing”: the rules con- 1


The Economist August 9th 2014 2 cerning the use of force and the treatment

of detainees in those circumstances have been open to different interpretations by distinct bodies of law. In many instances, the Law of Armed Conflict and human-rights law are complementary. But in others, for example the case of Serdar Mohammed, a suspected Taliban commander who was detained by the British for 110 days in 2010 and is seeking damages under the ECHR, they are less so. In May the High Court ruled that his detention had been unlawful. Philip Hammond (then defence secretary, now foreign secretary) said that the MoD would appeal against a verdict that could open the door to hundreds of other claims. The chief of the Defence Staff, General Sir Nicholas Houghton, pointed to the problem: legal and safety issues conceived for civilians in peacetime are increasingly being applied to military operations. The warrior spirit Nobody doubts that the treatment of Baha Mousa, a hotel receptionist, was the result of soldiers behaving inhumanely and illegally and that it was entirely appropriate to bring those responsible for his death to trial. The MoD has implemented 71 out of the 73 recommendations made by Sir William Gage, the inquiry’s chairman, to ensure that similar abuses will not happen again—a reflection of its lack of preparedness for the situation British forces found themselves in. Army training manuals failed to explain that five of the interrogation techniques used had been banned by the British since 1972 and were illegal under the Geneva Convention. The indefatigable Mr Shiner, who believes he is the subject of a campaign of vilification quietly orchestrated by the MoD, claims that there are 11 other Iraqi deaths in British custody that should be investigated. But the armed forces and many politicians are now losing patience with what Mr Hammond describes as “ambulancechasing lawyers…aggressively seeking out foreign claimants” and are trying hard to cut off the legal assault. One measure already being taken is stopping the flow of legal aid to people who have little or no connection with Britain by imposing a residency test. The government might also argue that, as case law and precedent have extended the ECHR to combat operations with perverse results, Britain should derogate from the convention during operational deployments. As far as combat immunity is concerned, Mr Hammond has already suggested that the government will have to legislate to restore it in full if legal decisions go against it. The armed forces should urgently consider another reform, too: introducing much more rigorous legal training for all ranks. “Lawfare”, as it has been called, is not going to go away. 7

Britain 25 The Welsh language

Dragonian measures CARMARTHEN

Government meddling has created a new Welsh dialect

I

N THE Blue Boar, a pub so local that the landlord is surprised to hear its sign is missing, Roy Thomas picks up a text from his grandson. It contains the word “brechdanau”, meaning sandwiches. A Welsh speaker, Mr Thomas knows the word, but only because he has read it in old books. “I’ll probably text back in English,” he says. “Otherwise I’ll make a mistake.” Wales’s native language is in decline. Between 2001 and 2011 the proportion of people in the principality who speak it fell from 21% to 19%, with the steepest decline in its rural northern and western heartland (see map). Native Welsh-speakers continue to leave for work, to be replaced, in those beautiful districts, by English retirees. But a new kind of Welsh language is rising, giving hope to some and perplexing others. Welsh identity is linked to the Welsh language—far more than, say, Scottishness is linked to Gaelic—and the devolved government has done much to promote it. Almost a quarter of primary schoolchildren in Wales are now taught mostly in Welsh, and the proportion is steadily rising. Civilservice and media jobs often require it. As a result, the language is holding on, and sometimes even growing, in traditionally Anglophone south Wales, particularly in and around Cardiff, where politics and the media are clustered. But the Welsh that can be heard in schools and that is spoken by the sports commentators on the Blue Boar’s small television set is different from the kind that many native speakers grew up with. A standardisation centre at Bangor University has added new words, such as “cyfrifiadur” for computer. Old words that had fall-

Spreading the word Welsh speakers 2001-2011

2011

Percentage point change

% 0 to 9.9 10 to 29.9

30 to 49.9 50 to 70

ANGLESEY

0 to 2 0 to -1.9 -2 to -3.9

Carmarthen Llanelli Swansea

Cardiff

Sources: Welsh Language Commissioner; Based on OS mapping M014/14

-4 to -5.9 -6 to -8

Pay attention if you want a good job en out of use in many parts, like “brechdanau”, have been revived. Grammar is more English and less complicated. The new Welsh also sounds different. The second syllable of “tadau” (fathers) now has an a-sound in the north and an esound in the south. But in the 16th century it sounded something like the English “die”, and this is the way the new speakers have it. This is also the way the word is read out loud: written Welsh emerged when the Bible was translated in 1588, and preserves the ancient pronunciation. Not everybody is delighted with the new lingo. “So bloody fake”, mutters the Blue Boar’s landlord at the television, while local comedians like Daniel Glyn mock the clunky phrases on stage: “I can speak English and Welsh, but neither of them proper, bach.” Jonathan Snicker of St John’s College, Oxford, says the change breaks the linkbetween older villagers and the urbane young, who can struggle to understand each other. But Colin Nosworthy, a spokesman for the Welsh Language Board, points out that the birth of a new dialect is a good sign for a language. “Better a slack Welsh than a slick English,” he says—and many agree. Efforts are being made to spread the new dialect to a belt above Swansea, where Welsh is doing particularly badly. S4C, the Welshlanguage broadcaster, is moving from Cardiff to Carmarthen taking Welsh-speakers with it. This year’s Eisteddfod, a cultural festival, is in nearby Llanelli. There are worse ways of trying to preserve a language, some of which are also being tried in Wales. A planned nuclear power station in Anglesey has run into opposition from people who worry that many of the 6,000 construction jobs would go to non-Welsh speakers, diluting the language. Protests from the same quarters have held up the building of 8,000 homes in Gwynedd. A few awkward phrases from schoolchildren seems like a relatively small price to pay. 7


The Economist August 9th 2014

26 Britain The British diaspora

And don’t come back Some 5m Britons live abroad. The country could do far more to exploit its high-flying expats

W

HEN British politicians talk about winning the “global economic race” (as they often do) they have athletes like Gregor Wilson in mind. Mr Wilson taught himself to code as a child. He started and built his first company while at university and sold it on graduating. His second venture, a software firm, is booming and will soon be ready to take on more staff. He is also preparing to leave Britain for good. In the popular imagination, British expats are leathery retirees in the Mediterranean. But from 2006 onwards the weak pound, the bursting of Spain’s property bubble and rising taxes in France made the costas less attractive. The number of old Britons emigrating annually has more than halved since then. Dean Blackburn, head of HSBC Expat, part of the high-street bank, says that a different breed of emigrant is now on the march: the ambitious graduate bound for North America or Asia. The sharpest rise has been among those moving to the glittering East (see chart). Mr Wilson will build his business in Hong Kong. The web, along with the reach of the English language and the cachet of a British degree, gives young people like him opportunities undreamed-of by their parents’ generation. They are also untethered for longer: on average, they buy a house and form a family later in life than did previous generations. Figures from the Office for National Statistics show that, since the eve of the economic crisis, emigration is down by 19% overall but up by 8% among 15- to 24-year-olds. High housing costs help to drive young folk abroad. For the monthly rent on a rabbit hutch anywhere near central London, graduates live grandly elsewhere. “We can afford to travel around Australia, rent an apartment with a sea view and save some money,” explains Emma, a publisher and recent Oxford graduate who moved to Melbourne last year. Those with advanced degrees are especially likely to leave for countries where pay and research facilities are better. This is regrettable. Britain’s productivity rate is puny; firms and factories badly need such skilled employees. But it is also an opportunity—which the country is squandering. According to the World Bank, the British diaspora (at nearly 5m people, roughly the size of Scotland) is the largest of any rich country and the eighth biggest overall. Britain’s many expats could strengthen its

Go East, young man Destination of emigrants from Britain 2006=100

Africa and Asia* ex-Commonwealth EU15 200

Indian subcontinent United States

Total, 2012, ’000

26

150

45

100 79 20

50 2006 07 Source: ONS

08

09

10

11

12

*Not including Middle East

trading links, channel investment into its economy and generally burnish the national brand. But Britain’s government seems to have “no coherent strategy” for engaging with them, says Alan Gamlen of the Oxford Diasporas Programme, a research unit at Oxford University. Of 193 UN member states, 110 have formal programmes to build links with citizens abroad. Britain is not one of them. The Foreign and Commonwealth Office’s database of Britons abroad is patchy. Of all the high-flying expats with British passports your correspondent asks, only one— Danny Sriskandarajah, a migration expert based in South Africa—has had any contact with local embassies or with UKTI, Britain’s trade-promotion body. And his Indi-

an friend has received much more attention from his consulate. Indeed, India is a trailblazer in this field. It has an entire ministry for its emigrants. Mr Gamlen says it partly has this to thank for the success of its IT industry, built by Indians lured home from Silicon Valley and Europe. Other countries are similarly welcoming. Italy and France even reserve parliamentary seats for their diasporas. The British government would probably have to work harder than most to sustain ties with the country’s expats. Britons are relatively good at melting into other countries without trace. They are a individualistic bunch, have Commonwealth links and a native language that often makes it easy to integrate. Kiwi seeds New Zealand offers a good model for Britain’s hands-off diplomats to emulate. Wellington has spent 30 years encouraging firms and philanthropists to root out Kiwis abroad. Its proudest achievement is the Kiwi Expat Association, a public-private partnership that supports and connects overseas New Zealanders through social media and networking events, and helps them return home if they so wish. Britain might also make it easier to bring spouses into the country. Expats who want to move back with their non-British partners often collide with their home country’s evertougher immigration regime. If Britain does not want its talented globetrotters, others do. Germany actively recruits Britons to take apprenticeships there. Middle Eastern governments tour British universities doling out visas. Mr Wilson was contacted out of the blue by the Chinese authorities, who invited him to relocate his firm and offered to pay for his flight. “America and China seem really keen to attract us,” he says. “Britain just doesn’t seem that interested.” 7


The Economist August 9th 2014 27

Europe

Also in this section 28 Germany’s preacher president 28 Russia and the West 29 War crimes in Kosovo 30 Italy’s economy shrinks... 30 ...as do public-sector wages Charlemagne is on holiday

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

Turkey’s election

Tyrant or steadying hand? ANKARA AND ISTANBUL

The Erdogan era is about to enter its next stage

O

N A rainy Sunday evening Turkey’s prime minister, Recep Tayyip Erdogan, was delivering a fiery speech full of references to the glories of Islam and Turkey’s Ottoman past when a woman on a stretcher was lifted to the podium. He knelt down, took her hand and offered comfort. “Allahu akbar [Allah is great],” she screamed. A sea of supporters, waving Palestinian and Turkish flags, went wild. These scenes at a recent rally in Istanbul have been repeated across Turkey as Mr Erdogan campaigns to become the country’s first popularly elected president. Few doubt that Mr Erdogan will achieve his goal in a first round of balloting on August 10th. Opinion polls suggest that if turnout is below 80%, he will win up to 55% of the vote and a run-off scheduled on August 24th will be unnecessary. Ekmeleddin Ihsanoglu, a former secretary-general of the Jeddah-based Islamic Co-operation Organisation—who was fielded jointly by the main opposition Republican People’s Party (CHP) and the Nationalists in the hope that he would draw pious voters from Mr Erdogan—is trailing at around 38%. Selahattin Demirtas, the Kurds’ candidate, whose youthful good looks, sharp wit and all-embracing message are appealing even to Kemalist stalwarts, is nonetheless unlikely to attract more than 10%.

Mr Erdogan’s enduring popularity since his conservative Justice and Development (AK) party was catapulted to power in 2002 may seem baffling. A probe, launched in December and targeting his family, cabinet members and business cronies, has thrown up allegations of graft, kickbacks and money-laundering. Mr Erdogan denies any wrongdoing. In March 301 workers perished in a mine explosion in the town of Soma, a disaster widely believed to have been caused by lax safety rules. When heckled by protesters at the scene, Mr Erdogan was filmed cuffing a worker. One of his advisers was caught on camera kicking a protester while security guards pinned him to the ground. Adding to the government’s blunders, for more than two months Islamic State militants in Iraq have been holding 49 members of the Turkish consulate in Mosul, including the consul-general, as human shields against possible Western intervention. Had Turkey heeded warnings from the Iraqi Kurds to evacuate the consulate before the group overran Mosul, the hostages would probably have escaped. “There is no mystery to Erdogan’s success,” argues Seyfettin Gursel of Istanbul’s Bahcesehir University. “It’s because of the economy.” Over the past decade millions of Turks have been lifted out of poverty.

When the financial crisis hit Europe, Turkey’s economy, fuelled mainly by domestic consumption, kept expanding; growth was over 9% in 2010. Shiny new hospitals, in which the needy receive free treatment, have bolstered a sense of stability and well-being. Where Mr Erdogan’s critics see a tyrant (he has muzzled the press, stacked the judiciary and the security services with loyalists and rewritten laws to suppress the corruption probe), his supporters see a steadying hand. The former footballer has declawed the army and eased bans on the Islamic-style headscarf. He was the first to negotiate with the Kurds. Before winning a third term in 2011, Mr Erdogan did more than any of his perpetually squabbling, secular-minded predecessors to make Turkey a richer, freer and happier place. But Mr Erdogan has become increasingly autocratic. He is also a master manipulator. When mass protests erupted last year over government plans to build a shopping mall in Istanbul’s main Taksim Square, Mr Erdogan convinced his base that these were orchestrated by a cabal of Jews and their allies in the media (including The Economist). When the graft scandals erupted in December, he blamed them on Fethullah Gulen, a Pennsylvaniabased Sunni Muslim cleric who, he claims, is part of a global conspiracy to overthrow AK. Dozens of alleged Gulenists in the police force have been arrested. The AK leader’s next goal is to boost the powers of the presidency so that he can continue to rule Turkey from the Cankaya palace. In a draft bill AK deputies proposed, among other things, that the president be allowed to dissolve parliament and to appoint cabinet ministers. “These 1


The Economist August 9th 2014

28 Europe 2 are powers a Latin American dictator

couldn’t dream of,” says Riza Turmen, a CHP deputy. Nuray Mert, one of dozens of newspaper columnists sacked under government pressure, insists that Mr Erdogan wants to impose a “Saddam Hussein-style Baathist regime”. Gigantic portraits of Mr Erdogan have become ubiquitous. Mr Ihsanoglu and Mr Demirtas were given only a fraction of the airtime granted to Mr Erdogan on state-run television. Oy ve Otesi, an independent election-monitoring group, is already warning of possible fraud. For now AK lacks the two-thirds majority in parliament needed for the constitutional tweaks to increase the president’s powers. Critically, the economy is beginning to wobble. Inflation is up; growth is down, to around 4%. Exports are slipping because of the violence that has engulfed Syria and Iraq, Turkey’s second-biggest market. Mr Erdogan may well be tempted to call early elections (via the AK puppet prime minister he is hoping to install) before the effects set in. But AK may well not bag enough seats to allow him to fulfil his dreams. He would then turn to the Kurds for their backing in exchange for further political concessions. If that were not forthcoming, Mr Erdogan’s grip may finally weaken, paving the way for a new leader. Many think that would be the best outcome for Turkey. 7

Germany’s president

Preaching a new German gospel BERLIN

Joachim Gauck is pushing the limits of his office

F

ROM the Vosges mountains to the Flemish plain, Joachim Gauck, Germany’s president, visited the killing fields of the first world war this week for the centenary commemorations. As is his wont, he teared up easily and embraced heartily. This emotional style of accepting German responsibility for the past and turning it into reconciliation has become his trademark since he became Germany’s head of state in 2012. Whether in Israel, Poland or Greece he finds the right tone. Along with Germany’s head of government, Angela Merkel, he is one reason why Germany today appears, on balance, unthreatening and even likeable to its neighbours. Mrs Merkel and Mr Gauck began as an unlikely pairing. When he was first mentioned as a candidate for president in 2010, she opposed him, viewing him as a potential rabble-rouser. (Presidents are chosen by a federal convention consisting of parliament and delegates from the 16 states,

The pastor and a pastor’s daughter but only after the main political parties agree on the candidates.) But in 2012 the then president, Christian Wulff, was forced to resign amid a corruption scandal (he has since been cleared). Mr Gauck’s name came up again, and Mrs Merkel dropped her resistance. Both spent their formative years in communist East Germany, Mr Gauck as a Lutheran pastor, Mrs Merkel as the daughter of one. But life in the dictatorship shaped them differently. Mrs Merkel learned to keep her views to herself until an opportune moment arises. He learned the opposite lesson: to speak from the heart, even against the grain. His loathing for the regime began when he was a boy and his father was nabbed and imprisoned in a Siberian gulag for several years over a vague allegation of espionage. The defining moment of his adult life was the fall of Berlin Wall. For a decade after reunification in 1990, Mr Gauck led the agency charged with investigating and documenting the Stasi, East Germany’s equivalent of the KGB. These experiences left him with a visceral yearning for freedom. Liberty is a big theme of his speeches. In Freiburg this year he praised liberal and “neoliberal” values in society and the economy, though these are unfashionable terms in Germany and often used derisively. Generally pro-American, he has however expressed outrage against the spying by America’s National Security Agency on Germans. But Mr Gauck must tread carefully. Germany’s constitution defines the presidency as a mainly ceremonial office. He must be impartial and above “operational” politics, as an aide puts it. More than any of his predecessors, Mr Gauck tests these limits. He called followers of the NPD, a party

with neo-Nazi tendencies, “crazies”. When the NPD sued in Germany’s constitutional court, the judges sided with Mr Gauck. Mr Gauck caused his biggest controversy in a speech in January at a security conference in Munich. Addressing a country that is resolutely pacifist as a reaction to its own legacy of aggression, Mr Gauck demanded a rethink. Its neighbours today trust Germany, he thinks, so Germans should trust themselves, too. Mr Gauck called for more vigorous diplomacy—of the sort that Mrs Merkel has, in fact, displayed of late in the Ukraine crisis. Such diplomacy requires armed force as a last resort, he contends. Outside Germany it is easy to underestimate how inflammatory that line of thought is. A politician in Brandenburg called Mr Gauck a “repulsive warmonger”. Addressing parliament in June, Gregor Gysi, a leader of The Left, a party descended from East Germany’s Communists, distorted Mr Gauck’s views as meaning that “we should take part in more military operations”. A group of 67 eastern German Lutheran pastors wrote an open letter attacking Mr Gauck’s line. But the president will keep preaching. Mr Gysi was reprimanded in parliament for misquoting him. Mr Gauck wrote a reasoned reply to his fellow pastors, adding nuance to his argument. Most Germans seem to listen, and increasingly to agree. 7

Russia and the West

How to lose friends MOSCOW

Vladimir Putin pretends that he can make Russia self-sufficient and strong

“I

SOLATION”, “consolidation” and “self-reliance” are different terms used among Moscow’s political and business elite to mean the same thing. In the face of international sanctions occasioned by its support of the rebels in eastern Ukraine and its earlier annexation of Crimea, Russia is preparing to pull inward. It is hunkering down for a long period of diplomatic antagonism and economic hardship. That process appears to be accelerating. On August 6th the Kremlin responded to Western pressure by announcing that it will ban or reduce agricultural imports from countries imposing sanctions on Russia. The tensions in eastern Ukraine are rising. Ukrainian forces have, in effect, closed off the rebel stronghold of Donetsk through a campaign of often-indiscriminate shelling. If it falls to Kiev, then the proMoscow insurgency will lose its potency. Mr Putin may be tempted to salvage his credibility by sending in Russian troops on 1


The Economist August 9th 2014 2 the pretence of a “humanitarian” opera-

tion. According to NATO, 20,000 Russian soldiers have amassed at the border. They are engaged in live-fire drills involving fighter aircraft and bombers—the sort of manoeuvres that have presaged invasion before. Even if troops do not cross the border, the confrontation between Russia and the West looks set to continue through the rule of President Vladimir Putin and, perhaps, beyond. By increasing his support of the rebels after the crash offlight MH17 last month, Mr Putin has shown that he values his own understanding of Russia’s historic destiny more than the economic well-being of his country and its global reputation. He is making a risky bet that challenging the architecture of the post-cold-war order will reap its own rewards and make up for a drop in living standards. It is a mistake to think of Mr Putin as

Europe 29 “mercantile”, says a Duma deputy from the pro-Kremlin United Russia party. Rather, he is an “historical figure” set on establishing Russia as a self-sufficient centre of power. Mr Putin told his security council last month that “Russia is fortunately not a member of any alliance”, which he presented as a “guarantee of our sovereignty”. The new antagonism between Russia and the West will not be a battle between superpowers; for one thing, today’s Russia lacks an ideology with appeal beyond its borders. In an interview with The Economist last month, America’s president, Barack Obama, said that the challenges Russia presents are “effectively regional”. The Kremlin proudly claims it will aim to replace Western goods and services with domestic ones, for instance in hightech parts for the arms industry. Import substitution could work if manufacturers weren’t running at near-full capacity and

War crimes in Kosovo

A country awaits PRISTINA

Who will be indicted for war crimes?

T

HIS is Kosovo’s holiday-and-wedding season, but some in the small Balkan state don’t feel much like celebrating this year. On July 29th Clint Williamson, an American prosecutor leading a special European Union task-force investigating war crimes, came out with a damning report. His team was created to look into claims in a report for the Council of Europe, published in 2010, which accused senior members of the wartime Kosovo Liberation Army (KLA) of heinous crimes. He came to very similar conclusions. According to Mr Williamson, senior officials of the KLA led a campaign of murder and ethnic cleansing against Serbs and Roma in the wake of the war in 1999. Instead of dismissing claims that some of the disappeared were murdered for their organs, as had been widely expected in Kosovo, Mr Williamson says there are “compelling indications” that this did happen in a “handful” of cases, though he does not yet have enough evidence for indictments for that. Witness intimidation, he says, is the greatest single threat to the rule of law in Kosovo. Mr Williamson knows whom he wants to indict for other crimes, but no court yet exists to try them. Plans are well advanced for the establishment of an extraterritorial tribunal in The Hague, along the lines of the Scottish court that prosecuted the Libyans accused of blowing up an airliner over Lockerbie. First, Kosovo’s parliament must pass a law allowing this to happen. “Horrible things

happened and they need to be addressed,” says Petrit Selimi, the deputy foreign minister. The trouble is that the party of Hashim Thaci, the outgoing prime minister, has been unable to cobble together a government since it came first in elections on June 8th. As parties squabble about who has the right to form a government, the country is paralysed. Meanwhile rumours are circulating about who will be indicted. Names mentioned include senior members of Mr Thaci’s party, and opposition politicians. All of Kosovo is waiting, including minority Serbs in the north, who are supposed to join Kosovo’s administrative system under the terms of a recent agreement. In fact, says Branislav Nesovic, a civil-society activist, no one “has a clue what is going on”. In June Serbs removed an old barricade on the bridge that divides the town of Mitrovica between Serbs and Albanians, but they quickly became frightened and replaced it with a post-modern barricade made of turf and flowerpots. Father Sava, the abbot of Decani, a Serbian Orthodox monastery, worries that the international community may be forgetting Kosovo. He is horrified by videos of Albanian jihadis in the Middle East. Kosovo, he says, is full of social tensions and unless the economy improves and the region moves closer to the EU, he fears “an explosion” in which politicians could easily “redirect their frustration at minorities”.

in dire need of new investment, which will be in shorter supply as foreign financing shrinks. The country’s $173 billion in sovereign-wealth funds, built up over years of windfall profits from oil sales, will be drawn down to stabilise the rouble and pay off the debts of state banks and firms. “It won’t kill us, but it will create problems,” says the United Russia deputy. Mr Putin will have to push the country’s financial resources to their limit if he wants to fulfil the promises on social spending he made when he returned to the presidency in May 2012. (At the time Russia forecast its GDP growth at 5% a year; the IMF now predicts GDP growth for this year at just 0.2%.) Mr Putin has already proposed the introduction of a 3% sales tax as a way of filling holes in regional budgets. The government has also announced it will siphon off private pension-fund contributions to the federal budget, prompting a deputy economic-development minister to declare he was “ashamed” of the move. He was fired the next day. Such problems have not yet hurt Mr Putin. Indeed, he is more popular than ever and his propaganda apparatus is proving to be highly effective. A poll released this week by the Levada Centre, a think-tank in Moscow, shows that 74% of Russians have a negative view of America, the highest number in Russia’s post-Soviet history. The showdown with the West over Ukraine has allowed for a “powerful discharge of frustration” built up over years since the Soviet collapse, says Lev Gudkov, director of the Levada Centre. And now that Mr Putin knows relations with the West are spoiled no matter what, he may be prepared to up the ante again. 7

Proudly alone


The Economist August 9th 2014

30 Europe Italy’s economy

Shrinking again

Italy’s parliament

High-class errand boys ROME

Parliamentary workers are facing a cut in their generous pay Rome

Italy slips back into recession

I

T’S the economy, stupid. Had Matteo Renzi, a keen student of American politics, paid more attention to the slogan invented for Bill Clinton’s successful presidential campaign in 1992, he might be in a better position today. On August 6th his government’s statisticians disclosed that Italy was back in recession. Preliminary estimates suggested that GDP fell by 0.2% in the second quarter of 2014 after a drop of 0.1% in the first quarter. This was the worst blow to the prime minister since coming into office in February. No one expected such a dismal performance. Forecasts ranged from 0.1% to-0.1%. If the estimate is confirmed, it will mean second-quarter growth is weaker than at any time since 2000. The finance minister, Pier Carlo Padoan, put a brave face on the numbers by pointing to an encouraging increase in industrial production in June. But the reversal of Italy’s economic fortunes will have a profoundly demoralising effect on a nation that had thought the worst was over. It could adversely influence decisions on investment, employment and consumption. News that the economy is shrinking also leaves a huge dent in the credibility of the government’s overall strategy. On entering office, Mr Renzi took a gamble—that the economy would recover without the need for much structural reform, enabling him to get on with what he judged to be the more important business of institutional change. When the GDP figures came out, the prime minister was closeted with Silvio Berlusconi, the leader of Italy’s secondbiggest opposition party, trying to agree on a new electoral law, the second phase in their ambitious plan for a more effective and stable form of government. Members of the Senate have approved the guts of a bill to implement the plan’s first phase, to suppress the upper house’s power to block or distort legislation. Mr Renzi’s main ploy for boosting growth has been a €80 ($107) monthly tax break for lower-paid workers. That too had a political flavour because it helped the prime minister silence the left wing of his party and win an impressive victory in European elections in May. But this week the head of the shopkeepers’ association said the tax break’s impact on domestic consumption had been “almost invisible”. Other growth initiatives are on the runway, notably legislation to restart building projects. But, unlike liberalisation, privati-

T

O EARN €136,000 ($181,590), a browse of the internet suggests, you need to be an IT operations director at a British firm, governor of New York state—or an usciere (usher) in the Italian parliament. An usciere’s duties include carrying messages, accompanying visitors and looking dignified in uniforms laden with gold braid. The sole occupational hazard is of a punch in the eye while intervening in the occasional brawl between lawmakers. Now, however, the uscieri face a second danger: a cut in their salaries. In May, Matteo Renzi’s government put a €240,000 cap on annual public-sector

Gold braid and a golden job sation and labour-market reform, infrastructure projects need money for take-off. Even before this week’s GDP shock, the government was struggling to find the resources it needed. On August 4th it withdrew plans to bring forward the retirement of school and university teachers after the treasury objected that there was not enough cash to pay them. The government’s spending plans for the rest of 2014 are based on an assumption of 0.8% growth by year’s end, and that now looks as likely as a summer snowfall in Sicily. If Italy is to respect its euro-zone budgetreduction commitments without yet more tax increases, deep spending cuts will be

earnings. That will directly affect “only” about 130 of Italy’s 2,300 parliamentary employees. But other salaries are to be reduced to keep pay differentials the same. Earnings of an usher nearing retirement are expected to drop over a threeyear period from €136,000 to a miserly €100,000-105,000. Last month several hundred parliamentary workers besieged a meeting of deputies who had gathered to agree on a draft plan. As the deputies left, they encountered a barrage of ironic applause and shouts of “Didn’t touch your own salaries, did you?” This unprecedented scene was a foretaste of the difficulties Mr Renzi faces as he attempts to take on entrenched interests in Italian society. The speaker of the lower house reminded the protesters that beyond Montecitorio, the palace housing the chamber, there was a real country—one where more than a decade of economic stagnation has reduced real GDP per person to the level of1998. Inside parliament, years of long service have kept salaries rising inexorably. Figures leaked to a television reporter last year showed that most parliamentary workers could expect their salaries to quadruple in real terms over a 40-year career. “The justification for all this is a word, ‘autodichia’, the doctrine that says parliament should have total freedom to manage itself so it does not come under pressure from the government,” says Sergio Rizzo, co-author of “La Casta”, a bestselling book on the privileges of Italy’s political class. Talks between the government and the trade unions representing the uscieri will take place in the next few weeks. They’ll need a big table: there are 11 unions who have members working in the lower house and 14 in the Senate. needed (of €15-20 billion by most reckonings). There is plenty of waste and extravagance to be tackled (see box). But unless the government acts quickly to free up markets and encourage rationalisation and efficiency, there is a risk that the cuts will simply subdue demand further, accelerating the downward spiral in which the economy is trapped. Mr Renzi, a digital-technology enthusiast, last month likened his programme of constitutional reform to the PIN of a mobile telephone. It is only when you have keyed in the number, he explained, that the telephone will work. But what if the battery has run down in the meantime? 7


The Economist August 9th 2014 31

United States

Also in this section 32 Presidents and growth 33 Congressional primaries 33 Colorado’s lively politics 34 James Brady and gun control 34 Streetcars and urban renewal 36 Southern accents 37 Lexington: The George H.W. Bush revival

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

Barack Obama’s message to business

Stop whining, I’m your friend

The president wants CEOs to play ball. He might have to change his own language

W

ITH two and a halfyears left in office, Barack Obama wants to shed his image as a president who is hostile to business. In an interview with The Economist last week aboard Air Force One, which was supposed to focus on foreign policy, Mr Obama introduced the subject of business and launched a strident defence of his record. Bosses, he argued, have not given him due credit for running the economy well. And rather than grumbling about the burden of regulation and casting him as a class warrior, chiefexecutives should think harder about society as a whole. The full interview is on our website. But Mr Obama’s impatience with Main Street is interesting, because the feeling is mutual. His administration provokes quiet fury from many corporate leaders: even Democrat-voting bosses moan about a White House that “doesn’t get it”. Some cite a president bent on redistribution and red tape as a reason not to invest in America. But who is correct? The president’s strongest card is macroeconomic policy (see chart). Mr Obama points to such measures as high stockmarket values, record corporate profits and job growth. How much of this he can claim credit for is a question debated by economists (see next story). But, given the mess that he inherited, it is hard to claim that he has done badly. Indeed, CEOs tend to give fairly high

marks to his economic team: they may not have enjoyed being lectured about Keynesian stimulus by Larry Summers and Tim Geithner, both now departed, but they sensed the economists knew their subject. The main complaints from business are threefold. First, Mr Obama rarely misses a chance to cast them as the bad guys. In a speech in Kansas City just before the interview, he raised whoops by lambasting “unpatriotic” companies which (perfectly legally) register their headquarters overseas for tax purposes—or, as he puts it, “stash their money offshore”. A fairer stance would be that America’s corporate-tax system is a mess, which the president deserves part of the blame for failing to fix.

The second element is more personal. In face-to-face meetings, the White House’s starting point is contempt. Bosses exchange horror stories about being herded in for photo-opportunities or being invited to the White House to suggest policy ideas—only to find themselves accused of special pleading. Sooner or later the CEOs mention Valerie Jarrett, who many depict as the commissar of the West Wing. In his interview, Mr Obama half fell into this stereotype, talking about CEOs only being motivated by shareholder value—a caricature that infuriates business leaders who spend much of their time dealing with “stakeholders” of one sort or another. Mr Obama duly retreated, but only a little. Yes, he accepted that CEOs spend a lot of time on corporate social responsibility, but he still sees a gap between their professed values and how their firms lobby in Washington: “My challenge to them consistently is, is your lobbyist working as hard on those issues as he or she is on preserving that tax break that you’ve got? And if the answer is no, then you don’t care 1 about it as much as you say.”

Bragging rights Corporate profits

S&P 500

% change on a year earlier

60

600

1,500

30

300

500

10

11

12

13

14

’000

2,000

1,000

2009

Monthly change in employment

0

+

+

0

0

30

300

60

600

90

2009

Sources: Thomson Reuters; Bureau of Economic Analysis; Bureau of Labour Statistics

10

11

12

13

14

900


The Economist August 9th 2014

32 United States 2

The third complaint is over-regulation. Businesses moan that the White House has become a red-tape machine. Mr Obama responds that businesses will always find some regulations inconvenient, which is fair. Asked about the crushing complexity of flagship laws passed on his watch, such as the Dodd-Frankfinancial reforms or the Affordable Care Act (“Obamacare”), he is defensive. Given a blank canvas and a calmer political environment, they could have been “far more elegant”. But democracy is “messy”, he explains. Even allowing for that, many commercial sorts would say that the White House underestimates the cost of complexity. Carly Fiorina, a former CEO of HewlettPackard (and a Republican) says large companies might be able to hire professionals to navigate America’s over-complex, uncompetitive tax and regulatory systems, but small firms and entrepreneurs cannot. Other CEOs argue that Mr Obama’s failure to rein in spending and simplify laws—typified by his decision to ignore the bipartisan reforms to entitlements and the tax system suggested by the Simpson-Bowles commission—will haunt America for a long time. Behind most ofthe antipathy sits one big issue and a lot of counter-productive language. The big issue is inequality. The president dismisses the idea that he is a class warrior. “Feel free to keep your house in the Hamptons and your corporate jet,” he assures the wealthy. That may be hard to take from a politician who has cited tax breaks on private planes in many a campaign speech. But there is no doubt where his sympathies lie. In Kansas City Mr Obama declared that the “challenge of our time” is creating an economy that works for all America, which he defines as one in which workers earn enough to send their kids to college and—after 20 or 30 years—retire with dignity. To the president, after two decades of middle-class wage stagnation, the bestpaid need to avoid sounding ungrateful. “The folks who don’t have a right to complain are the folks at the top,” he said. That will always put Mr Obama to the left of many corporate leaders. But the man on Air Force One was also plainly a long way from the socialist ogre that boardrooms fear. On a lot of issues, from immigration to infrastructure and even climate change, this generally pragmatic president is closer to Main Street than the Republicans are. But his language—about tax-dodging companies and Hamptons swimming pools—does not help him. Here is one piece of advice: Businessmen have a different set of delusions from politicians, and need, therefore, different handling. They are, however, much milder than politicians, at the same time allured and terrified by the glare of publicity, easily persuaded to be “patriots”, perplexed, bemused, indeed terrified, yet only too anxious

to take a cheerful view, vain perhaps but very unsure of themselves, pathetically responsive to a kind word. You could do anything you liked with them, if you would treat them (even the big ones), not as wolves or tigers, but as domestic animals by nature, even though they have been badly brought up and not trained as you would wish. It is a mistake to thinkthat they are more immoral than politicians. If you work them into the surly, obstinate, terrified mood, of which domestic animals, wrongly handled, are so capable, the nation’s burdens will not get carried to market; and in the end public opinion will veer their way.

This is from a private letter that John Maynard Keynes sent to Franklin Roosevelt. Business bosses often clash with politicians, but today’s gulf of mutual distrust is unusually wide. Mr Obama could probably do more to bridge it. 7

Presidents and growth

Timing is everything Why the economy has grown faster under Democratic presidents

“S

INCE 1961…the Republicans have held the White House 28 years, the Democrats 24,” said Bill Clinton in 2012. “In those 52 years, our private economy has produced 66m private-sector jobs. So what’s the jobs score? Republicans 24m, Democrats 42[m].” In the two years since, Barack Obama has increased the Democrats’ lead by close to 5m. Since the second world war the economy has done better under Democratic presidents, who have overseen more job creation and higher stockmarket returns than Republican leaders. During this time the economy has grown about 1.8 percentage points faster when a Democrat occupies the White House (see chart). Messrs Clinton and Obama credit their economic policies. But new research suggests it has more to do with luck. Alan Blinder and Mark Watson, economists at Princeton University, studied the last 16 presidential terms—from Harry Truman’s second to Mr Obama’s first—to find out why the economy has grown faster under Democrats. They were quickly able to rule out some possible explanations, like a president’s age and experience, or which party controlled Congress. Though one might surmise that Democratic presidents inherited hardier economies than Republican ones, they actually tended to take over when times were more difficult. Messrs Blinder and Watson then looked at the impact of fiscal and monetary policy. But neither seemed to explain why the economy favoured Democratic

presidents. The average difference in the federal budget deficit between Democratic and Republican administrations is too small to be significant, concluded the authors. And though the parties have different tax philosophies, changes to policy have had little influence on growth. Ronald Reagan slashed taxes for the rich, whereas Mr Clinton raised them. Still, both presidents presided over impressive economic expansions. Interest rates have generally risen under Democrats and fallen under Republicans, so any advantage from monetary policy “would seem to have favoured Republican presidents”, say the authors. If anything, both fiscal and monetary policy “seem to be a bit more stabilising” under Republican presidents. Much of the growth under Democratic presidents has been the result of privatesector investment and increased consumption. They have been blessed with lower oil prices, larger increases in productivity and better global economic conditions. The timing of Democratic presidents appears impeccable compared with Republicans—Mr Clinton took office just as the technology sector began to boom, whereas George W. Bush could not get out before the financial crisis. But it is not all down to luck. Oil prices were affected by the Gulf and Iraq wars. Mr Clinton’s budget cuts probably helped facilitate the long growth spell of the 1990s. And Mr Bush’s housing policy (along with that of his predecessors, including Democrats) did little to discourage the risky loans that fuelled the meltdown in 2008. In the end, the authors are probably right to conclude that the growth gap between Democratic and Republican presidents is explained by good luck, with perhaps a touch of good policy. 7

The lucky left Average annualised GDP growth by presidential term %

0

1

2

3

4

5

6

7

Democratic average Republican average

Truman (2nd) Eisenhower (1st) Eisenhower (2nd) Kennedy-Johnson Johnson Nixon Nixon-Ford Carter Reagan (1st) Reagan (2nd) Bush Clinton (1st) Clinton (2nd) G.W. Bush (1st) G.W. Bush (2nd) Obama (1st) Source: “Presidents and the US Economy”, by A.S. Blinder and M.W. Watson


The Economist August 9th 2014

United States 33 Colorado politics

Ground war LOVELAND, COLORADO

What a row about fracking says about politics in America’s liveliest state

E

Immovable incumbents GRAND RAPIDS, MICHIGAN

The Republican primaries have produced fewer upsets than expected

J

WYOMING

t o n F r

Loveland Boulder

150 km

NEBRASKA Fort Collins Longmont Lafayette Broomfield

Denver

C O L O R A D O

Presidential election voting, 2012 Obama Romney

KANSAS

g e R a n

S N T A I N M O U

won by seven points. Drawing conclusions about the Republican Party from these results is difficult. For starters, both incumbents faced underwhelming challengers. Mr Ellis’s campaign was so vicious that Mr Amash refused to take his congratulatory phone call. Dr Wolf, a second cousin of Barack Obama, ran a cleaner campaign and did better than expected. But he was tripped up when it was discovered that he had posted X-rays of his patients on Facebook along with crude jokes about them. The Republican primaries in Kansas and Michigan, and others elsewhere this year, seem to say more about the power of incumbency than anything else. With just a few notable exceptions—such as Eric Cantor, the former House majority leader, who lost in June—those already in office have faced down challenges from candidates of all stripes. Indeed, Mr Roberts’s victory makes it probable that for the first time since 2008 no incumbent Republican senator will lose a primary. But the campaigns have raised the question of what makes a politician truly conservative, a mantle grasped by nearly all of the Republican candidates. For Mr Amash it is a devotion to liberty that does not always suit Republican priorities. For Mr Roberts it seems less about ideology and more about partisan loyalty. Republican leaders in Congress have had a difficult time accommodating these competing visions. Judging by the primaries, their job will not get any easier. 7

Y C K R O

USTIN AMASH, a congressman, represents one of the most conservative parts of Michigan. Pat Roberts (pictured), a member of the Senate, represents one of America’s most conservative states. After hard-fought campaigns both men won their Republican Party primaries on August 5th and now look likely to retain their seats. The similarities end there. Mr Amash, who is 34, was first elected to the House of Representatives in 2010, riding the Tea Party wave that wiped out both Democrats and old-school Republicans. A staunch libertarian, he has alienated some in Congress with his stubbornness, which has earned him the nickname “Dr No”. He tried to oust John Boehner as Speaker and was duly punished, losing his seat on the budget committee. Sensing an opportunity, business-minded Republicans backed Mr Amash’s challenger in the primary, Brian Ellis. But Mr Amash whipped him, winning by 15 points. Pro-business Republicans have little beef with Mr Roberts, who is 78, but conservative insurgents were out for his blood. Having served 33 years in Congress (17 in the Senate), Mr Roberts is the epitome ofan establishment Republican. The main charge against him was that he had become too comfortable in Washington. He admitted frankly that he owned no home in Kansas and visited the state “every time I get an opponent”. His opponent this time, Milton Wolf, a doctor, was supported by national and local Tea Party groups, but it was not enough in the end. Mr Roberts

UTAH

Congressional elections

VERY February thousands of American romantics send their Valentine’s Day cards via Loveland, a small city north of Denver, where they are stamped with a cheesy poem and sent on. But in recent months, as Loveland has found itself on the front line of Colorado’s fracking wars, the mood has been darker. Locals, complaining that energy firms were threatening their children’s health and poisoning water supplies, placed a moratorium on the ballot. B. J. Nikkel, a former state legislator who campaigned against the ban, found herself compared to Joseph Goebbels. Television ads depicted anti-fracking campaigners as semi-crazed flat-earthers. Ms Nikkel prevailed in Loveland, but the row dragged on. State and industry lawsuits flew against other cities that passed bans, and campaigners, egged on by Jared Polis, a maverick Democratic congressman, circulated petitions for other anti-fracking ballot measures. Republicans countered with industry-friendly proposals. The issue threatened to overshadow two close elections: for governor, and one of the state’s two Senate seats. That fear faded on August 4th, the deadline for petitioners to submit their signatures. Alongside an ill-at-ease Mr Polis, John Hickenlooper, Colorado’s Democratic governor, announced a deal between the warring parties: the fracking initiatives and a state lawsuit would be withdrawn and a group formed to frame new rules. Most Democrats (and energy firms) sighed with relief. Continued hostilities would have drawn out-of-state money and imperilled their candidates, even if they opposed the measures. The row sheds light on Colorado’s lively brand of politics. Much of its energy re- 1

Cities that voted on fracking moratoria Vote passed Vote did not pass Shale basin Sources: EIA; The Economist

Tight-gas basin


The Economist August 9th 2014

34 United States 2 serves lie in or near densely populated

parts of the Front Range (see map). Leftleaning souls from places like California have flocked there, as well as to Denver itself. They have greened the state’s politics; along with a fast-growing Latino population they are nudging Colorado, once a Republican stronghold, leftward. Barack Obama’s coalition of the young, nonwhites, gays and women has won him Colorado twice, and the Democrats control both houses of the state legislature. But that is only halfthe story. Democratic success in Colorado is also due to a wellfunded, well-organised state party and a Republican tendency to pick crackpot candidates. Registered Republicans still outnumber Democrats. “Anyone who says Colorado is a left-leaning state is high,” says Ted Trimpa, a Democratic consultant who counts marijuana interests among his clients. A delicate partisan balance, a polarised legislature (second only to California’s, according to recent research) and a widely used initiative system have made Colorado a testing ground for virtually every contentious issue in American politics, from gay marriage to gun control to the death penalty, and now fracking. Frustrated by years of defeat but convinced Colorado was still fertile ground, this year Republicans recruited Cory Gardner, an affable congressman who represents the state’s east, to challenge Mark Udall, a Democrat, for the Senate seat he won in 2008. Mr Gardner is no moderate: last year National Journal, a magazine, declared him one of the most conservative members of the House of Representatives. But he is a more presentable candidate than the last Republican to run for a Colorado Senate seat, who compared homosexuality to alcoholism and said primary voters should back him over a female rival because he didn’t wear high heels. Each candidate paints himself a paragon of reason and his opponent an extremist. And each has had awkward moments. Mr Gardner wriggled over a “personhood” measure on the November ballot that would grant fetuses legal rights. Coloradans have twice rejected similar measures; Mr Gardner backed them but says he has changed his mind. Mr Udall, whose Senate voting record is staunchly loyal, has gone to great lengths to avoid being seen with Barack Obama, including staying away from one of his own fund-raisers. Colorado could prove crucial to the Republicans’ hope of capturing the Senate. Polls show Mr Udall slightly ahead, but that could change if national opinion turns against the Democrats. Campaign money has poured in; the Koch brothers, conservative industrialists, are spending for Mr Gardner and Mr Udall is backed by Tom Steyer, a green Californian billionaire. In Loveland, fractivists are plotting their next move. “This war isn’t over,” growls one. 7

Gun control

Bullets to the head WASHINGTON, DC

Why James Brady’s shooting led to gun control, but Gabby Giffords’s did not

W

HEN James Brady (pictured, left), who at the time was Ronald Reagan’s press secretary, was shot in the head during a failed assassination attempt on the president in 1981, newscasts reported that he was dead. This proved premature: Mr Brady died on August 4th. After the shooting, he went on to become the country’s most successful advocate for gun control. Under a law that bears his name, over 2m applications for firearm purchases have been turned down after background checks revealed that their owners were not the sorts of people to be trusted with a Glock. Since Gabby Giffords, a congresswoman from Arizona, was shot in the head in 2011, no federal gun-control laws have passed. The different responses reveal much about what has changed in the triangular relationship between Americans, guns and politicians between the two shootings. Congress has passed laws that make it impossible to know for sure how many Americans own guns, but polling data suggest that the number who do has decreased since Mr Brady was shot. Rather than make it easier to pass laws, this has made it harder: small, energetic groups have more sway over Congress than ones that are larger and more diffuse. It took 12 years from the shooting of Mr Brady to the passing of background checks, so it is too early to conclude that Mrs Giffords’s wounds will not eventually result in something similar, such as a ban on the kind of oversized magazines that her shooter used. But the chances of that look remote. One reason is the pattern that follows

high-profile shootings. After the murder of 20 children and six adults at a school in Newtown, Connecticut in 2012, the National Rifle Association (NRA), the biggest group representing gun owners, claims that its membership increased. This is not as strange as it seems. Shootings that make headlines lead to calls for gun control. Though these mostly fail, they provoke a pushback from pro-gun groups, which warn their members of federal plots to take their guns away. Though some states passed gun-control measures in the year after the Newtown massacre, many others ended up with more permissive laws than before. Gun enthusiasts have had particular success with laws that allow people to carry concealed weapons, leading to a boom in sales of specially-made shirts that allow their wearers to draw quickly. Polling by Pew suggests that three-quarters of NRA members support the expansion of background checks to cover purchases made at gun shows or online, a loophole in the Brady law. The organisation’s bosses, however, take any measure that restricts access to guns to be a small step towards a final destination of an America disarmed. Its scorecards are the most popular way for voters to assess a candidate’s soundness on guns, so congressmen often vote with them in mind, even if that means voting against laws that most NRA members support. Such was the case with a modest bipartisan attempt at federal gun control in the wake of Newtown. Like so many before, it failed. 7

Streetcars and urban renewal

Rolling blunder WASHINGTON, DC

Federal subsidies have inspired some silly transit projects

L

ATE and over budget, streetcars are finally rumbling to life in Washington, DC. The long-awaited service, which has cost at least $135m to build, spans 2.4 miles along H Street in the city’s north-east. But it is not taking passengers yet. Operators are still learning how to drive the electric trains, which may come into service by the end ofthe year. In the meantime, locals can hop on the bus: plenty of them already ply this route, and often at a faster clip. Most American cities paved over their streetcar tracks decades ago, deeming the services slow, rickety and inconvenient. Commuters have long preferred cars and buses. But streetcars—sometimes known as trolleys or trams—are making a comeback. Services are rolling out in at least 16 American cities, with dozens more in the works. Even bankrupt Detroit has begun 1


The Economist August 9th 2014

36 United States 2 work on a three-mile line that is expected

to cost $137m. Fans say streetcars create jobs and spark urban investment. Developers like them because they run on fixed tracks, which means official commitment to a route is locked in. Boosters point to Portland, Oregon, which unveiled America’s first streetcar line with modern vehicles in 2001. One study found that the city’s westside line attracted new business and housing valued at more than 24 times its construction cost. Plans in Atlanta and Tucson have similarly generated hundreds of millions of dollars in private investment and raised property values. The District’s H Street neighbourhood has been moving upmarket for years, but some credit the promise of a streetcar with accelerating development. Others are more sceptical. The relationship between streetcars and development is not clear, say researchers funded by the Federal Transit Administration (FTA). In cities where streetcars have led to urban renewal, they are part of larger, heavily subsidised development plans, with changes in zoning, improvements to streets and other upgrades. And while streetcars are cheaper than other rail projects, they are still costly to build and maintain. Operating expenses are more than twice those for buses, according to data from the FTA, and capital costs are hefty. Tucson’s project, for example, cost nearly $200m and opened years late, in part because the city had to clear utilities from under the tracks, install overhead electrical connections and repave much of the four-mile route. All this investment might make some sense if streetcars offered an efficient way to move people around. But here, too, the evidence is flimsy. Unlike European trams, which often cover long stretches in independent lanes, American streetcars tend to span walkable distances and share the road with other vehicles. This means they

A streetcar named desire

Regional accents

Mind that drawl, y’all GREENVILLE, SOUTH CAROLINA

Southern speech still draws unwanted attention

“I

N AMERICA we do not care what a man talks; for we know that the sentiment back of the words will be American,” wrote Mark Twain to a friend in 1892. Those with regional accents may wish as much were true today. But New Yorkers wanting “cawfee”, Californians up for a “hella” good time, and Georgians ordering hot “dawgs” are often mocked. Southern accents elicit particularly harsh reactions from many Americans. With this in mind, the Oak Ridge National Laboratory in Tennessee planned to host a weekly “Southern Accent Reduction” class, inviting prospective participants to “be remembered for what you say, not how you say it”. But the six-week course was cancelled last month after workers complained. The laboratory’s spokesman admitted that “it probably wasn’t presented the right way.” Technically speaking, no single southern accent exists: varieties include a fading classical strain, whose speakers diminish the letter “r”, and the common lowland lilt. But they have certain aspects in common. For example, a process called glide deletion—which makes two vowels

inch along with traffic, often at less than 12 miles per hour, on tracks that make it impossible to navigate busy streets or ride around obstacles. Indeed, their slow speeds and frequent stops mean they often cause more congestion. A bus route could move up to five times more people an hour, says Randal O’Toole of the Cato Institute, a think-tank.

sound like one—lengthens the “i” in “pie” across the region. Loose grammar and indulgent vowels mean the southern accent is often associated with stupidity, says Jennifer Cramer of the University of Kentucky. Two in five Americans think it makes the speaker sound “uneducated”. The bias is learned early and is not limited to northerners. In one study, nine- and ten-year-old children in Illinois and Tennessee said people with northern accents sounded “smarter” and more “in charge” than those with southern drawls. On the other hand, southerners are thought to be more honest and nice on account of their speech. A survey by Cupid.com, a dating website, found the southern accent to be the sexiest in America (think Scarlett O’Hara and Rhett Butler). Still, many southerners want to tone it down. Natalie Baker Shirer, an instructor at Carnegie Mellon’s school of drama, has helped bankers, lawyers and even a priest change the way they talk. “Everyone has their own true voice, their own music, but people need to make themselves understood,” says Ms Shirer. If streetcars are so slow and costly, why are there suddenly so many? Because federal subsidies have encouraged them. Under Barack Obama the Department of Transportation has made grants of up to $75m available to “small” projects that promise to revitalise urban areas and cut greenhouse-gas emissions. They need not be cost-effective in the conventional sense if they make a place more liveable or offer other vague benefits America’s streetcar revival is gobbling up funds that might otherwise go towards cheaper, nimbler forms ofpublic transport, such as buses. This is not only wasteful, but tends to favour better-off riders, such as tourists and shoppers. Poorer residents are mainly served by buses, if at all, says Daniel Chatman of the University of California, Berkeley, who studies regional planning. “The economics of many light-rail and streetcar projects is abysmal,” he adds. Well-designed bus routes can spur development, too, and at far lower cost, says Adie Tomer of the Brookings Institution, a think-tank. According to the Institute for Transportation and Development Policy, another think-tank, Cleveland’s rapid-bus service has attracted $5.8 billion in private investment along its 6.8-mile route. It was built in 2008 for around $50m—just a third of the cost of the District’s streetcar. 7


The Economist August 9th 2014

United States 37

Lexington The George H.W. Bush revival Americans miss George Bush senior, but that doesn’t mean he could get elected today

T

WO decades since losing the presidency after a single term, George Bush senior is in fashion. No living ex-president enjoys higher net approval ratings (though his successor, Bill Clinton, comes close). George W. Bush has written a loving book about his father, out in November. Two other books are in the works (one wistfully titled “The Last Gentleman”). They follow admiring television biographies on HBO and PBS. The establishment cheered Mr Bush’s 90th birthday in June, which the former navy pilot marked with a parachute jump. “Happy 90th to our former boss,” beamed the CIA, tweeting a picture from Mr Bush’s security badge as agency director. Sailors on the USS George H.W. Bush, an aircraft-carrier, formed the message “41=90” on their flight deck. The Republican National Committee (RNC) hailed Mr Bush’s WASP-ish sense of style, selling socks in the vivid colours loved by the ex-president, a “sock man”. In May the John F. Kennedy Presidential Library gave Mr Bush its “Profile in Courage Award”, casting his1990 pact with a Democratic-controlled Congress to raise taxes as an act of patriotic selfsacrifice. In the Kennedy library’s telling, Mr Bush put country above his 1988 campaign pledge, “Read my lips: no new taxes”, though that promise-breaking threatened his career. Political nostalgia is complicated: the collective memory is often fuzzy. Mr Bush’s original tax vow was a desperate bit of pandering that aides knew would haunt him; as the 1992 election neared he called the tax rises a mistake. When voters sigh for a leader they once jeered, they are mostly expressing unhappiness about the present, rather than changing their minds about the past. Clues about modern politics lurk within this Bush boom. There are many reasons why a man mocked as a buttoned-up toff—for citing his mother’s advice, “Nobody likes a braggadocio, George”, or woodenly assuring a New Hampshire crowd, “Message: I care”—is now praised for his modest reticence and bipartisan dignity. At 90, less of a premium is placed on being in touch. But Mr Bush’s awkward authenticity is also a rare quality in today’s slick, poll-tested, teleprompter politics. In a partisan age, Mr Bush earns credit for policies that steered between extremes. Start with foreign policy. A generation ago his swift, limited Gulf war left the Right asking why coalition forces had not rolled on to Baghdad and toppled Saddam Hussein. Con-

servatives and Democrats in Congress grumbled about his handling of the Soviet block’s collapse, faulting him for showing little “elation” as the Berlin Wall fell. “I’m not a very emotional kind of guy,” retorted Mr Bush, who was in fact quietly seeking Russian consent for a unified Germany inside NATO. Today, few ask why he did not take Baghdad and foreign-policy grandees long for a muscular realist like Mr Bush. That is a reaction to George W. Bush’s rashness. But it also reflects anxiety that Barack Obama’s sober doctrine for American power—first, do no harm—has veered into not doing much at all. The elder Bush steered between other extremes. He increased quotas for family immigration and skilled workers but vowed to deport more foreigners under his “war on drugs”. A former oil man, he passed clean-air laws. He fretted about government spending while defending public service as a calling. Mr Bush visibly disliked the hucksterish business of campaigning (Timothy Naftali, a biographer, once described him looking as unhappy at a debate as a child “dropped off at the wrong birthday party”), yet he let aides run brutal attack ads. He clashed with tribunes of the new Right in Congress, notably Newt Gingrich, the future House speaker, but also railed at “carping little liberal Democrats”. Nearly 22 years ago the middle way led to defeat, squeezed between Mr Clinton and conservative and populist critics, including the independent presidential candidate Ross Perot. Does surging Bush-nostalgia signal that America would now elect his modern equivalent by a landslide? Oddly enough, no—mainly because he would not be chosen by today’s Republicans. It is not hard to design a thought experiment, pondering what would happen if the 41st president were 30 years younger and running for office today. For his politics runs through the veins of Jeb Bush, his second son, former governor of Florida and an icon of the Republican Party’s “governing” wing. Establishment types long for Jeb to contest the 2016 presidential election (others might agree with Jeb’s mother, Barbara, that it is time to let other families have a turn, beyond the Kennedys, Clintons and Bushes). But doctrinaire conservatives loathe Jeb for his moderate line on immigration and for supporting the Common Core, national education standards that hardliners call a liberal plot to brainwash kids. Their hostility would make a Jeb Bush candidacy a costly slog. Similar forces obliged another technocratic friend of business, Mitt Romney, to tackrightwards to win the 2012 Republican nomination, hurting him in the general election. Not his grandfather’s Republican Party Ask conservatives about those paying tribute to George H.W. Bush—the RNC, the CIA, big TV channels and the Kennedys—and they might struggle to say which they distrust more. Bowing to the times, George P. Bush, Jeb’s son, calls Mr Gingrich a political role model as he campaigns to become Texas land commissioner, his first run for office. It is conceivable that the presidential candidate closest to the elder Bush could be a Democrat, Hillary Clinton, a wonkish pragmatist and foreign-policy realist—though her best friends could not call authenticity her strong point. Even then, her party’s Left will demand concessions if she runs. The problem is structural. Centrists still fill big jobs in business and the public sector, but control the beating heart of neither party. Bush-nostalgia is surging in a country stalked by populism. Missing the 41st president is one thing. Reviving the America that could elect someone like him, quite another. 7


38

The Economist August 9th 2014

The Americas

Also in this section 39 Brazil’s presidential election 39 NAFTA’s bickering junior partners 40 Bello: Argentina after the default

For daily analysis and debate on the Americas, visit Economist.com/americas

Cuba and the outside world

Rekindling old friendships MARIEL

Cuba is once again resorting to geopolitics to support a failing economy

C

ARLITO, a wiry man with greying hair, sits under a palm tree in Mariel, a town on a bay 40km (25 miles) west of Havana, sipping rum and watching a container ship edge out towards the Caribbean. He recalls seeing a flotilla of smaller boats leaving from this same spot in 1980, carrying thousands of opponents of the Castro regime to Florida in the “Mariel boatlift”. Those were politically charged times. Government trucks would come to his school to deliver eggs for him and his friends to throw at the people fleeing. About a decade and a half later, after the collapse of the Soviet Union in 1989 plunged Cuba’s economy into crisis, sources of protein were so scarce that Carlito recalled those wasted eggs with bitter regret. Some “Marielitos”, as those who fled are known, returned recently and Carlito was stunned at how prosperous they had become. “We used to call them traidores (traitors),” he chuckles. “Now we call them traedolares (bring dollars).” Across the bay from where Carlito sits is a $900m container port, which was built with Brazilian money and inaugurated in January. There are plans to develop a special economic zone alongside it, modelled on the thriving export hubs, such as Shenzhen, that China developed from 1980 onwards. The port is part of a vision for Cuba that relies less on Cuban-American gusanos (worms) sending remittances to prop

up the local economy, and more on an inflow of foreign investors. But Carlito is keeping his excitement in check. Construction workers building the container terminal were paid a mere 250 pesos ($10) a month, he says, so the ramshackle town has yet to benefit from the development. None of the 23 firms who have sought licences to operate in the special economic zone has yet been granted one. Even Joaquín Infante, the 88-year-old vice-president of the slow-moving National Association of Cuban Economists and Accountants, urges speedier authorisation of investment. “We need to be more flexible and take more risks,” he says. Despite reforms that have brought some big changes to Cuba in the form of private restaurants, bed-and-breakfasts and new co-operatives, the economy has virtually ground to a halt. In the first half of the year GDP grew by just 0.6%, leading the government to reduce its estimate for fullyear growth to 1.4%. That is lower than the 2.7% annual average figure since Raúl Castro (pictured on the right, with Vladimir Putin) became president in 2008. Investment is the root of the problem. In a report in July, two Cuban economists, Omar Everleny and Ricardo Torres, estimated that the growth in Cuba’s capital stock, such as machinery and buildings, fell to 7.8% of GDP last year, close to its level of 5.4% in 1993 when the economy was in

serious trouble. (In Latin America as a whole the figure is above 20%.) From the 20th floor of the Habana Libre, a run-down hotel, not one crane can be seen on the skyline. “The economy is screwed,” says a Havana-based diplomat. Supporters of the regime argue that the reforms simply need more time. A profitoriented reorganisation of state-owned behemoths, such as the sugar monopoly, could be promising; it is just that the bureaucrats who run them are slow to change. Critics, however, see a fundamental flaw in the reform model. Although it has sought to give some people more freedom in what they make and sell, the state keeps a stranglehold on the inputs they need for those businesses, such as seeds for growing crops, or sauces and spices for restaurants, or spare parts for taxis. It has cracked down on “mules” bringing in such goods on passenger planes from abroad. Bad pennies Diplomats say such counter-measures will make it harder for Cuba to attract the $2.5 billion in annual foreign investment that the regime aims for. Some also reckon the financial squeeze on the island has tightened this year in the wake of the case against BNP Paribas, a French bank, for evading American sanctions on doing business with Cuba, among other places. That is why Cuba-watchers have paid close attention to the visits of Russia’s president, Vladimir Putin, and China’s leader, Xi Jinping, in recent weeks. Though both men offered few concrete investments in Cuba, they provide an opportunity for the Castro regime to start reducing its dependence on its closest ally, Venezuela, whose pro-Cuba government has been rocked by instability this year. Says Mr Infante: “We have to diversify and not depend on just 1


The Economist August 9th 2014 2 one partner.” He hopes that means more

Chinese and Russian investment in Mariel. One envoy says the regime also prefers such investments to Western capital because it sees neither China nor Russia as a “Trojan horse” working towards regime change. A Cuban economist sees uncanny parallels with the special terms offered to the Soviet Union in the cold war. “The mentality of the decision-makers is to talk to Russia, talk to China, and make them offers based on politics,” he says. “But this is the same mentality we had in the past… and it didn’t do much for productivity.” Cuba’s courtship of Russia is particular-

The Americas 39 ly striking: a day after Malaysian Airlines flight MH17 was shot down, Fidel Castro publicly blamed Ukraine’s government. Such an overtly pro-Russian stance on Ukraine may hinder political negotiations that started this year between Cuba and the EU, diplomats say. It also makes it harder for Barack Obama to improve America’s relations with Cuba, let alone consider an end to the counter-productive 54-year-old embargo. Back in Mariel, Carlito wants good relations with everyone, especially America. “Luckily we Cubans have a lot of patience and patience is good,” he says. “Without it there’s just frustration.” 7

Brazil’s presidential-election campaign

A tightly scripted telenovela SÃO PAULO

Political airtime on TV follows a strict schedule. Will it matter?

B

RAZILIANS love television. Nearly all households own a set, more than do a refrigerator. Over two-thirds of the population watch it every day. In the eyes of the state, that makes television too potent a tool to let politicians—or broadcasters— wield it as they please. On August 4th the evening news on Brazil’s dominant TV Globo network began showing daily reports from the presidential campaign trail—but only according to an elaborate schedule. In the name of fairness and compliance with rigid rules dating to 1997, it affords President Dilma Rousseff and her two main rivals one minute each of daily campaign coverage. To ensure a level playing field, the law also bars candidates from buying TV ads with their own cash. Instead, the exche-

Do they count the words?

quer pays all free-to-air channels 80% of market rates to run commercials produced by parties and their hopefuls. Most will be broadcast from August 19th until polling day on October 5th, three times a week in two 25-minute blocks. These ads, together with similar ones for local and congressional races, will cost taxpayers an estimated 840m reais ($368m). This “free” television time will be split between presidential candidates using a complicated formula which is largely based on the size of electoral alliances. The going rate for one minute in each block of airtime is a cabinet portfolio. In June Ms Rousseff replaced her transport minister after a junior partner threatened to pull out of her coalition and to hand its 60 seconds to Aécio Neves, her principal challenger. She now has nearly 12 minutes, more than twice Mr Neves’s tally. One voter in four relies on commercials for information about candidates. Studies have shown a correlation between the amount of television time they receive and success in local and congressional polls. Little wonder that TV production costs eat up the biggest chunk of Mr Neves’s war chest, according to Otávio Cabral, his media co-ordinator. Yet the last time commercials swayed a presidential race was in 1989, when the telegenic Fernando Collor beguiled voters with slick tricks such as newfangled computer graphics, notes David Fleischer of the University of Brasília. Since then, he says, commercials have at best sustained candidates’ trajectories rather than changed them. That may be enough for Mr Neves. He currently trails Ms Rousseff by 16 percentage points in the first round. But that is down from 23 points in April. And recent polls for the first time showed him neckand-neck with the president in a run-off.

NAFTA’s junior partners

She loves me, she loves me not MEXICO CITY AND OTTAWA

Why America’s two neighbours don’t get along

C

ANADA and Mexico share the fortune, or misfortune, of a border with the world’s most powerful country, which looks down on both of them. For 20 years, as privileged trading partners ofthe United States, they have had the opportunity to influence it by creating a shared vision for North America. Instead the two have bickered like rivals in a tawdry ménage a trois. Canada plays the part of the wronged partner. It has jealously sought to protect the relationship with its neighbour, fearing that Mexico may steal its thunder. “Canada is quick to give offence and Mexico is quick to take it,” says Laura Dawson, author of a report on the bilateral relations for the Canadian Council of Chief Executives, a business group. That could be shrugged off as irrelevant in a region where the only bond that matters is with the United States. But there are economic costs for North America as a whole, including the United States, because more could be done to link supply chains and energy markets trilaterally rather than just bilaterally. Canada was a reluctant participant in the negotiations for the North American Free Trade Agreement (NAFTA), which was launched in 1994. It agreed to join largely to safeguard the advantages it had won from a prior free-trade deal with the United States. After the terrorist attacks on September 11th 2001, efforts to strengthen NAFTA through trilateral negotiations lost momentum. Instead, the United States, Canada and Mexico have sought to tackle border and security issues bilaterally. Relations between Canada and Mexico have become more brittle this year; the leaders of both countries have pointedly snubbed each other. Visas are the cause of much of the ill will. President Enrique Peña Nieto cancelled a visit to Canada in June, after the government of Stephen Harper refused to lift a “temporary” visa requirement imposed in 2009 following a sharp rise in Mexican asylum requests. Mexico feels demeaned: it used to enjoy visa-free status in Canada, which is rare for a Latin American country. “President Peña would not subject himself to the horrors of having to present a visa,” says his ambassador in Ottawa, Francisco Suárez Dávila. Mr Peña had hoped that a meeting with Mr Harper earlier this year, on the sidelines of the “three amigos” summit with President Barack Obama, would lead to a breakthrough on the issue. But Mr Harper publicly refused to budge, saying visas were a 1


40 The Americas 2 sovereign matter and not for negotiation.

Mexican experts say the visa issue represents more than just wounded pride. They acknowledge that Mr Harper’s government originally responded to a rise in spurious asylum claims at a time of soaring crime in Mexico. But the situation has improved since and they are irked by the unwillingness to discuss the issue even though business and tourism between Mexico and Canada have been affected. Business groups in both countries are keen to see warmer ties. Although trade between the two countries under NAFTA has grown almost sevenfold, most of it is

The Economist August 9th 2014 linked to the United States, and two-way investment is modest. There is potential to develop supply-chain linkages of the sort that now criss-cross the border between Mexico, the United States and Canada, but only a few Canadian companies—such as Bombardier, an aerospace and rail firm— have taken the plunge. The most promising area for further integration of the three economies is energy, which could further strengthen North America’s competitiveness as a manufacturing hub. Mr Peña’s scrapped visit to Canada’s oil heartland, Calgary, was supposed to give him a chance to promote

landmark reforms allowing private investment in the oil and gas industries for the first time in over 75 years. On August 7th and 8th senior officials from both countries were due to meet in Mexico city to revive negotiations on the visa issue. A recent decision to expedite permits for seasoned travellers from Mexico to Canada was seen as a mildly positive step. Yet Mexican officials have little optimism that Mr Harper will scrap the requirement altogether. Many will quietly hope that the more Mexico-friendly Liberals will oust him from power in elections scheduled for October 2015. 7

Bello The palindrome of Kirchnerismo Default gives Argentina’s president a political advantage, but not for long

I

T IS a rainy Saturday morning, three days after Argentina defaulted on part of its foreign debt. In a damp and flimsy shack in Salas, a settlement of muddy lanes and foul streams on the outskirts of Buenos Aires, Ramon Gallardo and his neighbours listen attentively to staff from TECHO, a housing charity. They are briefing residents about the 15 one-room huts they will build in return for a nominal contribution of money and labour. TECHO has erected many of its sturdy, weather-proof huts in struggling Haiti. But there are takers in rich Argentina, too. Many of them are among the 20-30% ofArgentines who, according to unofficial estimates, live in poverty despite a decade of economic growth. Now Mr Gallardo is worried that his work as a casual building labourer will dry up. “They told me the job I’m on will stop because of the default,” he says. Urban myth or not, this perception highlights the risk that President Cristina Fernández de Kirchner has run by choosing to scotch last-minute talks and defy an order by Thomas Griesa, a New York judge, to settle with hedge funds that are demanding full repayment oftheir Argentine bonds. As a result, Judge Griesa blocked a payment to some of Argentina’s foreign bondholders who took part in debt restructurings in 2005 and 2010 and hold 93% of the debt. That, in turn, precipitated the default on July 30th. Ms Fernández and Axel Kiciloff, her inexperienced economy minister, rail that Argentina is once again being mistreated by speculative “vulture funds”, and by a judge who appears out ofhis depth. Some of these points have merit. But unlike the last time Argentina defaulted in 2001, it is not insolvent. Ms Fernández and her late husband and predecessor, Néstor Kirchner, could have dealt with the “hold-out”

creditors years ago by quietly buying up their bonds. Even now, her officials have offered the judge no alternative solution and seem to have no clear negotiating strategy. Instead, the president has opted to try to turn this battle into a nationalist epic. That offers an immediate, albeit slight, political dividend: her approval rating has crept up to over 40%. In this she is being true to type. In 11 years in power the Kirchners have preferred nationalism and confrontation to pragmatism and professional competence, while focusing relentlessly on the short term. When the economy was rebounding from the collapse of 2001-02, and was helped by a big rise in world prices for Argentina’s farm exports, “they discovered that they could govern for ten years solving each day’s problems,” says Luis Alberto Romero, a historian. “But now those problems are mounting up.” Even before the default, the economy was set to contract by about 1.5% this year. Businesses are laying off workers, or cancelling overtime. The current account and the public finances are both in deficit. Inflation is at 39%, according to Elypsis, a consultancy. On the black market a dollar costs

nearly 50% more than it does at the official exchange rate. With foreign-exchange reserves dwindling, Ms Fernández had begun to settle the disputes with investors that prevent Argentina drawing on international credit. Her priority had seemed to be to reach the end of her term in December 2015 in reasonably good order. That now looks harder. How much worse the economy gets as a result of the default depends on how long it lasts. Many financial analysts assume that the government will settle in January (when a clause in the restructured bonds that makes this harder will expire). That may be too sanguine. The uncertainty Ms Fernández has unleashed will curb investment. The government’s only Plan B is an $11 billion currency-swap facility with China which may slightly ease the pressure on the currency reserves (and thus on the exchange rate). But if more Argentines find, like Mr Gallardo, that default threatens their job, they may start to blame the president. The Kirchners’ decade in power resembles “a palindrome”, according to Eduardo Levy Yeyati of Elypsis. It began with default, recovery, opening up and rising expectations, and then reversed the order. But not wholly so. Three things mitigate Argentina’s mess. One is that the government’s child allowances, which many in the Salas settlement receive, mean the social desperation of 2002 ought not to be repeated. The second is that a better-advised and more pragmatic president would find it fairly easy to put the economy back on track and win foreign investment. And third, next year’s election is likely to produce this outcome. It is the knowledge that Ms Fernández is on the way out and that her populism is no longer affordable that is putting a floor under economic decline.


Middle East and Africa

The Gaza war

The Economist August 9th 2014 41

Also in this section

Will the ceasefire hold?

42 Why Arabs fret less about Gaza 42 Jihadists v Kurds in Iraq 43 Pre-marital sex in Iran

GAZA AND JERUSALEM

44 Science in Africa takes off

After a month of horrendous bloodshed, both sides are looking for a way out. But it will be hard to turn a ceasefire into a more durable settlement

44 Ethiopia curbs its press

N

EARLY a month after Israel began its onslaught against the Islamists of Hamas in the Gaza Strip, local fishermen this week again tentatively dropped their nets into the sewage-ridden harbour off Gaza City. They watched warily in case Israel’s gunboats out to sea were ordered to fire on them despite a 72-hour ceasefire that began on August 5th. As The Economist went to press, the peace was still holding. The bigger question in the minds of Gazans and Israelis was whether the lull, the longest since the war began, could presage the start of deeper negotiations. The Al-Badia coffee shop on Gaza City’s main street has lifted its shutters to sell its beans, but not yet to reopen its upstairs café for the well-to-do. Hamas’s middleranking officials are turning on their mobile telephones, less nervous that Israeli drones buzzing overhead will track them down and try to kill them. Unlike previous ceasefires, which each side broke almost as soon as they began, this one feels a bit more solid. Israel has withdrawn most of its forces. Egypt is hosting Israeli and Palestinian negotiators, albeit at separate tables. Once the haggling begins in earnest, the ceasefire may well be extended, though Hamas sounds less keen than the Israelis. Both sets of belligerents claim victory. Hamas and its fellow armed groups boast that they have halted one of the world’s most powerful armies. Their leaders are still alive and unbowed. Hamas’s command-and-communications networks are still more or less intact. They claim the mor-

al high ground, too. “We killed their soldiers,” says a Hamas fighter. “They killed the people.” According to the UN, more than 1,800 Palestinians have been killed during the fighting, three-quarters of them civilians, against 64 Israeli soldiers, two civilians and a Thai worker. For its part, Israel notes that after three weeks of fighting on land, Hamas has accepted ceasefire terms that are close to what Egypt first suggested, and Hamas refused, before the Israeli ground assault began. For the time being, the blockade of Gaza remains firmly in place. If Hamas wants Israel to keep negotiating, it must hold fire. That, in the short run, would mean accepting the “quiet for quiet” terms set by Binyamin Netanyahu, Israel’s prime minister, at the war’s outset—and a continuation of the status quo ante, which Hamas has defiantly refused to accept. If both sides insist on achieving their full list of demands, the negotiations could quickly bog down. Hamas wants Gaza to have unfettered access by land, sea and air. It wants the border crossings to be opened and the siege lifted. It also wants payments to be transferred forthwith to the enclave’s 40,000 civil servants and public workers. Israel, on the other hand, wants Hamas to accept that Gaza must be demilitarised in return for normalisation and peace. Each side so far is still rejecting the other’s demands. “If they have a defence minister, why shouldn’t we?” asks a Gazan farmer who has lost his 4,000 chickens. For so long as such differences remain unset-

tled, inertia may take hold. The blockade would be likely then to remain, as it did after the last serious ceasefire agreement at the end of 2012. Hamas may well start firing rockets again at Israel and begin planning another uprising. The cycle of violence, which has erupted three times in the past five years, may resume. Hamas has been hurt more than it would like to admit. Much of the enclave has been turned into rubble. A quarter of Gaza’s population have been rendered homeless. Schools are sheltering tens of thousands of people, sometimes 70 to a classroom. Israeli shells have destroyed sewage and desalination plants, knocked out Gaza’s sole electricity station, and clobbered what was left of Gaza’s factories and export industries. Although Hamas has a core of popular support, many Gazans feel it shares the blame for the catastrophe. “Why did they drag us into this war?” asks a businessman, noting the months Hamas spent preparing tunnels and crafting rockets instead of meeting people’s more prosaic needs. “The people paid more for this than Hamas did,” says the owner of a hotel that has had to close. Should Hamas fail to get the siege lifted and enable Gazans to reconnect with their compatriots in the West Bank, the bigger bit of a would-be Palestinian state, the grumbling, more audible in the past few days, could reach a crescendo. Its officials claim that the 32 tunnels Israel says it has destroyed will be easy to rebuild; the acres of debris provide good con- 1


The Economist August 9th 2014

42 Middle East and Africa 2 struction material. The blockade may limit

fresh arms supplies, but Gaza’s own rocketproduction lines can be brought back into service. “This isn’t the time for crying,” says a Hamas official. “Algeria lost a million people fighting for freedom, Vietnam more. This is the tax we have to pay.” Lest they be labelled traitors, many Gazans echo such defiance. “My life is gone, but I want a better one for my children,” says a fisherman, surveying the wreckage of his bombed-out boat. “We’ve lost 2,000 people,” says another. “What difference does it make if we lose another1,000?” Israel may have lost, too Mr Netanyahu may also face dissent in his own ranks. If the ceasefire holds, Israelis will back him, though opinion polls suggest that a majority wanted the war to go on until the Israeli army had “finished the job”; most of Hamas’s tunnels have been destroyed, but it has several thousand rockets intact. If the ceasefire were to erode, so too could public support. Hawks on the right of Mr Netanyahu’s ruling coalition are already accusing him of vacillation. Seeing that Israelis have now had four wars since 2006 (the first in Lebanon, the last three over Gaza), can Mr Netanyahu spare them a fifth? Much will depend on what the negotiators now in Cairo achieve in the next week or so. For the first time Palestinians are represented by a delegation embracing all the main factions, including Hamas and Islamic Jihad, a more extreme group close to Iran. Mr Netanyahu has sent his most trusted advisers to talk to them, albeit indirectly. Americans, Europeans and Arabs from the most powerful countries in the Middle East are shuttling to and fro. Even if Israel and Egypt agree to at least a partial easing of the blockade by regularly opening the borders with Gaza, more contentious issues are already bubbling up. One is to allow the Palestinian Authority under Mahmoud Abbas, which partially runs the West Bank, to reassert itself in Gaza, ending Israel’s policy of keeping the administration of the two chunks of Palestine separate. That would mean letting the

We just want to go home

Gaza and the Arab world

A collective shrug CAIRO

The Gazans’ plight has aroused less sympathy in other Arabs than usual

P

Tripoli and Benghazi. This week the Yazidis of northern Iraq (see next article) have been threatened with annihilation in the face of a jihadist onslaught. Compared with such horrors, Arabs may be less keen to single out their old Israeli foe. Another reason is political. Since its coup a year ago that tossed the Muslim Brotherhood out of power, Egypt, the most populous Arab state and a traditional arbiter between Israel and the Palestinians, has led a furious backlash against Islamists. Egypt’s government has killed some 1,400 Brotherhood sympathisers in the past year and jailed thousands more. Allies such as Saudi Arabia have joined in demonising the group, whose Palestinian branch happens to be Hamas, the rulers of Gaza. For the first weeks of the latest Gaza war much of Egypt’s press either ignored it or even insinuated that Palestinians had it coming. Unlike London, Paris and New York, Arab capitals saw no big protests. It makes a stark contrast to earlier conflicts.

Palestinian unity government (mainly of technocrats), which was endorsed both by Hamas and by Mr Abbas’s more moderate Fatah party in April, physically take over Gaza. For Mr Netanyahu this would be a volte-face; the latest Gazan war was fuelled partly by his swearing never to talk to a Palestinian government backed by Hamas. Another issue that has already moved up the agenda is a suggestion that foreign organisations, including the UN and the European Union, should monitor the demilitarisation of Gaza and oversee the crossing points, to ensure that arms are not smuggled in. It has been mooted that some 3,000 members of Mr Abbas’s presidential guard would help check Gaza’s border with Egypt, which is 14km (eight miles) long. The tunnels would have to be blocked and formal trade routes monitored, too. Mr Abbas must embrace Hamas to bring it into line. But it is hard to envisage Hamas agreeing to disarm completely; that would deprive it of its raison d’être as the last bastion of resistance to Israel. So there is ample scope for an early bust-up between negotiators in Cairo. The current administration there is loth to give much leeway to Hamas, which it regards as a branch of the Muslim Brotherhood, whose government in Egypt it ousted last year. The ceasefire could easily be broken, but neither side is keen to resume the battle. The likelihood is that there will be a lull. No one can yet tell how long it will last. 7

Iraq’s civil war

UBLIC opinion among the Palestinians’ strongest natural supporters, their fellow Arabs, has been notably slower to rally on their behalf than during the two previous Israeli onslaughts on Gaza in the past five years. Pressure on Arab diplomats to do something has been commensurately slower to mount. Only now, after a month of gore, have officials from elsewhere in the Arab world gathered in Cairo in an effort to arrange a longer-lasting truce. One reason for the tardy Arab response is simple: compassion fatigue. There are too many other Arab wars going on and too many troubles in the region for many Arabs to sustain their instinctive sympathy for the Palestinians. In Syria’s civil war, which has already left at least 170,000 dead, nearly as many died there in a single week in mid-July as the 1,800-plus Palestinians who have been killed during Israel’s four-week campaign in Gaza. Bombs and rockets have been falling on the Libyan cities of

Who wants to rescue the regime? BAGHDAD

As the jihadists make further gains, some Iraqis want America back in

N

OW that the jihadists of the Islamic State (IS) are threatening not just the regime based in Baghdad but also the sturdier forces of Iraq’s autonomous Kurdish region, will American forces be sent back in, albeit on a relatively small scale? So far such a scenario has only been toyed with in Washington. But the situation has become more urgent since the IS, formerly the Islamic State of Iraq and Greater Syria (ISIS), tore through the Kurds’ defences on August 3rd, taking Sinjar and Zumar, two important cities in the north-western part of Iraqi Kurdistan (see map on next page). The Peshmerga, as the Kurdish fighters are known, have hitherto been a far more effective force than the regular Iraqi army, whose troops fled in early June when the IS captured Mosul, Iraq’s second city. So the Kurds’ failure to withstand this latest IS onslaught has caused jitters in Baghdad, where there has been a stand-off for several weeks between government forces and the jihadists only about 30km (18 miles) north of the capital. Putting a brave face on 1


The Economist August 9th 2014

Middle East and Africa 43

2 the disaster, the Kurds say they have made

a “strategic retreat”. The IS’s advance is particularly grim for the Yazidis, a religious minority for whom Sinjar is an ancient hub. When the jihadists captured Mosul with support from aggrieved Sunni Arabs resentful of the sectarian Shia diktat of Nuri al-Maliki’s government in Baghdad, they told the city’s thousands of Christians to convert, flee or be killed. Renaming themselves as plain IS to display their ambition to create a caliphate that will transcend the national boundaries of Syria and Iraq, where they now roam across a swathe of territory bigger in area than the state of Jordan, the jihadists are behaving even more harshly towards the Yazidis, whose religion is a mysterious accretion of various faiths, including Zoroastrianism. They worship seven angels, the most notable of whom is brilliantly garbed as a peacock. The IS deems them unworthy of conversion and says it will kill them wherever they are found. “We tried to fight them but had only our rifles,” says a Yazidi leader who has fled into the mountains north of Sinjar, where tens of thousands of his coreligionists are sheltering without food or water. The UN says that many Yazidi children have already died in the exodus. It is still unlikely that Baghdad will fall—in the near future, at any rate. But the Kurds’ loss of Sinjar and the territory around it has increased the pressure on Mr Maliki to step down in favour of someone who might form a less sectarian coalition government. Mini-mission creep? The Americans, who have already sent in small teams of special forces mainly as advisers, are said to be considering the dispatch of an additional combat force of fewer than 2,000 to act alongside regular Iraqi forces and Sunni tribal fighters in the provinces in the north and west of Iraq where the IS holds sway. But the Americans are thought to be loth to put a sizeable contingent of troops on the ground as long as Mr Maliki is still in office. The Americans and the Iranians, who have hitherto backed Mr 200 km

T U RK EY Zumar Raqqa

Aleppo

LEBANON

Deir ez-Zor

NI

N

Mosul IRAN Erbil

EH EV

Kirkuk

S Y R IA

Beirut Damascus

Tikrit Samarra Ramadi

GOLAN HEIGHTS

Falluja

I R AQ

Amman

JORDAN

Sinjar

S AU D I ARABIA

Area of Islamic State (IS) control Sources: Institute for the Study of War; The Economist

Baghdad Tigr is Euph rates

Kurdish control

Maliki, may now be at one in concluding that he must go. The Kurds are also urgently calling for American help. They say they will not be able to defeat the IS without an infusion of arms and weapons, as well as support from the air. The Kurds’ setbacks against the IS have shocked Mr Maliki’s government into co-operating militarily with the Kurds. The Iraqi air force, modest as it is, has been sent to launch air strikes in support of the embattled Peshmerga in Nineveh province, of which Mosul is the capital; on August 6th it bombed an IS-held building in Mosul, reportedly killing 50 ji-

hadists. But the Iraqi Kurds and their leader, Masoud Barzani, still want Mr Maliki to go. The prime minister is said to be worried that if he steps down he will be arrested or killed. As a member of parliament, he is immune from prosecution. He is said to have a bunch of arrest warrants ready to issue against his rivals, should they bid to replace him. For their part, they say that Mr Maliki would be guaranteed his safety should he leave office. But in the feverish atmosphere of Baghdad, at a time when the IS threatens Iraq’s Kurds as well as its Shias, trust is in diminishing supply. 7

Sexual mores in Iran

Throwing off the covers

TEHRAN

An official report blows the lid off the secret world of sex

I

T IS the last thing Iran’s religious rulers want to talk about, but they may just have to. An official report has documented the nation’s worst-kept secret: sex of every kind is taking place outside the marital bed in the Islamic Republic. Something, in the ruling ayatollahs’ view, must be done. An 82-page document recently issued by Iran’s parliamentary research department is stark in its findings. Not only are young adults sexually active, with 80% of unmarried females having boyfriends, but secondary-school pupils are, too. Illicit unions are not just between girls and boys; 17% of the 142,000 students who were surveyed said that they were homosexual. In Tehran, the capital, long known for its underground sex scene, chastity is plainly becoming less common. The scope and pace of change are challenging the government and posing a headache for the clerics who dispense guidance at Friday prayers. The report is also a rare official admission of the unspoken accord in Iran: people can do what they want so long as it takes place behind closed doors. Parliament’s researchers, on this occasion, were allowed to say the unsayable. Their suggestion for stopping unsanctioned sex is remarkably liberal. Instead of seeking to cool the loins of the youngsters altogether, they should be allowed publicly to register their union by using sigheh, an ancient practice in Shia Islam that lets people marry temporarily. A legal but loose and much-deprecated arrangement, which can last from a few hours to decades, sigheh is often viewed as a cover for promiscuity or prostitution. Clerics themselves have long been suspected of being among its biggest beneficiaries, sometimes when they are on

They don’t think it’s a sin extended holy retreats in ancient religious cities such as Qom. For less conservative Iranians, some of whom even jokingly describe themselves as “not real Muslims”, the report is merely an admission of reality—and an amusing distraction from the austere topics usually occupying their leaders’ minds. “This is what every human body needs,” says Zahra, a 32-year-old chemist who lives with her boyfriend in northern Tehran and declares that she has no intention of seeking authorisation to have sex. “I have one life and though I love my country, I cannot wait for its leaders to grow up,” she adds. Iran’s media, always wary of being shut down, have played safe by ignoring the report. So have members of parliament. In most official circles, sex in Iran is still too hot to talk about.


The Economist August 9th 2014

44 Middle East and Africa Science in Africa

On the rise

Ethiopia and its press

The noose tightens ADDIS ABABA

Bloggers and journalists who criticise the government are under the cosh LAGOS

Scientific research in Africa is gathering momentum

A

FRICA has a poor reputation for scientific innovation. But when South Africa jointly won a bid in 2012 to host the world’s largest science project, for a radio telescope called the Square Kilometre Array (SKA), it hoped to foster a new image. “It’s changing the way the world sees us, as somewhere for cutting-edge science and technology,” says SKA’s Bernie Fanaroff. “And also the way we see ourselves.” SKA’s satellite dishes will eventually span Australia, New Zealand and eight sub-Saharan countries. When complete, hopefully in around a decade, they could be the world’s single largest source of data. That may in turn help host countries develop data-processing skills that will benefit them in other areas of “big data”. The project is at the forefront of a blossoming of scientific research in Africa. Health care and agriculture are the priorities. Across the continent, programmes are under way to develop seed varieties to withstand Africa’s changing weather. In Uganda, where bananas are a staple, scientists are using genetic modification to boost disease resistance. New strains of cotton and rice are being developed, too. In health care, more clinical trials are taking place in Africa than before. The vast majority of local laboratories still fail to meet the World Health Organisation’s basic standards, but there are a growing number of exceptions. African biomedical researchers are looking into diseases such as HIV/AIDS, tuberculosis and malaria, and tropical diseases often ignored by big pharmaceutical companies. “The neglected tropical infections are Africa-specific,” says Tim Meade, an American paediatrician based in Zambia. “If we don’t find answers here they will remain a mystery.” The number of scientific papers produced by Africans has tripled in the past decade, to over 55,400 in 2013, according to Reed Elsevier, an Anglo-Dutch information company. That still only accounts for 2.4% of the world’s total, but it is quite a jump. The quality is rising, too. More funding and better internet connectivity are helping. Access to scientific literature offered by public-private partnerships like Research4Life, a UN-led initiative that makes research papers freely available in poor countries, has helped, too. A new generation of African politicians with technical training is promoting innovation. International businesses are starting research programmes in Africa. Last year

A

RANKING that countries do not aspire to ascend is the one compiled by the Committee to Protect Journalists, a New York-based group. It reckons that Ethiopia is Africa’s second-worst jailer of journalists, ahead only of its ultra-repressive neighbour and bitter enemy, Eritrea. Cementing its lamentable reputation, on August 4th Ethiopia briefly resumed the trial of ten journalists and bloggers, nine of whom it has kept in prison since April; one is being tried in absentia. The court proceedings are to start again in earnest on August 20th. The ten are accused of several offences, including breaches of the country’s controversial anti-terrorism laws. These include having links to banned opposition groups and trying to cause instability via social media. The government says the journalists and bloggers are connected to two groups that it deems terrorist organisations: the Oromo Liberation Front, a rebel outfit that seeks a better deal for Ethiopia’s largest ethnic

group, which predominates in the south; and Ginbot 7, a leading opposition movement formed after widespread protests following Ethiopia’s general election in 2005. The arrests are part of a broader clampdown on the opposition and the media. In June Andargachew Tsigie, Ginbot 7’s exiled secretary-general, was detained in transit through Yemen and flown to Ethiopia. He had previously been sentenced to death in absentia in two separate trials. On August 4th Ethiopia’s ministry of justice upped the ante by filing fresh charges against five magazines, a newspaper and their publishers, alleging that they were “engaging in incitements that could undermine national security” and promote discord. Readers view the five popular magazines, which have criticised government policies, as an alternative to the rosy narratives of state media. With a general election due next year, this seems to be making the ruling party twitchy.

IBM launched a laboratory in Nairobi, Kenya’s capital. The firm wants to use its artificial-intelligence technology to support health workers in areas where doctors are scarce. Philips, a Dutch electronics firm, is opening an innovation hub in Kenya to focus on health care and lighting. Most African countries are starting from a low base and still spend only a tiny proportion of GDP on scientific research. But programmes like IBM’s and SKA’s are luring talented African scientists back from

across the world, reversing decades of brain drain. The Next Einstein Initiative at the South Africa-based African Institute for Mathematical Sciences is now turning out hundreds of top-notch scientists every year at five postgraduate centres across the continent, each specialising in an area related to African development. By 2023 it aims to have 15 centres. Says the institute’s Thierry Zomahoun, “We want to create a generation of scientists who will lead Africa’s transformation.” 7

The stamp of future success


The Economist August 9th 2014 45

Asia

Also in this section 46 Malaysian politics 47 India’s civil-service exams 47 Japan’s economy 48 Banyan: Neither truth nor justice

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

Thailand

Peace, order, stagnation BANGKOK

As the economy stumbles, the junta has an image problem

T

HE army has long been the most powerful force in Thai political life, and has wholly monopolised it since its latest coup in May. Bangkok, the capital, remains calm, and many ordinary Thais do not miss the self-serving political classes who were booted out. Still, how popular the National Council for Peace and Order, as the junta calls itself, really is remains hard to say. It is a criminal offence to criticise it, and the press is muzzled. Lèse-majesté cases are piling up. The junta has even banned a computer game, Tropico 5, in which players set up their own military dictatorship in a fictional paradise where sunny beaches and political corruption “coexist in perfect harmony”. The coup leader, General Prayuth Chan-ocha, and his fellow soldiers have been busy putting up a façade that bespeaks legitimacy. The coup has the endorsement of the 86-year-old king, Bhumibol Adulyadej. On August 7th the crown prince, Maha Vajiralongkorn, chaired the opening ceremony for a new national assembly to replace the elected politicians who were kicked out. Stuffed with army officers and members of the old Thai establishment, it will be a rubber-stamp affair. It is all a throwbackto an earlier, simpler era. Unlike the generals of 2006, when the last coup took place, the current lot are intent on retaining complete control. A temporary constitution grants the army men

absolute powers. And to safeguard against the generals ever coming before the courts in some future reckoning, it grants an amnesty for actions related to the toppling of the democratically elected government of Yingluck Shinawatra. The 2006 coup leaders ousted her brother, Thaksin Shinawatra, a telecoms billionaire turned authoritarian politician whose populist parties have for years won every election that has been permitted. Back then the generals thought they could marginalise Mr Thaksin as a political force and encourage a return to a tutelary democracy guided by the establishment around the king. Those who removed Ms Yingluck now realise that they must ensure the Shinawatras are wholly spent as a political force. The generals let Ms Yingluck leave Thailand for Paris on July 20th to attend a birthday party for Mr Thaksin. They did so on the condition that she returns to face possible charges relating to her time as prime minister. Yet some must be calculating that she will join her brother in self-imposed exile. Without competitive elections, the Shinawatras are powerless. The Orwellian name the junta has given the new dispensation is “genuine democracy”. There is, in truth, a reformist element to its programme, including a desire for less inequality and an impartial enforcement of laws. Many of the populist proposals, such as reforms to health care,

are taken straight from Mr Thaksin’s playbook. Yet finding people with stature and experience to front the new order is not proving easy. For foreign minister, the junta tried to recruit Surin Pitsuwan, a former secretary-general of ASEAN, the Association of South-East Asian Nations. At home and abroad, he is one of Thailand’s most respected figures. But he could not be tempted. South-East Asian diplomats say the Thai foreign ministry is paralysed, lacking guidance. With no proper interim government, portfolios are unlikely to be filled on merit. Although a non-businessman is running the state airline, at least he is the air force chief. How, though, to explain the head of the navy heading the ministry of culture? Getting the trains to run The junta seems to realise it has an image problem. This matters to it because for all the emphasis now on political stability, the economic mood is jittery. The economy has shrunk precipitously this year. Exports, in a country that depends more than most on them, have stopped growing. High household debt further complicates matters. Thailand is likely to be Asia’s most lacklustre economy this year. Economic revival is the generals’ priority. From day one, therefore, General Prayuth has tried to reassure investors. He has made himself head of the Board of Investment, which has swiftly approved billions of dollars worth of pending applications. General Prayuth is leading a splurge in infrastructure spending, including on two high-speed railways worth $23 billion that are seen as vital future links to China. But approving such projects is one thing; getting them up and running so that they start to have a positive economic impact is quite 1


46 Asia 2 another. Nor is the quest to reassure outsid-

ers helped by the certain knowledge that cronies of the army (whose officer corps at times resembles a business club) will be hungry for the juiciest deals. As for democracy, that will have to wait. General Prayuth gives October 2015 as the probable date for an election. The junta will not say, however, what restrictions it might impose. Given that the whole point of this coup, and the last, was to overturn a winner-takes-all electoral system that served Mr Thaksin so well, it would be a wonder if no restrictions applied. Whether the next full constitution, Thailand’s 20th, will be put to a popular referendum is equally unclear. What the generals want, above all, is for “moral people”, not elected populists, to run the country. It is heartening that the junta has shown some concern to bring about a reconciliation, however unlikely, between the pro-Thaksin “red shirts” and their opponents, who paralysed Bangkok in giant protests from late last year. But that

The Economist August 9th 2014 does not necessarily mean the army will allow Thaksinite politicians to take part in drafting the new constitution, let alone run in the proposed election. Most Thais would like to see their country emerge one day as a prosperous, truly democratic leader within South-East Asia. Thailand’s economic growth since the 1960s has raised incomes and provided education to most of its citizens. But the pillars on which future prosperity rests are crumbling. A strong commitment to the rule of law, a well-regulated financial system, and transparency in how fortunes are made are all in short supply. For now the army men taking Thai society back to the past are legally unassailable. Many Thais may in any case give them the benefit of the doubt. But at some point the self-appointed leadership will be unable to justify its continued existence. The junta may yet surprise everybody by pushing reforms, healing society’s deep rifts, and restoring democracy. But do not count on it. 7

Malaysian politics

What’s Malay for gerrymandering? KUALA LUMPUR

This year’s delineation of electoral boundaries will determine the future of Malaysian politics

I

N LAST year’s general election, the ruling coalition, Barisan Nasional (BN), won 47% of the vote but took 60% of the 222 parliamentary seats. The opposition coalition, Pakatan Rakyat (PR), won a majority of the popular vote (51%)—but only 40% of the seats. To many disenchanted Malaysians, the result was a glaring example of the systematic rigging that, they claim, is designed to keep the ruling coalition in power. The main party, the United Malays National Organisation, has been in office since independence in 1957. This backdrop explains why the regular boundary delineation that the election commission embarked upon earlier this year has become so important. Ensuring that constituencies are fair, representative and not distorted is a struggle for democracies everywhere (consider the gerrymandered seats of America’s Congress). But in Malaysia the problems are particularly bad. With its ethnic-Chinese support concentrated in densely populated urban seats, the opposition gets fewer MPs for every vote it wins than does the BN, which has a lot of seats in rural areas where most Malays live. The two east Malaysian states of Sabah and Sarawak are notorious in this respect; they are known as the BN’s “fixed deposits”. A seat like Kapar (held by PR in Selangor province) has nine times more

voters than Putrajaya (nominally the country’s federal capital and held by Barisan). But both return one MP. It means the “value” of a vote varies enormously around the country. The typical international norm for the variation in the number of voters per constituency is 10-15%. In Malaysia this variation can run to hundreds of percent. The country’s origi-

nal constitution stipulated that the size of constituencies should vary by no more than 15% within states. This was later widened to 33%, then taken out altogether. The opposition thinks that the aim was to give the election commission, all of whose members are chosen by the government, free rein to draw the electoral boundaries in the government’s favour. Long-held suspicions about the commission were stoked last year when its former chairman, Abdul Rashid, joined Perkasa, a far-right body devoted to the interests of ethnic Malays, which is allied to BN. Several independent organisations are trying to put pressure on the commission. One such, Tindak Malaysia, reckons there should be no more than a 10% variation in peninsular Malaysia and a 15% variation in eastern Malaysia. Bersih (“clean” in Malay), which has campaigned for electoral reform since 2006, is demanding that the variation should not be more than 33% between rural and urban seats. Bersih is also calling for an end to the gerrymandering of constituencies, in which areas are carved out of one constituency and given to another in order to give one political party a small majority in many districts while concentrating the voter strength of the other party into as few districts as possible. For its part the commission, which reports later this year, says it wants to split up some of the more densely populated seats, increasing their number by up to a fifth. This, it says, is in line with the increase in seats after previous delineations. On the face of it this move seems sensible. But critics smell a rat. They point out that even the biggest democracies, including America, have not always felt a need to increase the numbers of representatives in line with the population. And most of the newly created seats after the last delineation went to none other than parties belonging to the Barisan Nasional. 7


The Economist August 9th 2014

Asia 47

India’s civil-service exams

The unlevel field DELHI

Fights over English speak to deeper problems in education

F

OR weeks angry students, most of whom went to Hindi schools, have been taking to the streets of Delhi, the capital, in protests over India’s national language. That language, of course, is English. Drawing support from opposition parties as well as from the youth wing of the governing Bharatiya Janata Party, the students directed their anger at India’s gruelling civil-service examination. They claimed it discriminated against candidates who had not gone to English-language schools. On August 4th the government buckled, saying that this year, marks for an English-language portion of the test would not count. It has hardly mollified the students. Many want the Civil Services Aptitude Test scrapped altogether. “We are not against English or maths,” says Janardan Mishra, a 22-year-old graduate from Allahabad, in perfectly colloquial English. “We want only a level playing field.” The test aims to put analytical reasoning above rote memorisation. Students who have fared worst since the test came in three years ago have been those from the swathe of north India where Hindi is spoken as a first language, as well as, more generally, those from rural backgrounds, where students from lousy schools end up choosing humanities for higher studies over crunchier disciplines. Simmering discontent boiled over in June, when the results of last year’s test came out. Of the 1,122 who passed, the protesters say, just 2.3% came from nonEnglish schools. As often in India, the fight is about countryside versus city, poor versus rich. It should matter to Narendra Modi, who became prime minister in May. He has demanded the tall order of “maximum governance with minimum government”. A lean, mean bureaucracy is central to such ambitions, and he will want to keep civilservice standards high—which includes proficiency in English. Yet striking a blow against English suits some of his nativist supporters. Several of his ministers have made high-profile speeches in Hindi where English would once have been chosen. Many hope that when Mr Modi travels to America in September he will break custom and speak in Hindi. As for the students, their complaints run broader than language wars. A senior bureaucrat who used to teach at the civil service’s national academy was blunt about the real problem the protesters

It seems English is one of them faced. “They’re going to miserable schools which teach them nothing. Education in north India has collapsed.” He regards this as a desperate problem but adds that, “at the end of the day, I need to run a system.” Hundreds of thousands pin their hopes on a few hundred positions. The civil-service exams cannot be set in order to fix the failings of poor schools. 7

Japan’s economy

Feeling the pinch TOKYO

Even as jobs grow scarce, real wages continue to fall

I

F ABENOMICS means anything, it is the promise of the prime minister, Shinzo Abe, to restore healthy economic growth to Japan and end years of deflation. To that end the central bank, sloughing off its traditional caution, has flooded the economy with money and encouraged the yen to slide. Mr Abe has wooed investors with a resolutely upbeat message about Japan’s prospects. As a consequence, the stockmarket is up by three-fifths since Mr Abe came to office in late 2012, and even property prices in Tokyo are rising after years in the doldrums. Yet for folk who do not own bundles of shares or a flat in Tokyo’s trendy Daikanyama neighbourhood, the picture is very different. The mantra of Mr Abe and his advisers has been that a virtuous circle would come about whereby wages would rise and lift consumer spending, which in turn would boost investment by companies. Bingo: Japan would emerge from deflation. That is not happening and it is a conundrum.

On the one hand, the labour market is tight to bursting. That is partly because of strong demand for workers in, for instance, construction. But it is also because the population is shrinking fast. The number of Japanese is predicted to fall from 127m today to under 90m by 2060. Every year the working-age population falls by about 1m. Today unemployment stands at just 3.7% (dream on, Spain). Yet despite a tight labour market, real wages continue to tumble (see chart). In May they fell by 3.8% compared with a year earlier—the steepest decline in years. That is despite the government’s use of moral suasion to get companies to hike basic pay in annual wage negotiations with unions this spring. Officials marched into boardrooms to demand higher pay for workers. Households were always likely to feel squeezed after the government raised Japan’s consumption tax in April, from 5% to 8%. Slightly higher inflation, stoked by the Bank of Japan’s massive easing, adds to the effect. But the government was expecting real wages to rise. One factor contributing to the fall in real wages is deep-seated. Japan’s labour market is divided between regular employees, who are highly paid and protected against being fired, and low-paid, non-regular ones at the bottom of the heap. Non-regular workers filled 36.8% of all jobs in June, a near record. Most new jobs created since Mr Abe came to office have been for nonregular workers. They are not usually part of annual negotiations. Many are women, who end up earning less than men. Companies must start hiring more permanent workers. Yet big firms already have too many overpaid and unproductive regular workers, Robert Feldman at Morgan Stanley points out. What is needed is for excessive safeguards for permanent workers to be cut back at the same time as pay and security for non-regulars are beefed up. But with permanent employees still making up the bulk of the workforce, bringing about such a change means spending political capital. Has the prime minister got the guts? Abenomics, and Japan’s recovery, rests on it. 7

The wages conundrum Japan’s: real wages*

unemployment rate

Change on a year earlier, %

%

3

6

+

0

5

3

4

6

3

9

2004

06

08

Source: Thomson Reuters

10

12

14

*Including overtime pay and bonuses


48 Asia

Banyan

The Economist August 9th 2014

Neither truth nor justice

Efforts to confront Asian atrocities founder on the rocks of political expediency

N

EARLY four decades after atrocities perpetrated by one of the cruellest regimes the world has known, two leaders of the Cambodian Khmers Rouges were this week convicted and sentenced for their crimes. After a trial lasting 222 days, with testimony from 92 individuals and 166,500 pages of written evidence, Khieu Samphan, now 83, and Nuon Chea, 88, heard the verdicts against them on August 7th. For the survivors of the nightmare their party imposed on Cambodia from 1975 to 1979 it should be a moment of catharsis. Instead, this may be one of those rare moments when life sentences feel like impunity. This is not just because of the men’s old age. Neither man said he felt truly guilty—Mr Khieu Samphan even claimed that whatever he had done was “to protect the weak”. Yet the regime he represented was responsible for the death of perhaps 1.7m people, one-quarter of the population, through execution, torture, overwork, starvation and neglect. Nor is this the end of the two men’s trials. In order to bring at least part of the protracted judicial process to a conclusion, the cases against them were subdivided. This trial covered the forced evacuation of Phnom Penh and other cities after the Khmers Rouges’ victory in 1975. Another one includes a charge of genocide of Cambodia’s Muslim minority. Moreover, other, more famous, culprits have managed to cheat justice. The Khmer Rouge leader, “Brother Number One”, Pol Pot, died in 1998. His brutal one-legged army chief, Ta Mok, known as “the butcher”, followed in 2006. Ieng Sary, the regime’s foreign minister, died last year. By then his wife, Ieng Thirith, also indicted, had been found too demented to stand trial. Kaing Guek Eav, known as Duch, in comparison a junior figure, is serving a life sentence for having run Tuol Sleng, a torture facility in Phnom Penh. He at least was contrite. Five other suspects have cases pending. These few aside, only Mr Nuon Chea and Mr Khieu Samphan are likely to face the courts to account for the Khmers Rouges’ misdeeds. Not that they are small fry. Mr Nuon Chea was “Brother Number Two”, second only to Pol Pot in the hierarchy. Mr Khieu Samphan was head of state. But this “hybrid” judicial process, in a body that is a compromise between an international tribunal run by the United Nations and an indigenous Cambodian court, has been expensive and high-profile. At this important juncture in the

court’s existence, it is hard to avoid the feeling that the drive for justice in Cambodia is ending with an unsatisfying whimper. Foreign pressure for a more searching process has failed to overcome the resistance of the Cambodian government. On the face of it, that seems odd. This government—for all the instability, UN-administered interregnum, coups and rigged elections since—is the direct successor of the one installed by Vietnam after it invaded in January 1979 and put an end to the Khmer Rouge tyranny. The present prime minister, Hun Sen, was first appointed in 1985. His government long used its “liberation” of Cambodia as a source of legitimacy. But Mr Hun Sen himself is a former Khmer Rouge cadre. To consolidate his power in the 1990s, he did deals with his old comrades. Mr Hun Sen has good reason to keep retribution against the Khmers Rouges confined to a few figureheads. What is more, the record of his own regime, which is accused of repression, electoral malpractice, land grabs and extra-judicial killings, makes Mr Hun Sen not keen to have the spotlight shone for much longer on his country. He has an interest in the inviolability of Cambodia’s judicial sovereignty. And many Cambodians feel it wrong to see the Khmers Rouges as a purely domestic phenomenon. The movement grew as a reaction to a corrupt American-backed administration and America’s bombing of Cambodia in the Vietnam war. It was backed by China. Mr Hun Sen can also argue that his country has gone further than many others in confronting its past. In China a show-trial of four purged leaders in 1980 drew a symbolic line under the horrors of the Cultural Revolution. None of those responsible for the worst man-made famine in history in the late 1950s and early 1960s has been called to account. In Indonesia, the slaughter of perhaps 500,000 alleged Communists and others in 1965-66 has never been properly investigated. Hopes that a new regime under Joko Widodo, the president-elect, may end the tradition of impunity seem over-optimistic. He was fought hard to the presidency by a former general accused of serious human-rights abuses. Voters do not seem to be pressing for accountability. What transpired when Myanmar’s president, Thein Sein, met its opposition leader, Aung San Suu Kyi, in 2011 is secret. But after that the former general embarked on a remarkable set of reforms, apparently satisfied that members of the junta that misruled Myanmar for half a century would not face prosecution. What’s the point of trying? Even where tribunals have been staged, they have been coloured by politics. Many Bangladeshis celebrated the sentences handed down in the past two years on alleged leaders of pro-Pakistani groups involved in the murder of perhaps 3m of their compatriots in the country’s liberation war in 1970-71. But many would also recognise that it is a flawed, partisan process, which in any event ignores the role of soldiers from what was then West Pakistan. In Sri Lanka the bloody end of the civil war with the Tamil Tigers in 2009 remains contentious. There is no prospect of the government in Colombo admitting that its army, as many allege, was guilty on occasion of indiscriminate violence. In Sri Lanka the wounds are still fresh. It seems obvious that they will never heal unless both sides recognise that they made mistakes and did wrong. But the same is true of countries like Cambodia and Indonesia, where wounds have festered and scars seem ineradicable. That nowhere in Asia seems yet to have achieved a form of justice that both imposes retribution and fosters reconciliation is no reason to stop looking for one. 7


China

The Economist August 9th 2014 49 Also in this section 50 Alcohol consumption

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

Ethnic unrest

Spreading the net KASHGAR

New episodes of violence and repression have heightened tensions in Xinjiang in Xinjiang, where Turkic-speaking Uighurs once formed an overwhelming majority and now feel increasingly marginalised by Han Chinese immigrants. Police routinely stop foreign journalists from approaching trouble-spots. Social media are rigorously censored. Kashgar police stop motorists going into and out of Uighur sections of the city, checking identity cards and belongings. Crimes meriting detention can include carrying too much petrol; it could be used for bomb-making. The nervousness of the man in the clothes shop is not mere paranoia. The government encourages neighbours and friends to inform on each other. In Kashgar officials have recruited households to monitor their blocks in an authoritarian version of neighbourhood watch. On Au-

Karamay Kashgar Urumqi Yarkand Yecheng I Hotan X I N J

G

N THE oasis town of Kashgar, in the far western region of Xinjiang, the authorities are keen to stop the spread of uncensored news about recent bloodshed in the area. On July 28th the deadliest outbreak of unrest in years involving Muslim Uighurs took place. By official accounts nearly100 people were killed; Uighur exiles say many more than that died. Officials have blamed the incidents on “terrorists”. Uighurs blame government heavy-handedness. Inside a clothing shop near central Kashgar, a young Uighur says many members of his ethnic group have been taken away by police in recent months, some of them merely for talking to outsiders. In May the authorities declared a “people’s war” on terrorism in Xinjiang. The recent violence suggests victory is far away. In the attacks near Kashgar, police say that a gang of Uighurs attacked government offices with knives and axes, killing 37 people, and that 59 of the attackers were gunned down in response. Two days later one of the government’s allies in the war, the chief imam of Kashgar’s largest mosque (pictured above), was stabbed to death after morning prayers. His attackers were Uighurs. The government said they were “thugs influenced by religious extremist ideology”. Two of them were shot dead and a third arrested. The government’s increasingly repressive security measures make it difficult to gain a clear account of the recent incidents

AN

I

C

Beijing

H

I

N

A Shanghai

Kunming

1,000 km

Hong Kong

gust 1st, in an anti-terror operation near the city ofHotan, south-east ofKashgar, the authorities claimed to have recruited 30,000 volunteers to help encircle and hunt down ten terror suspects, nine of whom were killed. Officials announced financial rewards of 300m yuan ($49m) for “thousands” of locals who had helped. The government has been spooked by militant Islam in neighbouring countries (the borders of Pakistan and Afghanistan are less than 300km, or 185 miles, south of Kashgar). It worries that Uighur nationalists are using religion to assert a separate identity. At official “Project Beauty” checkpoints, Uighur women in traditional facerevealing dress reprimand passers-by wearing Islamic veils. In the north-western Xinjiang city of Karamay, a local newspaper said on August 4th that people wearing head scarves, veils or long beards were not allowed to board buses. The authorities’ fears of terrorism are not fanciful. Random attacks on civilians are becoming more common and the violence is spreading beyond Xinjiang. In October last year Uighurs in Beijing rammed a car into a security barricade near Mao’s portrait in Tiananmen Square. The vehicle exploded, killing six people, including three inside the car. In March as many as eight Uighurs with knives attacked passengers at the railway station in Kunming, killing 29 people. Some Chinese called the incident the country’s “September 11th”, suggesting the shock was similar to that experienced by America in 2001. In April and May two attacks using explosives in the provincial capital of Xinjiang, Urumqi— one at a railway station and the other at a busy market—killed at least 46 people and injured more than 200. Relations between Han Chinese and Uighurs in the region have deteriorated sharply since 2009, when clashes erupted 1


50 China 2 in Urumqi between Uighurs and Hans,

leaving around 200 dead. The government has responded by pouring in money. Xinjiang is due to be connected to the rest of China by a bullet-train track later this year; Kashgar is soon to be connected by expressway to the north of Xinjiang, which officials say will boost the city’s economy. But Uighur grievances have been exacerbated by officials’ intolerance of Islamic traditions and their emphasis on Chinese instruction in schools. Kashgar itself, an historic Uighur market city on the old Silk Road, has demolished and rebuilt vast areas of ancient neighbourhoods, heedless of residents’ complaints. Activists say the government has used more sticks than carrots with Uighurs since Xi Jinping became China’s leader in November 2012. In January police in Beijing detained Ilham Tohti, a prominent Uighur scholar who is widely considered a moderate advocate for better treatment of Uighurs. On July 30th Mr Tohti was charged with separatism. In Beijing in May, at a meeting of senior officials to discuss Xinjiang, Mr Xi called for “nets spread from the earth to the sky” to catch terrorists. Mr Xi and the ruling Politburo also discussed improving economic opportunities for Uighurs through even more government spending. Many Uighurs have yet to benefit from rapid urbanisation. Ma Rong, a sociologist at Peking University, found that Uighurs were one of only two ethnic groups in China among whom the proportion of farmers had grown in the decade to 2010, from 80% to almost 83% (the other being Kazakhs, a much smaller ethnic group in Xinjiang). Officials have not pursued efforts to create urban jobs for Uighurs with the same diligence as they have cracked down on their customs. A young Uighur woman training to be a civil servant, herself a daughter of two government workers, says that as a woman she is less likely to be hassled by security personnel at checkpoints. Last year, however, in her hometown in the southern Xinjiang city of Yecheng, she walked accidentally into a security cordon in a town square. She was confronted by seven or eight men who pointed guns at her. She felt lucky to be able to say, in Chinese, that she was sorry to be there. She says she once bristled at such security measures but now understands the need for them. Few Uighurs, however, sympathise with the authorities’ controls on their religion. The latest violence erupted at the end of the holy month of Ramadan, during which officials put pressure on teachers, students and civil servants not to observe fasting rituals. Philip Potter of the University of Michigan argues that in the long run, Chinese leaders “have painted themselves into a corner”, deepening the divide between themselves and the Uighurs they govern. Worsening unrest seems certain. 7

The Economist August 9th 2014 Alcohol consumption

The spirit level BEIJING

The Chinese are drinking more

L

I JUN, a construction worker from Shandong, sips a large bottle of Yanjing beer as he squats on the pavement and shares a lunchtime bag of noodles with a colleague. On such a hot day the beer quenches his thirst, he says; the alcohol will not affect his work because he is resting while he drinks. Many of his fellow workers are also enjoying a bottle. Awareness ofthe effects ofalcohol is extremely low in China. For centuries people enjoyed booze at celebrations, but few drank regularly. As incomes have shot up over the past 35 years, alcohol consumption has accelerated. Average annual consumption rose from 2.5 litres of pure alcohol in 1978 to 6.7 litres in 2010. Nearly 70% of that is spirits. Until recently social norms favoured moderate consumption. Most people quaffed only with meals; solitary boozing was rare. Few women drank and young Chinese mostly abstained. Biology encouraged moderation, too. About a third of the population finds it hard to metabolise alcohol. Those affected rarely drink. Consumption still looks tame by international standards. Intake per person is around half that of Germany or France, according to the World Health Organisation. But the countrywide statistics hide a grimmer picture. More than half the Chinese population is teetotal. Those who do drink often do so to great excess. Male Chinese drinkers down far more than Japanese ones, and almost as much as notoriously sozzled British, Australian or Irish boozers.

Boosting their CVs

Binge-drinking is prevalent and high-risk drinking has reached “epidemic proportions” in China, reckons Hao Wei of Central South University in Changsha, the capital of Hunan province. In China drinking with clients and colleagues is now seen as vital to career advancement; some job adverts even call for “good drinking capacity”. One study found that civil servants had a far higher incidence of alcohol-related liver diseases than the population at large (the higher the rank, the worse their health prospects). Traditions such as toasting at banquets encourage excess; drinking games are played by middle-aged men rather than university students. That is why Chinese people drink more, and more often, as they get older, whereas in Europe and North America consumption peaks by the early 20s. Worryingly, young Chinese are now taking to drink, too, often without food. Women are also upping their intake. The state has taken some action in response. Drink-driving cases fell by nearly 40% in the two years after May 2011, when the government started to clamp down and increase penalties. President Xi Jinping’s anti-corruption drive has quashed lavish banquets (although this has made high-end liquor much cheaper). But the government has done little to promote public education. Other countries have curbed drinking by increasing tax on booze. In 2006 China lowered its already paltry liquor tax. Its health services and professionals are poorly equipped to deal with alcohol-related problems, says Yilang Tang of Emory University in Atlanta, Georgia. There are no national guidelines on responsible drinking and the minimum drinking age is ambiguous. Rules relating to the sale, consumption and advertising of alcohol are weak or ill-enforced. As Central South University’s Mr Hao puts it: “Alcohol can be bought anywhere, at any time, by any person.” 7


International

The Economist August 9th 2014 51 Also in this section 52 Female politicians’ effectiveness 52 The Ebola panic

Civil-service reform

Modernising the mandarins

Tight finances and rising expectations are remaking civil services

T

HE senior civil servants huddled in an Oxford seminar room are some of the most discreetly influential people in Britain. Known as “mandarins” (a tribute to imperial China’s rigorous hierarchies), they oversee costly projects ranging from HS2, a planned high-speed railway, to procuring aircraft carriers and a sensitive nuclear-energy deal with (post-imperial) Beijing. When such a project goes awry it costs a fortune and damages politicians’ standing. So governments across the rich world, as well as some in developing countries, are striving to reshape their public services from ponderous bureaucracies into something nimbler and less blunder-prone. The seminar is run by the Saïd Business School and the Major Projects Authority (MPA), an agency set up by Britain’s governing coalition in 2011. Senior businessfolkare invited to lead discussions; officials share gripes with visiting permanent secretaries (the ministries’ top brass). The MPA’s boss, John Manzoni, a bullish former oil executive, wants to import skills more common in the private sector, such as managing risk, learning from competitors and improving supply chains. He is also trying to build expertise in running complex projects and (more ambitiously) to make the civil service an attractive place for high-fliers to spend part of their careers. According to Jocelyne Bourgon, who was head of Canada’s civil service in the

1990s when the Liberal government squeezed 50,000 jobs out of a bloated public sector, the focus of reform internationally has now shifted from mere staff-culling to recasting public services to cope with “shocks, crises, cascading failures and surprising breakthroughs”. She leads New Synthesis, a project that has convened six countries (Brazil, Britain, Canada, the Netherlands, New Zealand and Singapore) to share approaches to thorny subjects such as welfare reform. The greater availability of data gives today’s public servants advantages over their predecessors—if they grasp the potential. Since 2010 Britain has published data about public services on a single website, data.gov.uk, aiming to make them more transparent. America’s government has launched a similar effort. Such initiatives make it possible to “crowd-source” ideas and solutions, says Peter Ong, the head of Singapore’s civil service. Services designed by distant bureaucrats no longer satisfy today’s demanding citizens. Public feedback must be responded to in real time. As important, he says, is that officials study how their big ideas work in practice, and tweak them as needed. Singaporean civil servants on the fast track do stints helping to plan and run front-line services and listening to users’ gripes. Singapore delivers high-quality public services remarkably cheaply—spending

less than 5% of GDP on health care, for example, around half the global average. But “expectations are skyrocketing,” says Mr Ong, and Singaporeans want “more empathy and awareness of the citizen’s perspective”. That might sound odd in an authoritarian system. But in the past decade Singapore has moved ahead of many liberal Western countries, reshaping its criminal-justice system, for example, to prepare convicts for their return to society. Prison education, mental-health services and drug treatment have been beefed up—and honed by civil servants to create better links between the various agencies dealing with ex-offenders. Recidivism after two years out of jail fell from 44% in 1999 to 27% for those released in 2010 (although it edged upwards again a bit this year). Since the financial crisis of 2007-08, public administrations have come under increasing pressure not to let deadlines slip and costs spiral on big infrastructure projects. Over-runs can often be avoided by investing time and money earlier than governments tend to, says Atif Ansar of Oxford University’s Blavatnik School of Government. Officials often mistake slow progress for prudence, he adds—“but the maximum risk of something going wrong occurs once construction is under way, so you should keep that period as short as possible.” He cites the extension of Madrid’s underground system in the mid-2000s as a complex project that worked well because so much care went into planning and technical specifications. Metro de Madrid, the state-owned firm that ran the project, has since won contracts to upgrade tube systems in China, Russia and Latin America. Having the right staff matters as much as giving them the right things to do. The fact that Germany’s civil service consists 1


52 International 2 almost entirely of longtime employees

“does not exactly make for an atmosphere of questioning and new ideas,” points out Gerhard Hammerschmid of Berlin’s Hertie School of Governance. Performance-related pay, introduced in the 1990s, means the hierarchy is slightly less rigid than in the 19th century, when Bismarck complained about the stolidity of German officials. Better starting salaries and part-time working have been brought in to attract new entrants. But it remains too costly and legally difficult to get rid of underperformers. Smaller countries can be quicker to change. In the past decade New Zealand has recast its civil service, creating departmental chief executives who sign three- or five-year contracts to meet specified targets. They manage their fiefs, making it harder to pass the buck between them and transient ministers. The role of public-services commissioner has recently been strengthened to reduce short-termism and get departments to work together. Iain Rennie, the current commissioner, reckons the new approach has helped cut recidivism by 12%, by focusing on details such as jobs and housing for ex-offenders. Such inventiveness cannot entirely resolve the tension between capping spending and governments’ appetite for new things to do. But it suggests that governance can be improved without the state growing endlessly. Not a bad starting-point for rethinking the role of the mandarins. 7

Women in politics

Treating the fair sex fairly Female ministers are fewer than their male colleagues, but equally effective

“A

TOKEN sprinkling of women,” is how Luciana Berger, a member of parliament for the opposition Labour Party, dismissed the recent British cabinet reshuffle, the avowed aim of which was to make the government less male. Similar cries of tokenism followed last year’s appointment of Julie Bishop as Australia’s foreign minister, which made her the sole woman in the country’s cabinet. Almost everywhere women are in a minority in government cabinets (see chart for a selection of countries). Some fret that they are treated as mere window-dressing, making the government look more representative but given neither meaningful portfolios nor the support needed to be effective. New research suggests such criticisms may miss the mark. In a forthcoming paper*, Maria Escobar-Lemmon and Michelle Taylor-Robinson of Texas A&M University compare the experience and

The Economist August 9th 2014 Ebola

Not just tokens

Fear and loathing

Female cabinet ministers as % of total 2014 or latest

0

10 20 30 40 50 60

Sweden

24

France

31

Chile

23

Germany

16

Rwanda

32

Colombia

16

United States

23

Britain

34

Argentina

17

India

45

Japan Australia

Total ministers

19 19

Sources: Official websites; CIA Factbook; Inter-Parliamentary Union

accomplishments of the men and women among 447 cabinet ministers in recent administrations in five countries in the Americas: Argentina, Chile, Colombia, Costa Rica and the United States. Experience was measured by relevant academic background, previous cabinet posts and political connections; and success by the number of bills presented, length of tenure and whether a minister’s time in office ended with firing or forced resignation. If women were given unimportant portfolios or overlooked by the president, the authors reasoned, they would probably produce less legislation and be easier to get rid of than men. If they were appointed just for photo-ops in election years they would hold office for shorter spells. And if they were much less likely to succeed than men with similar credentials it would suggest that they were being treated as tokens, not taken seriously. But this was not what the authors found. Although female ministers initiated fewer bills than comparable male ones, overall they were as likely to succeed. Nor was there much evidence of tokenism in individual countries among the five. None of this is to say that female politicians are dealt a decent hand. Those who make it to cabinet seem to be treated fairly, but too few get the chance to build the skills and connections that are prerequisites for such jobs. And as the authors point out, their analysis says nothing about whether the women they studied were treated differently in cabinet meetings or by the media, or how female ministers fare in other countries. But it does suggest that the scarcity of women in senior political posts is more of a problem than tokenistic treatment of those who make it there. 7

...............................................................

*“Minorities not tokens, toward gender equality within cabinets”, by Maria Escobar-Lemmon and Michelle Taylor-Robinson. Working paper prepared for the annual meeting of the American Political Science Association, August 28th-31st 2014.

New York

Why panicking makes things worse

T

WO American health workers infected with Ebola in Liberia have been brought to Atlanta to receive care. “The fact that we are taking the Ebola patients, while others from the area are fleeing to the United States, is absolutely CRAZY,” tweeted Donald Trump, a property mogul, to his 2.65m followers on August 2nd. He is not the only one in a panic. On August 4th a New York hospital said that a patient might have Ebola. “Test result looms as NYers wait in fear”, blared the headline in one local paper. (The patient turned out not to have the disease.) By August 1st about 1,600 people in three west African countries—Guinea, Liberia and Sierra Leone—had caught the virus and nearly 900 had died, making this the worst Ebola outbreak ever. Several cases in Nigeria add to fears that it is jumping borders. There is no treatment for the disease, which can cause uncontrollable bleeding. Even if an experimental drug given to the health workers in Atlanta is effective, it will not be widely available for years. But Ebola is not as likely to kill large numbers as virulent airborne diseases. It is caught only by direct contact with bodily fluids and each victim usually passes it to just one or two others. A SARS case generates three more, and one of measles, 12-18. How far Ebola spreads therefore depends on the actions of politicians, doctors and patients. Fear could spur the creation of a coherent containment strategy, which will be sorely needed if crowded Lagos, Nigeria’s commercial capital, becomes a transmission hotspot. It could prompt more aid: on August 4th the World Bank pledged “as much as” $200m to fight Ebola, though some of this was already earmarked for the affected countries. But after decades of civil wars in west Africa, outsiders and authorities are widely distrusted. Villagers have attacked foreign health workers. Families are concealing ill relatives rather than bringing them to hospital. “We’ve never faced this level of population resistance before,” says Laurie Garrett of the Council on Foreign Relations, a think-tank. Panic in rich countries could make things worse. The difficulty with which Ebola is transmitted means that their own health systems could contain it. And threatening to cut travel and trade ties with affected regions will make it less likely that new cases are reported— and more likely that the disease spreads.


The Economist August 9th 2014 53

Business

Also in this section 54 Bernie Ecclestone’s $100m deal 54 The rise of TripAdvisor 55 Unilever, exemplar of sustainability 57 Schumpeter: Warren Bennis, father of leadership studies

For daily analysis and debate on business and our weekly “Money talks” podcast, visit Economist.com/business-finance

Mergers and acquisitions

Coming unstuck NEW YORK

When giant deals fail, life rarely goes back to normal

Q

UEEN VICTORIA sniffed that “We are not interested in the possibilities of defeat.” For empire-builders in the corporate world, failure is all too common. On August 5th the octogenarian Antipodean Rupert Murdoch withdrew 21st Century Fox’s unrequited pursuit of Time Warner. The deal would have been worth at least $70 billion and have created a media monolith. Hours later Softbank, a Japanese conglomerate which owns Sprint, an American telecoms firm, abandoned its effort to buy control of T-Mobile US, another operator in America, with an enterprise value of more than $30 billion. In 2014 there have already been two other big dealmaking snafus—Pfizer’s abortive bid for a fellow drugmaker, AstraZeneca, worth $125 billion, and the union of Publicis and Omnicom. The two advertising firms were supposedly engaged in a logical impossibility: an amicable FrancoAmerican merger of equals. In fact their executives were fighting like rats in a sack. In all, bids worth $390 billion have been terminated or withdrawn so far in 2014 (see chart). That is huge in absolute terms, though it mirrors the surge in mergers and acquisitions (M&A) this year. Typically10-20% of proposed deals end in tears, and this year has been no exception. Companies usually overstretch in two ways. They propose combinations that an-

noy regulators—despite the passionate appeals of Masayoshi Son, Softbank’s founder, American regulators were unimpressed by his plans to shrink the number of big mobile operators from four to three. Or they propose deals that test the limits of their balance-sheets and the patience of their investors. Mr Murdoch was offering a takeover premium of about $20 billion, more than the capitalised value of the cost savings that could have been achieved, suggesting the deal would have destroyed value for his shareholders. Reflecting this, his own share price had steadily fallen, reducing the value of the stock being offered to Time Warner. If Mr Murdoch chooses to

Busted flushes Global M&A deals withdrawn or terminated $bn

% of total

800

20

600

15

400

10

200

5 0

0 2003

05

Source: Bloomberg

07

09

11

13 14

bid again, he would have to find deeper cost savings. After Astra’s board dismissed an offer on May 26th, Pfizer’s shareholders had limited appetite for a dearer bid—although the American firm has not ruled that out. By tradition, when deals flop, everyone pretends nothing has really changed. Thus Mr Murdoch declared that “21st Century Fox’s future has never been brighter”, while Mr Son said, “Our focus moving forward will be on making Sprint the most successful carrier.” In fact failed transactions often have lasting consequences. Target firms that cook up ambitious forecasts as part of their defence face the hard taskofmeeting them. Astra said it expected sales almost to double by 2023 despite their being stagnant today. Share buy-backs are one way to rent some loyalty. Time Warner’s shares fell by 13% the day after Mr Murdoch’s exit. It plans to repurchase $5 billion of its shares, equivalent to 8% of its total. On the other side of the table, the thwarted acquirer may occasionally find it has dodged a bullet. Had Barclays, a British bank, succeeded in buying a Dutch rival, ABN AMRO, in 2007 for $92 billion it would have committed corporate hara-kiri. Royal Bank of Scotland, the ultimate victor in the tussle, ended up nationalised. But usually a failed giant deal damages the credibility of the acquirer’s managers and the coherence of its strategy. On August 6th Sprint said it would remove its chief executive, Daniel Hesse. Botched takeovers have tarnished other careers. Jack Welch, of General Electric, sullied his reputation by failing to buy Honeywell as a last hurrah before he retired in 2001. European regulators blocked the deal. Marius Kloppers, a young star who became chief 1


The Economist August 9th 2014

54 Business 2 executive of the world’s biggest mining

company, BHP Billiton, in 2007, lost his way after trying to buy its archrival, Rio Tinto, for $115 billion in 2008 and then in 2010 the obscure Potash Corp of Saskatchewan for a very unobscure $43 billion. By 2013 he had left BHP. The recent rash of failed deals may encourage other firms to be more cautious. The takeover announced on August 6th of Alliance Boots, a British pharmacy chain, by Walgreens, an American counterpart, was a downbeat affair. Walgreens lowered its earnings forecast; and in response to growing American disquiet about firms using takeovers to shift their tax bases abroad (“tax inversions”, as they are known), it also dropped a plan to use the deal to move its domicile to Europe. For failed predators and escaped prey alike the key to re-establishing momentum is to demonstrate strong operating performance. If earnings are rising, investors, staff and clients will forgive almost any-

thing. In 2010 Prudential PLC, a British insurer active in Asia, suffered a humiliating defeat when its own shareholders rebelled against its $36 billion takeover bid for AIA, a Hong Kong-based rival. Since then Prudential’s boss, Tidjane Thiam, has rebuilt his reputation in spectacular style by doubling operating profits. By this test, the outlook is queasy for some recent failed-dealmakers. Pfizer’s underlying pre-tax profits fell by 25% last quarter. Softbank’s American mobile arm lost money last year and is losing customers. Publicis said in July that its profits would be lower than expected. Its boss, Maurice Lévy admitted it had been “distracted”. For chief executives, the slog of day-today operations is miserable compared with the glamour and gratification of the world of M&A. But they can be assured that if they fail both at dealmaking and the mundane task of boosting earnings, their shareholders, like Queen Victoria, will not be amused. 7

Bernie Ecclestone

Irony alert BERLIN

For a load of dosh, Formula One’s boss has bribery accusations dropped

“I

ASSUME”, Judge Peter Noll told the defendant, Bernie Ecclestone, in a Munich court on August 5th, that “we’ll only see each other again on television.” With that Mr Ecclestone, the 83-year-old boss of Formula One motor racing, was free to leave. He must pay $100m—$99m to the state of Bavaria, $1m to a charitable foundation for children. But he will continue to be presumed innocent of the bribery charges that could have sent him to prison for up to ten years and put a spoke in the wheel of his sports empire. Mr Ecclestone’s lawyers settled with prosecutors under paragraph 153a of the German legal code. This was originally meant to speed up the settlement of certain kinds of muddled criminal cases so courts could keep up with their dockets. But in recent years, the paragraph has been invoked in high-profile cases of white-collar-crime, drawing criticism that it is a way for the rich to buy themselves out of trouble. Mr Ecclestone’s $100m payment set a record. The allegations against him dated back eight years. BayernLB, a bank owned by the state of Bavaria, was then selling its near-50% stake in Formula One. Mr Ecclestone paid $44m to one of BayernLB’s bankers, Gerhard Gribkowsky. He did so because Mr Gribkowsky had threatened to expose Mr Ecclestone’s tax affairs, said Mr Ecclestone’s lawyers. No, said prosecutors, he did so because Mr Ecclestone wanted to ensure that Bay-

ernLB sold to the buyer of Mr Ecclestone’s choice, CVC, a British investment firm, which now owns the stake. In 2012 Mr Gribkowsky was jailed for eight and a half years for taking a bribe. Common sense suggests that if a bribe was received, it must also have been given. But that is not what Mr Ecclestone’s case hinged on in the German system. At issue was whether Mr Ecclestone was aware that Mr Gribkowsky met the definition of an “office holder” (in this case, of BayernLB) at the time the money changed hands. Mr Gribkowsky was a board member of the bank. But he presented himself as an ordinary banker, Mr Ecclestone said. The British businessman could have been unaware of Mr Gribkowsky’s position. Prosecutors and judge have concluded that proving Mr Ecclestone knew better would take time and effort, and might fail. Hence the settlement. The enormous sum has nothing to do with the case, said Mr Noll. It stands in relation to Mr Ecclestone’s wealth, estimated at more than $4 billion. For the court, as for Formula One, the deal removes a headache. However, it has left a bad aftertaste. “Where is the justice in this?” asked Bild, the largest German tabloid. Sabine Leutheusser-Schnarrenberger, a former justice minister, called it “effrontery” that is “not in keeping with the sense and purpose of our rule of law”. But Mr Ecclestone was free to go.

Travel websites

David vs two Goliaths TripAdvisor could challenge the big two providers of online travel services

“B

REAKFAST is nasty, the rooms are nasty.” So complained a reviewer of an Oregon guesthouse earlier this year. There is nothing unusual in that: all hotels must deal with the odd disgruntled guest. This critique, though, appeared on TripAdvisor, a travel-review website. When the correspondent went on to document drunken housekeepers and licentious receptionists, the owners sued him. It was more than a point of pride. What customers say on TripAdvisor can make or break hotels. Around 260m people visit the site each month to read some of the 125m reviews. The firm makes money by displaying prices from online travel-agents (OTAs) alongside its reviews, and then charging those agents each time a customer clicks through. It is such a good example of a network effect that it is the subject of a Harvard Business School (HBS) case study. The more users post reviews, the more useful the site is to those about to book a holiday. This makes it more important to hotels and travel agents, who offer better deals. This results in more traffic—and more reviews— closing the virtuous circle. Last year TripAdvisor reported revenue of $944.7m. Because users post reviews free of charge, in 2012, Jeffrey Bussgang, an HBS lecturer, calculated that its gross margin was an as- 1

Service poor, view disappointing


The Economist August 9th 2014 2 tounding 98%.

For these reasons, some think TripAdvisor may be able to take on the “big two” OTAs, Expedia (from which TripAdvisor was spun off in 2011) and Priceline, which on August 6th bought up to 10% of Ctrip, a large travel website in China. These firms sell flights and hotel rooms directly, rather than pass booking requests on to others, as TripAdvisor does. But, says Blake Harper of Wunderlich Securities, a stockbroker, the two ways of doing business are converging. Sites owned by the big two, such as Hotels.com and Booking.com, now encourage user reviews. At the same time, TripAdvisor has launched Instant Booking, which lets smartphone users complete their bookings without leaving the TripAdvisor site (although the transaction itself will still be with an OTA or a hotel).

Business 55 Instant Booking serves another purpose. Half of TripAdvisor’s traffic comes through mobile devices. Being able to book in a single place will make its app slicker. Moreover, smartphones are creating firms which cater to travellers when they arrive at their destination—and TripAdvisor is getting into that business. In May it paid a reported $140m for La Fourchette, an online restaurant-booking service. On 24th July it said it was paying $200m for Viator, a firm that sells guided tours and other touristy activities. TripAdvisor’s boss, Stephen Kaufer, denies he wants to take on the big two. “We are a media site,” he says. “I want Expedia and Priceline to thrive because they are my clients.” But soon, holidaymakers will be able to book their entire trips without leaving the TripAdvisor app. Rivals beware. 7

Unilever

In search of the good business PORT SUNLIGHT

For the second time in its 120-year history, Unilever is trying to redefine what it means to be a virtuous company

S

LEEPING in the open on top of his mansion was a nightly routine for William Lever, founder of what is now Unilever, an Anglo-Dutch consumer-goods giant. When Paul Polman became chief executive of the soap-to-ice-cream-maker in 2009 (joining from a Swiss rival, Nestlé), the Dutchman spent a night in Lever’s rooftop bed as part of a total immersion in the history of his new firm. It helped persuade him, a year later, to launch a “Sustainable Living Plan”, the name for his attempt to make Unilever the pre-eminent example of how to do capitalism responsibly, just as it had once been under Lever. Outdoing even the Cadburys of Birmingham and the Rowntrees of York, Lever had pioneered the Victorian model of paternalistic business. At a time when disease and malnutrition were widespread in Britain, his products were marketed for their health benefits. His employees were decently housed in a purpose-built company town, Port Sunlight, on Merseyside. Lever campaigned for state pensions for the elderly and even provided schooling, health care and good wages at palm-oil plantations in the Congo. “Today, he would do the same things we are doing,” says Mr Polman. Like Lever, he insists that running the firm with close attention to its environmental and social impact is not an act of charity but of self-interest, properly conceived. The Sustainable Living Plan aims not only to reduce Unilever’s environmental footprint and increase its “positive social impact”, but also

Unilever’s lifebelt to double sales and increase long-term profitability. Milton Friedman’s view that business should focus on maximising shareholder value has been “interpreted way too narrowly”, Mr Polman argues. Under him, Unilever has again become the exemplar of the “good company”, the poster child of sustainability. If it cannot make the idea pay—with its deep pockets, long corporate history and determined boss—then perhaps no other firm can.

So far, Mr Polman’s efforts have earned rave reviews. A recent survey of “sustainability experts” by GlobeScan, a consultant, ranked Unilever first by a wide margin (see chart on next page). The company is generally reckoned to have the most comprehensive strategy of enlightened capitalism of any global firm. Unilever also stands out for the way it has tried to institutionalise its efforts, says Alice Korngold, author of “A Better World, Inc”, a book on corporate do-gooding. The board scrutinises the plan and executive pay is linked to its targets. In March, Mr Polman got a bonus of $722,000 for his efforts. Unilever says the plan has boosted employee satisfaction. It may have also have boosted the share price. Since the plan was unveiled in November 2010, Unilever’s shares have risen by more than 40%. And this was during a period when its biggest rival, Procter & Gamble of America, lost its way and ultimately its boss. But Unilever seems to have reached a critical moment. Its recent annual results disappointed the markets and the share price recently dropped below what it had been a year earlier. Shareholders are cautious. “Unilever has built a strong niche position with investors who focus on environmental [matters],” says Martin Deboo of Jefferies, an investment bank. “But for mainstream investors it is a modest positive at most, and then only so long as it does not cost much.” So the big questions are: can the company achieve the targets set out in its sustainability plan? And if it can, will that help it in the long run (as the share-price rise of 2009-2013 suggests)? Or might it eventually cost Unilever dear in terms of market share and investors’ backing, as the recent downturn could imply? The Polman Plan Unilever defines sustainability broadly. It includes not just environmental factors but improving the lot of customers and workers—its own and those in its supply chain. It also aims to contribute to society as a whole. These goals are seen as necessary to maintain the firm’s “licence to operate” in an age when, Mr Polman believes, companies will be subject to increasing public scrutiny. Specifically, by 2020, Unilever aims to: “help a billion people to take steps to improve their health and well-being”; halve the environmental impact of its products; and source all its agricultural raw materials sustainably, meaning that they should meet requirements covering everything from forest protection to pest control. Progress on energy use and waste reduction—which the firm directly controls— has been impressive. Through recycling and efficiency drives, three-quarters of Unilever’s manufacturing sites now send no non-hazardous waste to landfills. Car- 1


The Economist August 9th 2014

56 Business 2 bon emissions in its manufacturing opera-

tions are one-third lower than in 2008, through a combination of cleaner technologies and greater efficiency. Newly established best practices have spread faster than expected through the company, thanks to the creation of a central corporate team dedicated to spreading the word; previously this had been left to individual factories. The company also set up a “small actions, big differences fund” to invest in cost-saving ideas proposed by its business units. Many firms do such things. But to meet its broader goals Unilever has to change what goes on beyond its corporate walls. When it measured the greenhouse-gas emissions associated with its products, it found that significant emissions came in the supply chain—ie, not from Unilever itself. So it had to get the support of its suppliers, who range from food giants such as Cargill to small farmers in India. In 2010, 14% of its agricultural supplies were sourced sustainably by its own definition. Now the share is 48%. Unilever has achieved this partly by backing its suppliers’ innovations. For its soup brand, it created a €1m ($1.3m) Knorr Sustainable Partnership Fund, which invested in schemes such as drip irrigation for tomatoes in Spain and California that have increased yields and reduced water use. The company has signed up to certification schemes run by the Rainforest Alliance, a non-governmental organisation, to improve farming practices in cocoa (used in its ice-cream brands, such as Wall’s and Ben & Jerry’s) and tea (used by Lipton’s). Rainforest Alliance schemes also have an educational component and Unilever has trained more than half the small farmers of Kenya who grow tea, the country’s largest export crop. It has budgeted €4m to expand the scheme to other parts of Africa and to Vietnam. Training small farmers is all the rage with other consumer-goods firms, such as Coca-Cola, SABMiller and Walmart. It improves incomes at the bottom of the pyramid and makes farm supplies more secure by reducing environ-

By a mile Leaders in sustainability, % of analysts polled 0

5 10 15 20 25 30 35

Unilever Patagonia Interface Marks & Spencer Nestlé Natura Nike GE Walmart Puma IKEA Coca-Cola Source: GlobeScan/SustainAbility Survey

Polman looks over his shoulder at Lever mental threats such as water scarcity. Yet although Unilever may be able to buy its own raw materials from sustainable sources, it alone is rarely big enough to make a difference to any given commodity worldwide. As a result, Mr Polman spends a lot of time trying to persuade his peers and rivals to act more sustainably, too. A big test of his effectiveness will come with palm oil, a crop which plays a significant role in deforestation (tropical forests are often cleared illegally to make way for palmoil plantations). Lever’s main concern had been working conditions in his plantations. Mr Polman wants to change the entire industry. He and others have persuaded members of the Consumer Goods Forum, an industry group, to sign an agreement to shift to sustainable palm-oil production practices. In July Wilmar, the world’s biggest palmoil trader, signed up—a step forward. But the agreement has been criticised by environmental groups such as Greenpeace for allowing too long a transition to sustainability. Worse, the big Western consumergoods companies account for only 20% of palm-oil sales (the rest are by local traders in emerging markets such as China). So even if they all promise not to use palm oil from cleared forests, they may not be able to stop the deforestation. There is a bigger challenge for the Sustainable Living Plan: it will not be possible to meet its goals without changing customers’ behaviour. Three years ago the company measured the carbon footprint of 2,000 products and found that on average 68% of greenhouse-gas emissions in their life cycles occurred only after they got into the hands of consumers, mostly through the energy-intensive process of heating water (eg, for tea bags or washing powder).

Changing people’s behaviour is hard. The firm has a target of getting 200m consumers by 2015 to take shorter showers (thus reducing greenhouse-gas emissions, saving water—and using more Unilever products designed to work with less liquid). The goal will be missed so badly that people in the company liken it to getting smokers to quit. The firm has had some success designing products that use fewer resources. Two years ago, for example, it launched “dry shampoo”, a powder that works by being combed through hair. It has caught on fast. But even altering the product does not necessarily lead consumers to change behaviour, so Unilever has embarked on the hardest part of its new strategy—overhauling how it markets its brands. Soon after Lever launched Lifebuoy soap in the 1890s, he started running linked advertisements and educational campaigns. In America, millions of children took part in a Clean Hands Health Campaign in the 1920s. In 2002 Unilever started pushing the same idea in India, offering hand-washing classes in villages. Mr Polman has expanded this across the developing world. “We have done more hand-washing work in the past four years than in the previous 20,” he brags. The 21-day course, according to independent studies, reduces diarrhoea cases by 25% and increases school attendance because children are sick less often. The challenge now is to do the same with brands that do not have such obvious benefits as Lifebuoy. Saving the world one investor at a time “Unilever is taking this approach [sustainability] further than other companies,” says Linda Scott of Oxford University’s Said Business School. But refocusing 400 brands “on the good the product can do”, she reckons, will take a long time and “require patient capital”. And that raises the biggest question of all: will investors give Mr Polman the time he needs? In the 1920s shareholder pressure eventually forced Lever to scale back his ambitions. Mr Polman has been canny. One of the first things he did after taking over Unilever was to move away from quarterly reporting and stop giving guidance to the markets about the firm’s next results. He is trying instead to encourage investors to think about the fundamentals of the business which, he claims, are improved by the sustainability plan. Still, the share price has been edging lower, and a Unilever executive concedes privately that it may require a crisis—such as a spike in food prices like the one in 2007-08—for investors properly to value the new approach. Mr Polman’s experiment in enlightened capitalism is nothing if not ambitious. And not the least ambitious part of it is the attempt to change the short-term horizons of investors. 7


The Economist August 9th 2014

Business 57

Schumpeter Leading light The man who invented the study of corporate leadership, Warren Bennis, died on July 31st aged 89

W

ARREN BENNIS was the world’s most important thinker on the subject that business leaders care about more than any other: themselves. When he started writing about leadership in the 1950s the subject was a back road. When he died on July 31st it was an eight-lane highway crowded with superstar professors whizzing along in multi-million-dollar muscle cars. Mr Bennis produced about 30 books on leadership. Some of them are classics, such as “On Becoming a Leader” (1989). All are surprisingly readable, stuffed with anecdotes, examples and literary references. He offered advice to leaders from all walks of life. Howard Schultz, the chairman of Starbucks, regarded him as a mentor. Presidents from both sides of the aisle—John Kennedy and Gerald Ford, Lyndon Johnson and Ronald Reagan—sought his advice. If Peter Drucker was the man who invented management (as a book about him claimed), then Warren Bennis was the man who invented leadership as a business idea. Central to his thinking was a distinction between managers and leaders. Managers are people who like to do things right, he argued. Leaders are people who do the right thing. Managers have their eye on the bottom line. Leaders have their eye on the horizon. Managers help you to get to where you want to go. Leaders tell you what it is you want. He chastised business schools for focusing on the first at the expense of the second. People took MBAs, he said, not because they wanted to be middle managers but because they wanted to be chief executives. He argued that “failing organisations are usually over-managed and under-led”. Mr Bennis believed leaders are made, not born. He taught that leadership is a skill—or, rather, a set of skills—that can be learned through hard work. He likened it to a performance. Leaders must inhabit their roles, as actors do. This means more than just learning to see yourself as others see you, though that matters, too. It means self-discovery. “The process of becoming a leader is similar, if not identical, to becoming a fully integrated human being,” he said in 2009. Mr Bennis knew whereof he spoke: he spent a small fortune on psychoanalysis as a graduate student, dabbled in “channelling” and astrology while a tenured professor and wrote a wonderful memoir, “Still Surprised”. What constitutes good leadership changes over time. Mr Bennis was convinced that an egalitarian age required a new style.

Leaders could no longer crack the whip and expect people to jump through hoops. They needed to be more like mentors and coaches than old-fashioned sergeant-majors. Top-down leadership not only risked alienating employees. It threatened to squander the organisation’s most important resource: knowledge. There is no point in employing knowledge workers if you are not going to allow them to use their knowledge creatively. The last quarter of the 20th century often saw Mr Bennis in despair. He loathed the Masters of the Universe who boasted about how many jobs they had nuked and how much money they had made. “On Becoming a Leader” is full of prophetic warnings about corporate corruption, extravagant executive rewards and short-termism. He also lamented the quality of leadership in Washington, DC. But he became more optimistic in his last few years, at least about the corporate world. The Enron, WorldCom and Lehman disasters taught businesses the danger of hubris. And a new generation of CEOs, whom he dubbed “the crucible generation” and compared to his own second-world-war generation, were more impressive than their immediate predecessors, characterised not merely by tolerance of other people, but respect for them. Mr Bennis’s work on leadership was shaped by three different experiences. The first was the Great Depression: in 1932 his father was fired from his job as a shipping clerk without explanation and managed to put food on the table only by helping the mafia transport bootleg alcohol. The next was the second world war: he led a platoon into battle at the age of 19 and won a Purple Heart and a Bronze Star. The third was more cheerful: the big expansion of American universities during the post-war boom. The demobbed war hero went to Antioch College, where he was taken up by its president, Douglas McGregor, a social psychologist who subsequently made his name distinguishing between two approaches to running organisations, theory X (scientific management) and theory Y (humanist management). McGregor pulled strings to get Mr Bennis into the Massachusetts Institute ofTechnology to study for a PhD in economics. Despite a frosty reception—one of his professors, Charles Kindleberger, told him to his face that “We didn’t exactly throw our hats in the air when we saw your application”—he got a job teaching in the new field of organisational behaviour. The young scholar took full advantage of the intellectual cacophony of Cambridge, absorbing ideas from sociology to psychology, and eventually he tried his hand at leadership itself. He spent11 years as an academic administrator at a time when universities were being torn apart by student protests, first as provost of the University at Buffalo and then as president of the University of Cincinnati. Contrasting counterweights When Drucker came to a party at Mr Bennis’s post-modern house on Santa Monica beach in California, in the late 1990s, the two men were a study in contrasts: Mr Bennis, thin, tanned and dressed in a light suit; Drucker paunchy, pale and encased in black. Mr Bennis talked animatedly about leadership. Drucker growled that what mattered was followership. But in fact the men were brothers under the skin and worthy counterweights to each other: big thinkers who tooksubjects too often synonymous with platitudes and gobbledygook, and, by dint of a lot of hard twisting, wrung some sense out of them. 7 Economist.com/blogs/schumpeter


58

The Economist August 9th 2014

Finance and economics

Also in this section 59 Buttonwood: Lucky investors 60 Portuguese bank woes 60 Europe probes its banks 61 Hong Kong’s financial flows 61 Ghana in trouble 62 Free exchange: Subsidising shipyards

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

World trade

Bailing out from Bali

India’s scuppering of the latest trade talks leaves no one better off

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OR THE first half of 2014 officials at the World Trade Organisation (WTO) had a spring in their step. In December 2013 its159 members, meeting in Bali, had struck a “trade facilitation agreement” (TFA)—a pledge to cut red tape at customs posts around the world. It was the first big win of the Doha round, a 13-year slog to bring down trade barriers. But on July 31st, just before ratification, India withdrew its support, prompting the deal’s collapse. Some Indian concerns with the latest round of trade talks are valid; but its actions raise existential questions for the WTO, which will celebrate its 20th birthday next January without a single trade deal to its name. Developing countries had the most to gain from the TFA. According to the Peterson Institute for International Economics, in Washington, DC, it would create 21m jobs, almost all in poor countries. Even such a limited bargain, which does not cut tariffs, would boost developing-country GDP by $523 billion. India, among a handful of countries which receives help from the WTO to boost its trade, would have seen particularly large payoffs. At first glance its volte-face seems surprising. The deal was negotiated by India’s previous, protectionist-minded government, yet it is the relatively businessfriendly administration of Narendra Modi, the new prime minister, that has scuppered it. In truth, it was never clear if India’s farming policies could be compatible

with any WTO deal. Under the organisation’s rules, tradedistorting subsidies to farmers in a developing country cannot exceed 10% of the total value of its harvests. But under a new food-security law, India is bringing in a $4 billion-a-year scheme to provide cheap food for 800m people; and the minimum support prices the government offers to farmers, which for rice have more than doubled since 2001-02, will continue rising. If these measures breach the 10% limit, India would be open to a WTO challenge. The government insists it will not sacrifice food security on the altar of a trade deal. In December, before India’s elections, the WTO tried to accommodate its demands with a “peace clause” that would

Food for thought India’s grain stocks*, tonnes, m Wheat

Rice 80

Buffer norms and strategic reserve for rice and wheat

60 40 20 0 2004 05 06 07 08 09 10 11 12 13 14 Source: Food Corporation of India

*At July 1st

have made the food-security programme immune from challenge for four years. But the new government was unsatisfied with the fudge, worried that come 2017 it would have little bargaining power to get a permanent exemption. India’s hardball tactics will hurt a country struggling to shake off its protectionist reputation. Of 95 countries tracked by the World Bank in 2013, India’s exports-to-GDP ratio was 19th from bottom. Agricultural protection is high. In 2012 the European Union, rightly scorned for its own farm policies, spent the equivalent of 0.73% of GDP on agricultural support. India’s 1.15 trillion rupees ($18.8 billion) spending on food subsidies touches 1% of GDP—and has doubled since 2009. Even that is before counting subsidies to farmers for fertilisers, tractor fuel and the like. But India’s move was not sheer petulance. Arvind Subramanian of the Peterson Institute argues that India has been let down by agreements made during the Uruguay round of trade talks that finished in the mid-1990s. At that time, rich countries were allowed to keep many protectionist policies in return for promising to reduce them progressively. India, which was deemed not to subsidise domestic agriculture at the time, was thus left with stricter limits on supporting farmers, even as it lowered its import tariffs. The WTO could help out. The reference prices for commodities that it uses to measure handouts to producers date from 1986-88, which has the effect of exaggerating India’s protectionism. Rich countries are loth to update the reference prices, lest it open the floodgates for all sorts of other quibbles. But India could do some things to help itself. Three things stand out. First, it could exploit another historical legacy of the Uruguay deal. It has been a more enthusi- 1


The Economist August 9th 2014 2 astic tariff-cutter than that deal required: it

is free, for example, to raise the tariffs on vegetables from 30% to more than 100%. A commitment to keeping such tariffs low, or cutting them further, could form part of a deal whereby the WTO turns a blind eye to other subsidies even beyond 2017. Second, India’s food-security law need not lead to increases in rice and wheat purchases. The government intends to buy more than 30m tonnes of rice in the year from October, a 13% rise on the last haul. But its rice reserves exceeded 21.2m tonnes in July—over twice the recommended buffer stock (see chart on the previous page).

Finance and economics 59 Stores get so bloated that grain threatens to spoil and bureaucrats dump it on the world market: India is the world’s largest exporter of rice. To help poor farmers, India could instead focus on producer subsidies that are not linked with levels of output, such as cash transfers. The WTO finds this sort of help more palatable. Third, it could phase out minimum support prices, which tend to favour bigger, richer farmers (and which 62% of Indian farmers do not even know exist). With the money saved, it could focus on subsidising grain sales to India’s poor. No-one objects to using state funds to subsidise consump-

tion, at least not on trade grounds. India has a bloody nose, but the impasse may prove even more damaging for the WTO and the “trade round” system of multilateral trade deals that span many industries. More talks are scheduled for September, but the WTO is increasingly regarded as a divided forum that cannot achieve anything. Much trade liberalisation has been achieved through regional trade bodies and free-trade areas recently, with more such deals in the works. The countries keenest to promote trade may see more promise in such forums than in the fractious global talking-shop. 7

Buttonwood Practice makes imperfect Even experienced fund managers don’t beat the market

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HE harder I practise, the luckier I get,” said Gary Player, one of history’s greatest golfers. And it is a widespread belief that experienced professionals are a lot better than neophytes. But is that true of fund managers? A new study* suggests that the answer is distinctly mixed. The paper examined the records of 2,846 American mutual funds between the start of1996 and the end of 2008, overseen by 1,825 managers (some looked after more than one fund). Turnover was high; fewer than a quarter of the managers lasted more than five years. Just 195 of them lasted a decade. Unsurprisingly, those managers who were poor performers in their early years were more likely to lose their jobs. In their last year in charge of their funds, these neophytes underperformed the veterans. However, the veterans did not outperform consistently; what they did do was avoid periods where they did particularly badly. The authors concluded that “even long-term managers show no ability to beat the market on a risk-adjusted basis. The key to a long career in the mutualfund industry seems to be related more to avoiding underperformance than to achieving superior performance.” Another conclusion may be that it pays to start well. A few years of outperformance at the beginning of your career will establish a reputation as a star manager, and the money will roll in. At that point, it may not matter what happens next in terms of returns. A previous study by the same academics found that successful performance in the first five years of a manager’s career is not predictive of success in the following five years. A similar conclusion was reached in a study backed by Vanguard, a manager best known for its “tracker” funds—which

The luck runs out Actively managed US mutual funds % of funds in top-performing quintile at end-2007 By quintile at end-2013

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15

20

25

30

1st = best 2nd 3rd 4th 5th = worst Merged/ closed Sources: Vanguard; Morningstar

aim simply to replicate the market’s performance rather than beat it, as “active” funds attempt to do. It analysed the performance of equity mutual funds that had been in the top quintile (20%) of their sector, and thus might be favoured by investors. In the following five years, their performance deteriorated, with more of such managers ending up in the bottom quintile than in the top (see chart). Why is it so difficult to be a consistent outperformer? In another paper**, Charles Ellis, an investment consultant for more than 40 years, explains the reasons. Fifty years ago, institutions did less than 10% of all trading on the New York Stock Exchange; now it is more than 95%. In general, fund managers have access to the same information as their peers and, for liquidity reasons, tend to focus on the largest stocks in the market; this makes it very difficult to perform better than the benchmark, particularly after costs and fees are deducted. A few genuinely brilliant managers may outperform the index but it is all but impossible to identify them in advance. Academics have been alive to this issue for 40 years; what is surprising, however, is how slow the active funds’ clients have

been to catch on. Tracker funds still have only around 11% of global fund-management assets, according to a report by PwC, a consulting firm. The simplest explanation seems to be blind optimism. Mr Ellis cites a survey that shows clients expect the average manager to beat the market by a percentage point a year, after fees. Pension funds run by trade unions, bizarrely, are the most optimistic of all. There are a number of potential explanations. Some are psychological; the “Lake Wobegon effect”, in which everyone thinks they can pick above-average managers; or what might be called the “don’t just sit there, do something” problem, in which trustees have to justify their existence by shuffling managers, rather than just buying a tracker and going to sleep. Another possibility is that investors have to be blindly optimistic if they are to justify the high returns assumptions they have made. Public pension funds in America routinely assume returns of 7.5-8% a year even though the risk-free rate is less than 3%. If they are not going to earn these returns by tracking the index, they must assume they can beat the benchmark. As Mr Ellis tartly remarks, “among pension-fund executives, the elusive magic of outperformance is now the most favoured way of closing funding gaps.” The best, it seems, is the enemy of the good. In the hope of earning outstanding returns, investors are paying active fundmanagement fees that will only dilute the modest returns they are likely to earn.

.............................................................. * “The career paths of mutual fund managers: The role of merit”, by Gary Porter and Jack Trifts, Financial Analysts Journal, July/August 2014 ** “The rise and fall of performance investing”, by Charles Ellis, same FAJ issue Economist.com/blogs/buttonwood


The Economist August 9th 2014

60 Finance and economics Banco Espírito Santo

Sharing the pain LISBON

Portugal grapples with a failed bank

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HE Espírito Santos are a banking dynasty whose name is as resonant in Portugal as the Rockefellers in America. But their reign ended abruptly on August 3rd as Banco Espírito Santo (BES), a big Portuguese bank in which the family business had a stake of 20%, was restructured. That followed the disclosure of hefty losses of €3.6 billion ($4.9 billion) arising from exposures to the parent family-controlled group of companies whose interests range from hospitals to cattle ranches. The scale of the losses came as a nasty surprise to the central bank, which has spoken of a “fraudulent funding scheme” run by Espírito Santo companies outside its jurisdiction. It has also accused the former bosses—a new independent chief executive had already been drafted in—of committing previously unreported and potentially criminal acts of “seriously detrimental” management during its final days, with a negative impact of €1.5 billion. The loss brought the bank’s solvency ratio below the statutory minimum, disqualifying BES from European Central Bank funding essential to its survival. A massive rescue was essential, but the form it took embodied, at least partly, a tougher European stance intended to share the burden between taxpayers and private creditors. Its sound activities—deposits, senior debt and most assets—were transferred to Novo Banco, a newly-created “good bank”. Shareholders and junior bondholders (who are the first to be wiped out when a company fails) have been left with only the toxic assets, essentially the bank’s exposure to the crumbling Espírito Santo empire and a troubled Angolan lender. This “bad” bank, which keeps the BES name, will be liquidated.

Senior moment Banco Espírito Santo’s: share price, € 1.40

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Judging from the prices of the shares and junior bonds (see chart), few investors expect much from the sale. The situation is different for senior unsecured creditors, whose bonds are trading at levels that imply they will be paid back in full. That is because they are moving with BES’s untroubled assets to the healthy Novo Banco. That makes the BES rescue a fudged hybrid of bail-in (where investors foot the bill) and bail-out (where taxpayers do). Portugal’s assertion that the rescue comes at no cost to taxpayers is highly questionable: a total of €4.9 billion is being injected into Novo Banco from Portugal’s bank-resolution fund. Though all lenders contribute to this kitty, the fund has been bolstered by a

€4.4 billion government loan, using EU and IMF money left over from Portugal’s sovereign bail-out in 2011. The state cash will be paid back from the proceeds of Novo Banco’s sale. If the price tag is below €4.4 billion, banks, not taxpayers, in theory fall liable for the difference. That presumes the government does not step in to foot a bill that could threaten the stability of other lenders, having already seen BES tumble. The bail-in-bail-out hybrid Portugal has plumped for complies with current EU rules, but would fall foul of incoming regulations. From 2016, senior creditors and even large depositors would have to chip in, further insulating taxpayers. 7

European banking tests

Exam nerves Will this year’s stress tests do the trick?

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HE collapse of Banco Espírito Santo is a salutary reminder that Europe’s banking woes have not gone away. This year’s supervisory campaign to end the lingering European banking crisis looks even more essential than before. The initiative stems from the decision to make the European Central Bank (ECB) the single supervisor of euro-zone banks. Before the ECB takes formal control on November 4th, it is carrying out a thorough examination of the books of128 big banks, which hold 85% of the total banking assets in the 18 countries that share the single currency. These banks, along with those in the rest of the 28-member European Union, are also being subjected to stress tests, to see how resilient they would be if there were another recession combined with market reverses. Stress tests have acquired a poor reputation in Europe. They undermined confidence not just in the lenders but also in their supervisors, since they gave clean bills of health to banks that collapsed soon afterwards, such as Dexia, a FrancoBelgian outfit, in 2011. This time will be different, insist European officials, both at the ECB and at the European Banking Authority, which is co-ordinating the stress tests across the EU. For one thing, euro-zone banks can no longer shelter behind complaisant national supervisors that seek to protect their own. As important, the ECB’s assessment goes well beyond the stress tests. Indeed its most important feature is an asset quality review (AQR)—a stringent scrutiny of banking assets before they are subjected to the tests. A similar joint approach, combining stress tests with AQRs, seems to have worked in three of the euro-zone countries most afflicted by

bad banks: Ireland in 2011, Spain in 2012 and Slovenia in 2013. The euro-zone review has been a mammoth undertaking with 6,000 people working flat out, mainly among the auditing and consulting firms hired to examine the banking books. Their findings, which are currently being collated and checked at the ECB, will change the starting-point for the final run of the stress tests. Loans may, for example, be reclassified into riskier categories; the proportion judged non-performing may rise; the amount of collateral deemed available to cover losses may fall. The findings of the exercise will be announced in October, together with the capital holes it has identified. Some may already have been filled, as banks have rushed to bolster their capital before the results. Cyprus’s biggest bank, which is laden with non-performing loans, has for example recently raised €1 billion ($1.3 billion) from investors, including €400m from a group led by Wilbur Ross, who runs an American private-equity firm. This has helped to push up the bank’s capital ratio from 10.6% to 15.6%. Whether the supervisory probe will fully dispel Europe’s banking crisis is uncertain. One concern is that if any bank is found to need official help, its home government will have to provide it. That is less reassuring than if it could rely on the combined resources of all eurozone countries. Furthermore, the tests do not assess the viability of Europe’s banking business as a whole. A recent study by advisers to the European Systemic Risk Board, the EU’s prudential regulator, found that the continent was overbanked. That does not augur well, whatever the pass rates are in the exams.


The Economist August 9th 2014

Finance and economics 61

Hong Kong’s finances

Ghana and the IMF

HONG KONG

ACCRA

Exposure to China is rising but the biggest risk comes from America

A mounting deficit forces Ghana to ask for help

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Going with the flow F INVESTORS are worried about the cloud of political uncertainty looming over Hong Kong, they have a curious way of showing it. Over the past five weeks, as a rancorous debate over the city’s democratic future spilled onto its streets, there has been a flood of demand for its currency. The territory’s de facto central bank, committed to a 31-year-old dollar peg, bought the $9 billion that streamed its way, to prevent the exchange rate from rising. Explaining the sudden influx, Hong Kong’s authorities pointed to technical factors such as dividend payments and mergers that had forced companies to buy the currency in bulk. But animal spirits were also part of the mix. An exchange-traded fund that tracks Chinese equities reported record inflows as punters chased China’s still-rapid growth. And then came an intriguing Vladimir Putin effect. Wary of financial sanctions over the Ukraine conflict, Russian companies, including OAO MegaFon, a mobilephone operator, and Norilsk Nickel, a metals producer, moved some of their cash reserves into Hong Kong dollars—where, they believe, their money will be more insulated from American pressure. A common thread runs through both the politics and the economics. The uneasy balance that has fuelled Hong Kong’s protests is the same thing that has made its financial system so attractive to global businesses and investors: the city boasts deep connections to China within a decidedly non-Chinese framework. Hong Kong is the best place for foreign investors to buy Chinese shares and bonds or lend to Chinese companies. It offers a wider choice of Chinese assets than anywhere else outside the mainland. In Hong Kong, unlike the mainland, investors are protected by a mature legal system and can move money in and out, unimpeded by capital controls. For Russians keen to dodge sanctions, the Chinese-but-not-Chinese character of Hong Kong is also the big draw. Thanks to its peg, the Hong Kong dollar is a direct substitute for the American one. Yet the Chinese banks at which the Russians deposit their cash are seen as strong enough to resist Washington’s lawmakers. It is certainly not the first time that Hong Kong has had to defend its peg. With the currency allowed to float within a range of HK$7.75-7.85 per US dollar, inflows have regularly tested the strong side of the band in recent years. The Hong Kong Mon-

Time for thrift

My other wallet has roubles etary Authority has met the challenge and absorbed the incoming cash. Hedge funds have no appetite for taking it on. Until the yuan is freely convertible, which may not happen for years, the dollar peg looks safe. Yet this picture of stability is changing as Hong Kong is drawn more closely into China’s economic orbit. One-tenth of deposits in its banking system are now denominated in yuan, up from less than 1% five years ago. Loans to Chinese corporate borrowers now account for one-fifth of Hong Kong bank assets, up from 5% in 2007. This change has led some to conclude that the territory’s links to China are becoming an economic liability rather than a selling-point. Moody’s, a credit-rating agency, has given Hong Kong banks a “negative outlook”—a warning that it may downgrade them. The IMF has warned of spillovers from a Chinese slowdown. But if Hong Kong has one foot more firmly planted in China than before, it still has the other foot very much in the torrent of global capital flows. It is this non-China side of the picture that is the pressing concern. With its currency peg, Hong Kong has no choice but to import monetary policy set by the Federal Reserve according to America’s needs. Five years of exceptionally low interest rates have turbocharged Hong Kong’s banks by making it cheaper to borrow the money they go on to lend. Last year’s “taper tantrum”, when investors fretted about a rise in American interest rates, provided a taste of how cashflows into Hong Kong can easily turn to outflows. More than China’s growth, Russian sanctions or Hong Kong’s own politics, the Federal Reserve will have the biggest hand in shaping Hong Kong’s financial fortunes in the coming months. 7

PECTATORS of the euro crisis have learned to look for a few defining precursors when trying to decide which peripheral European country was next in line for a bail-out. These usually include slow economic growth, high indebtedness (either private or public) and a wobbly banking system. They may have to tear up those rules when looking at Ghana, which on August 4th asked the IMF for help after its currency, the cedi, fell by a third against the dollar since the start of the year. Until recently Ghana was something of a model for good governance inAfrica, so its fall from grace is a shock. It enjoyed a run of economic growth averaging about 6% a year, and although that moderated to 4.4% last year, growth of6-9% is expected in the next few years. Private-sector debt remains low and Ghana started this decade with public borrowing of below 40% of GDP. Such seemingly sound fundamentals meant its debut bond issue in 2007 was a huge hit among foreign investors. But recently Ghana has been living beyond its means. Public debt is rising rapidly and now tops 50% of GDP on official figures. Fitch, a ratings agency, puts it even higher at 62%, taking into account a revaluation of its foreign-denominated debt. The main cause is a yawning fiscal deficit, which stood at 10.1% in 2013 and is forecast by Fitch to remain above 8% in each of the next two years. Ghana’s deficit is in turn mainly the result of big rises in public-sector pay. In 2012 civil servants’ wages gobbled up 70% of government revenues, which have also been squeezed by falling commodity prices. The government hopes to cut that to 35% in three years. Meanwhile, the administration of John Dramani Mahama, the president, has changed tack on fuel subsidies—they were cut, then quietly reinstated—and has been unable to prevent tax collection falling short of expectations. A weakening global gold price has also sapped Ghana of a vital source of foreign exchange. The country had a current-account deficit of 12.3% of GDP last year. The IMF will probably demand a cap on borrowing, a public-sector pay freeze, a more consistent policy on subsidies and perhaps some privatisation of power and water companies. None of this will be popular. Having spent too freely for a few years, Ghana looks set to experience a bit of European-style belt-tightening. 7


The Economist August 9th 2014

62 Finance and economics

Free exchange Tilted marine New techniques show the damage done by subsidies at the heart of global trade

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HERE is no better symbol of the benefits of globalisation than the container ship. More than 9 billion tonnes of goods and materials were transported by sea in 2012, with trade helping to lift global growth rates. An ever-expanding web of links connects rich and poor; developing countries now account for around 60% of seaborne trade. But ships also show the rotten side of trade: protectionism. In 2006 China enacted a “Long and Medium-Term Plan” to enlarge its shipping industry by 2015. It has been successful (see left-hand chart). New research shows its attempts to tilt markets may be having a bigger impact than previously thought. Protectionism in shipping is centuries old. In a 1905 study* Royal Meeker, an American economist, explained how a system of subsidies developed under Elizabeth I. Rewards were based on tonnage of ship, and included “bounties” paid to fishing boats heading for the North Sea in search of herring. Adam Smith provided an early economic analysis in “The Wealth of Nations”, lamenting: “It has, I am afraid, been too common for vessels to fit out for the sole purpose of catching, not the fish, but the bounty.” The handouts distorted the shipbuilding industry, resulting in an oversize fishing fleet and a misallocation of resources. Far from avoiding the distortion Smith spotted, governments have been keen to nurture it. The early logic was military. A strong merchant fleet meant lots of boats that could be commandeered during times of war. One way to bolster shipping has been to grant lucrative contracts for postal delivery: Britain’s Cunard lines benefited hugely from such a deal in the 1830s. Another method, used by both America and Japan in the early 1900s, was easy finance, in the form of cut-price government loans. Modern shipping subsidies are used to build economic heft rather than military might. Governments like shipping due to the knock-on effects of a booming yard. Modern ships are huge (up to 400m long) and include up to 30,000 parts. Assembling them is labour-intensive, and so is making the parts that outside suppliers provide to the shipyards. A recent report by America’s Maritime Administration estimated that more than 107,000 people work in the country’s heavily protected shipyards. Adding in the companies supporting the yards, and the shops and services that support these workers, the total ran to 400,000, an employment “multiplier” of 4. So, the idea is, by helping shipping a government indirectly supports workers in many other industries. Yet economists’ views on subsidies have hardened over time.

Red tide rising World shipbuilding, % of total in gross tonnage Britain Europe Japan South China United States Other Korea

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Sources: “Maritime Economics”, by Martin Stopford; “Detection and Impact of Industrial Subsidies”, by Myrto Kalouptsidi (2014)

10 12

China’s policy provides subsidies both for the construction of ships themselves and for the building or expansion of shipyards. These interferences can distort trade, resulting in inefficient production. In deciding whether a subsidy flouts trade rules the World Trade Organisation (WTO) uses a “price gap” approach. The idea is simple: if a country is producing and selling something at a big discount to what others are charging, there is probably something fishy going on. Price gaps provide a quick warning system, but are a poor way to judge the full extent of subsidies, according to a 2013 book by Usha and George Haley, of West Virginia University and the University of New Haven. It is a static approach, ignoring how demand for each shipyard’s differentiated products varies over time. It also fails to account for variations in efficiency. Whereas Chinese workers may be relatively cheap, large South Korean or Japanese shipyards exploit economies of scale that smaller Chinese yards cannot. The balance of all these factors, in addition to subsidies, should influence a shipyard’s costs and prices. From the crow’s nest Recognising this, a 2014 working paper by Myrto Kalouptsidi of Princeton University provides a new way to spot subsidies and measure their impact. Using detailed quarterly data on factors like a shipyard’s age, size, capacity and staffing levels Ms Kalouptsidi estimates cost functions—the relationship between a yard’s output and its cost of production—for 192 yards across China, Japan, South Korea and Europe. By analysing data between 2001 and 2012, she can isolate the impact of China’s 2006 policy. The results are striking. A simple price-gap approach shows that Chinese ships cost 7.3% less than rivals’. Controlling for quality differences—Chinese ships are seen as lower quality and so should be around 3.5% cheaper, even in the absence ofsubsidies— gives a 4% gap, hardly justification for WTO rage. But Ms Kalouptsidi’s estimates show this is just part of the story. Government help artificially lowered Chinese firms’ costs by between 15-20%. The aid will have included explicit subsidies and hidden benefits, such as tolerating losses at state-owned yards. China’s market share jumped as the policy was introduced (see right-hand chart). As in Smith’s day, this has shifted resources. By comparing the costs and productivity of the shipyards in her sample, Ms Kalouptsidi forecasts how the market might have developed in the absence of China’s subsidies. Her analysis points to a big resource reallocation: absent the meddling, Japan’s market share would have been around 30 percentage points higher. Since many South Korean or Japanese yards are more efficient than China’s, it means that the true cost of ship production may well have risen. Bloated by subsidy, China’s yards have turned out a surfeit of vessels, often poorly matched to customers’ demands. All this suggests the WTO and other trade-watchers may need to refine their tools to help identify the full extent of subsidies. Other markets are ripe for this kind of analysis. The global glut of solar panels owes much to protectionism, according to the Hayleys’ book. Steel markets are badly distorted by subsidies to producers, says the WTO. Subsidised solar panels being exported aboard subsidised ships made from subsidised steel show just how far those that seek free trade have to go. 7

................................................................................................. Studies cited in this article can be found at www.economist.com/subsidies14 Economist.com/blogs/freeexchange


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64

The Economist August 9th 2014

Science and technology

Also in this section 65 The suicide of a stem-cell scientist 65 Does HIV protect against MS? 66 Rosetta’s mission to a comet

For daily analysis and debate on science and technology, visit Economist.com/science

Arctic science

A glide-path to knowledge THE BEAUFORT SEA, ABOARD RV UKPIK

A determined effort to understand the Arctic is going on, in the sea and on the ice

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HE Arctic is called by some the canary in the global-warming coal mine. Like that fated bird, carried in cages by pitmen well into the 20th century, it is sensitive to changes which might otherwise not be obvious. Canaries expired in contact with gases such as carbon monoxide and methane, warning miners to leave the area. The Arctic—or, rather, its sea ice—is similarly expiring as the Earth warms up in response to more of another gas, carbon dioxide. The area of the Arctic Ocean covered by ice at the height of summer has been shrinking by 11% a decade for the past 35 years. But the details are obscure—because gathering data in the Arctic Ocean is hard. This year, therefore, a systematic approach to that gathering has begun. The Marginal Ice Zone (MIZ) programme, paid for by the United States Navy, is seeding the Beaufort Sea—the part ofthe ocean north ofAlaska— with many sensors. In March the programme’s researchers laid dozens of devices along a transect running 400km north from the ice’s edge. Some of these instruments are weather stations sitting on the ice’s surface. Others are buried in holes punched through it. These measure the thickness of the icy layer, and also the salinity, temperature, oxygen concentration, organic-matter composition and movement of the seawater beneath. All these sensors beam their data to satellites. The plan is that they will drift with the ice until it melts. Even then, some

are designed to float, so they can continue their work. Floating sensors are not all that is planned, though. At the end of July, the crew of the MIZ’s research vessel, the good ship Ukpik (“snowy owl”, in a local language), began the operation’s next phase by deploying four instrument-laden robots known as Seagliders, which will roam the depths in search of readings. Seagliders are torpedo-shaped, but do not have conventional motors. Instead, each is fitted with an external oil-filled swim bladder and wings. When the bladder is emptied (by sucking the oil into the glider’s main body) the glider’s buoyancy is reduced. This causes it to sink, and water to flow over its wings, generating forward motion. As the vehicle nears the bottom, the oil is pumped back into the bladder, the wings change their attitude, and it sweeps gently upward—again generating forward motion. In this way, a Seaglider can cover 20km (around a dozen nautical miles) or more a day in a way that uses so little electrical power that its battery should last almost a year. The Seagliders that MIZ has launched will range back and forth between the open ocean and the water under the ice sheet, following that sheet’s edge as it retreats. This presents a problem, for Seagliders usually navigate by surfacing and taking a fix from the satellites of the Global Positioning System (GPS). At the same time,

they upload their data via another set of satellites, the Iridium network. Under the ice, both of these tasks are impossible. The solution is borrowed from natural denizens of the deep—whales—whose songs travel thousands of kilometres by being contained and refracted within distinct ocean layers. The layers the whales employ are a long way down, but scientists at the Woods Hole Oceanographic Institution, in Massachusetts, have found a shallower one that serves in a similar way (and also has the bonus of not interfering with cetacean communication). The MIZ’s researchers are using this. The snowy owl’s wisdom Among the sensors the scientists placed on the ice in March were a set of eight acoustic navigation beacons. These have base-stations at the surface, which fix their locations using GPS. They then rebroadcast that information from loudspeakers hanging 100 metres down below the ice, in the 1

Extent of summer sea ice R U S S I A September 2013

ARCTIC OCEAN

September 1979

Prudhoe Beaufort Bay S Sea ALASKA (to US)

NORWAY

North Pole

Sensor transect

GREENLAND

(to DENMARK)

CANADA Source: NSIDC

Possible shipping routes:


The Economist August 9th 2014

Science and technology 65

2 transmission layer. If a Seaglider can detect

two or more beacons while it is travelling through this layer, it can swiftly compute its own position. This may not always work, because the Seagliders might stray too far from the beacons. In that case, the researchers have a pair of robotic guide dogs to assist. These are called Wave Gliders (pictured at the top of the story). One part of each Wave Glider stays on the surface, generating electricity from solar panels during the Arctic’s 24hour summer daylight. The other part is an array of hydrofoils suspended four metres underwater. The difference in motion between the waves above and the calm below causes water to move over the hydrofoils and propel the Wave Glider forward up to twice as fast as a Seaglider. Although Wave Gliders broadcast far above the sound layer, and thus have shorter ranges than fixed beacons, they can be programmed to shadow the Seagliders, and keep them within earshot. For the next two months the MIZ’s network of gliders, floats, buoys, icebound instruments and weather stations, together with satellites and aerial surveys, will gather the largest quantity of data yet collected on the seasonal melting of the Arctic ice sheet. An icebreaker will recover any surviving devices before the ice re-forms, late in September. Two years of analysis will follow, to try to turn the observations into new climate models. With luck, the MIZ’s researchers will thus find out exactly what song the Arctic canary is singing. 7

Science in Japan

Stress test TOKYO

After a scandal, a renowned stem-cell scientist commits suicide

W

HAT happens to human cells if you douse them in a Petri dish full of public shame, official reprimands and months of intense stress? An answer came this week when Yoshiki Sasai, a distinguished stem-cell biologist at the RIKEN Centre for Developmental Biology in Kobe, Japan, hanged himself after being blamed over the fabrication of research. Dr Sasai had been an author, with Haruko Obokata, a younger, female colleague whose work he was supervising and promoting, of two papers published in January in Nature. These promised a leap forward in the much-hyped field of regenerative medicine. They purported to show that applying stress to ordinary mouse cells—squeezing them, or dipping them into a bath of mild acid—could turn them into pluripotent stem cells, capable of

Dr Sasai faces the music forming new animal tissue. In Japan, where female scientists are a rare species, Dr Obokata’s apparent breakthrough caused a sensation. It seemed to open the possibility of more rapid progress towards regenerative medicine’s ambitious goals of using pluripotent cells to test new drugs, study diseases, grow tissues and even fashion new body parts to replace damaged or missing ones. It would also have eclipsed the work of a scientist at Kyoto University who had, in 2006, devised a way of reprogramming ordinary cells into pluripotent ones using genes for molecules called transcription factors. By comparison, the technique Drs Obokata and Sasai suggested was simple. Many other scientists therefore tried to replicate it in the months following publication. But they could not, and doubts grew. Blogs and websites pointed out irregularities in the images and diagrams in the original papers. Finally, in April, an investigative panel at the RIKEN Centre slammed Dr Obokata for fabrication and plagiarism, and in July Nature retracted the papers. The panel did clear Dr Sasai of misconduct, but it laid upon him a “heavy responsibility” for failing to verify his star researcher’s study. He was a keen fundraiser for stem-cell research at RIKEN, which is one of Japan’s biggest research organisations, with laboratories all around the country, and that motive may explain his failure to scrutinise her work properly, according to another probe, by outside experts. Disciplinary action against him was expected, and the outsiders called for the Centre for Developmental Biology to be shut down. In April Dr Sasai told the Wall Street Journal that he was “overwhelmed with shame”. But some shame surely also attaches to the scientific establishment’s handling of the scandal—particularly in a country

where suicide is common. The Knoepfler Lab Stem Cell Blog, a website which has followed the implosion of the papers closely, called this week for all scientists to reflect on the pressure researchers are under to make transformative discoveries. Dr Sasai became a scapegoat, taking too much responsibility for the troubles, it said. Having been briefly in hospital for stress, and on powerful drugs, he had reportedly asked to step aside from his job, only to be turned down. Suicide, unfortunately, is a response that cannot be gainsaid. 7

HIV and MS

Antithesis, synthesis? A curious observation may lead to a treatment for multiple sclerosis

I

N SCIENCE, as in many other walks of life, what is unexpected is often what is most interesting and important. The idea, first mooted in 2011 by Julian Gold of the Prince of Wales Hospital in Sydney, Australia, that HIV infection—or maybe the drug treatment used to fight it—might protect against multiple sclerosis (MS), was certainly unexpected. Now, in a study just published in the Journal of Neurology, Neurosurgery and Psychiatry, Dr Gold has confirmed his suspicion. That is interesting. It may also be important. Dr Gold’s original motive for investigating the connection was casual observation. He treats people with HIV and has acquaintances with MS. He realised one day that he had never come across a case of someone with both. A literature search confirmed the lack of connection. Of the 1


The Economist August 9th 2014

66 Science and technology 2 700,000 published papers on HIV and

AIDS, and the 300,000 on MS, not one referred to a patient who had the pair of them. Eventually, he tracked down a single instance. Tellingly, that individual started to shrug off the symptoms of MS when he began taking drugs to combat his HIV. This finding led a Danish team to compare 5,000 HIV-positive people with a control group of 50,000 of their uninfected peers. Unfortunately, these apparently large numbers did not yield enough instances of subsequent multiple sclerosis for a statistically significant result to emerge. Dr Gold and his colleagues therefore turned to the English Hospital Episode Statistics, which record all interactions between the people of England and hospitals belonging to their country’s National Health Service. They used this database to identify and track everyone in England with HIV who was discharged from hospital between 1999 and 2011. In total, they found 21,207 HIV-positive individuals and compared them with 5,298,496 controls of similar ages and ethnic backgrounds. The rate of onset of MS in the controls suggested about 18 cases should have developed among the HIV-positive patients. In fact, the team found only seven. That result was statistically significant. It indicates that those infected and undergoing treatment are 60% less likely to develop MS than their uninfected peers. Moreover, further analysis showed this value leapt to 80% among those who had been infected and treated for more than five years. Dr Gold’s results do not show whether it is the infection or its treatment that is suppressing MS. Either sounds plausible. The immediate cause of MS’s symptoms (which range from clumsiness, and even paralysis, to depression) is that the sufferer’s immune system is attacking his central nervous system—specifically, the fatty sheaths that insulate the nerve cells in it. HIV meddles with many sorts of immunesystem cells and signalling pathways that are associated with multiple sclerosis, so this could be why the disease wanes in those infected with it. On the other hand, though the underlying cause of MS is unknown, many people suspect it is triggered by a yet-to-be-determined virus. If that is true, it may be that the antiviral drugs given to those with HIV are bringing relief by attacking this unknown culprit too. If this second idea is the right one, it means a treatment for MS looks eminently plausible; it may simply be a question of repurposing some existing drugs. If HIV itself is the protective agent, devising a treatment will be harder. Dr Gold’s discovery would still be a useful pointer, though, to the molecular-biological crack into which a suitable pharmacological crowbar might be inserted. Either way, then, this does look like an important result, derived ultimately from an unexpected observation. 7

Cometary science

Rosetta’s stone A European space probe has just arrived at its destination

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HE maths, of course, were straightforward. The centuries-old celestial mechanics of Johannes Kepler and JosephLouis Lagrange made it clear that Rosetta, a European Space Agency (ESA) mission to intercept Comet 67P/Churyumov-Gerasimenko, should work. But in space, it is the engineering that leaves room for doubt. So for 23 nerve-racking minutes on August 6th, mission scientists waited for a signal of success to travel 405m kilometres from a probe that lifted off more than a decade ago. When the message did arrive, mindful of pan-European involvement in the project, the craft’s caretakers tweeted “Hello, comet!” in 23 languages. It has been a busy year for Rosetta. The craft was roused from two-and-a-half years of hibernation in January, and has since been putting on the brakes and preparing for this week’s delicate manoeuvres. These have settled it into a roughly triangular orbit 100km ahead of its target. This most recent stage of the journey, however, is not the most daring. That will come during a series of exquisitely timed moves over the next few months, as the craft spirals in to approach within 30km or so of its objective. From this vantage, it will survey 67P’s rugged terrain in order to select a landing site for Philae, a lander that it will release in November. Project Rosetta is the latest in a series of

Found in space

cometary close encounters stretching back to Giotto, another ESA mission, which in 1986 passed within 600km of a more familiar comet, Halley’s. Sadly, the pictures Giotto sent back left much to be desired, but the intervening years have seen further missions with far better images, and in 2006 NASA’s Stardust probe even brought some comet dust back to Earth. Those who take an interest in comets, however, want more detail than pictures, or even dust, can provide. So, in 2005, Deep Impact (a NASA mission, not the Hollywood film) sent a 370kg “impactor” careering into Comet 9P/Temple 1, to look beneath its surface. Stardust was then redirected to take a peek into the crater the impact created. All these missions have shown that there is still much to learn from comets. They are now seen as “icy dirtballs”, dominated by rock, in contrast to the “dirty snowballs” hypothesised by Fred Whipple, an astronomer at Harvard University, in 1950. But the idea that the early Earth got its water from ice-laden comets ploughing into its surface is still popular. Indeed, some researchers believe comets also delivered the chemical ingredients of life. Philae—along with Rosetta, which will continue its orbit and help with the measurements after Philae lands—will ride with the comet as it reaches perihelion, its closest approach to the sun, in about a year’s time. Philae will sample the surface, and also measure radio waves sent through the comet’s bulk to probe its interior in the way that X-rays probe a human body. Then, as 67P arrives at perihelion, more and more icy material will evaporate and escape from it as jets, and Philae should be well-placed to sniff out exactly what lies within. 7


The Economist August 9th 2014 67

Books and arts

Also in this section 68 Artificial intelligence 68 America’s bureaucracy 69 South Korea’s soft power 70 A tribute to Chekhov 70 Inside al-Qaeda

For daily analysis and debate on books, arts and culture, visit Economist.com/culture

Revolution and war in Ukraine

I witness

A novelist’s enlightening account of life in Kiev during Ukraine’s turmoil

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ATIRISTS and surrealists are at once fortunate and challenged in the countries of the former Soviet Union. Their nefarious rulers and eventful politics volunteer themselves for parody, yet the lurid reality often outpaces satire and renders invention superfluous. Thus in his “Ukraine Diaries”—an account of the tumultuous past winter that saw his country’s president ousted and its territory dismembered—Andrey Kurkov whimsically imagines Russian tanks searching for the American commandos who are rumoured to have parachuted into western Ukraine. A few weeks later this fancy is superseded by events, as Russian forces do indeed invade, and Ukraine descends into chaos. Best known for gently absurdist novels that combine affection for his region with deadpan despair—especially “Death and the Penguin”—Mr Kurkov lives in Kiev, close to Independence Square. That was the centre of the revolution that began last November when Viktor Yanukovych, then Ukraine’s president, rejected a trade deal with the European Union. The idea that the EU could inspire an uprising seemed odd to some observers; Mr Kurkov makes clear that, to Ukrainians weary of venal government, Europe represents the rule of law. His “Ukraine Diaries” contain his daily observations from November until April—by which time the Kremlin had annexed Crimea, and Ukrainian troops were

Ukraine Diaries: Dispatches from Kiev. By Andrey Kurkov. Translated by Sam Taylor. Harvill Secker; 262 pages; £9.99 engaging Russian proxies in the east. One bonus of the diary form is dramatic irony: the reader, unlike the diarist, knows what will happen next. At one point, Mr Kurkov feels sure there will be no war, because those opposed to change are too apathetic to fight. By demonstrating that history is unpredictable, diaries such as his show that it is not inevitable: Ukraine’s rapid degeneration from protest to bloodshed was the result of a chain of errors, which Mr Kurkov’s entries chronicle. Mostly the errors were attributable to Mr Yanukovych, who, by trying to crush dissent, succeeded only in inflaming it. But perhaps these diaries’ biggest service—one that only this sort of account can offer, more than compensating for the lack of hindsight—is to show how headline history intertwines with ordinary, private lives. “Life goes on,” Mr Kurkov says. “Not once has it stopped.” He drinks coffee and cognac with friends, one of whom gives him a vacuum cleaner. He juggles the demands of elderly parents and adolescent children. The family goes to the dacha for weekends. He struggles to concentrate on his new novel. Amid diplomatic and paramilitary manoeuvres, he organises a paint-

balling party for his son’s birthday. He takes his family for its annual winter holiday in Crimea, poignantly unaware that because of the annexation this will be their last. “I drove the children to school,” Mr Kurkov writes baldly one day in January, “then went to see the revolution.” Mr Kurkov quickly adapts to the barricades: “Why does what seemed impossible or crazy before now seem logical?” Then the arrests and beatings escalate to abductions, torture and murder. Festive protests turn violent; instead of donated food, the protesters need bottles for Molotov cocktails. Rumours swirl: of troop movements and massacres, of the mining of metro stations. Thugs patrol the city with truncheons and guns. Russian-literature enthusiasts will be reminded of “The White Guard”, Mikhail Bulgakov’s novel of Kiev during the Russian civil war, and of Ivan Bunin’s journal of Odessa during that conflict. In mid-February, Mr Kurkov records, comes a “night of warfare” that “transformed the city centre to ruins”. Increasingly this carnage crowds out the author’s personal life, though there is a nice vignette in which his daughter asks for extra pocket money, citing the spiralling inflation. Downtown Kiev, he joltingly notices, “looks like a paintball field”. Growing vegetables at the dacha begins to seem less a hobby than a necessity. Mr Kurkov sleeps badly; his eyesight suffers. And as winter thaws, the focus of his ire shifts. To begin with it is directed at Mr Yanukovych, with his clumsy duplicity and flagrant corruption. “This country has never had such a stupid president,” Mr Kurkov concludes, “capable of radicalising one of the most tolerant populations in the world!” Or, more concisely: “Stupid bastard!” All the same, he is unsentimental about the revolutionaries, some of whom 1


The Economist August 9th 2014

68 Books and arts 2 turn to score-settling and extortion. After

Mr Yanukovych flees Kiev, however, and Russia’s insidious but deadly invasion begins, the main villain is Vladimir Putin. (The EU’s response is depressingly slow: “As if the news were arriving not by internet but by messengers on horseback.”) For all their controlled rage and wry wit, nicely captured in Sam Taylor’s translation, Mr Kurkov’s diaries are valuable partly because of who he is. Born in Russia, he writes in Russian and considers himself Russian by background if not citizenship— though now he has “nothing in common with Russia and its politics”. He is an incarnation of a joint culture with a glorious but imperilled heritage. His book is a lament for Ukraine, but also, in the end, for Russia itself—as scarred by Mr Putin’s lies and larceny as Ukraine has been by his war. 7

Artificial intelligence

Clever cogs Superintelligence: Paths, Dangers, Strategies. By Nick Bostrom. Oxford University Press; 352 pages; £18.99. To be published in America in September; $29.95

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UMANS like to think of themselves as special. But science has a way of puncturing their illusions. Astronomy has demoted Earth from the centre of the universe to just one planet among zillions. Darwin’s theory of evolution has proved that, rather than being made in the image of some divine benefactor, humans are just another twig on the tree of life. Those keen to preserve the idea that humans are special can still point to intelligence. Crows may dabble with simple tools and elephants may be able to cope with rudimentary arithmetic. But humans are the only animals with the sort of general braininess needed to build aeroplanes, write poetry or contemplate the Goldbach conjecture. They may not stay that way. Astronomers are beginning to catalogue some of those other planets. One or more may turn out to have intelligent inhabitants. Or humans may create intelligence in their own labs. That is the eventual goal of research into artificial intelligence (AI)—and the possible consequences are the subject of a new book by Nick Bostrom, a philosopher from the University of Oxford. Writing about artificial intelligence is difficult. The first trick is simply passing the laugh test. Much like fusion power, experts have been predicting that intelligent machines are 20 years away for the past halfcentury. Mr Bostrom points out that there has, in fact, been plenty of progress,

though it is mostly confined to narrow, well-defined tasks such as speech recognition or the playing of games like chess. Mr Bostrom is, sensibly, not interested in trying to predict exactly when such successes will translate into a machine that is generally intelligent—able to compete with, or surpass, humans in all mental tasks, from composing sonatas to planning a war. But, fantastical as it seems, nothing in science seems to forbid the creation of such a machine. “We know that blind evolutionary processes can produce humanlevel general intelligence, since they have already done so at least once,” he writes. In other words, unless you believe that there is something magical (as opposed to merely fiendishly complicated) about how the brain works, the existence of humans is proof, in principle at least, that intelligent machines can be built. Having taken the possibility of AI as a given, Mr Bostrom spends most ofhis book examining the implications of building it. He is best known for his work on existential risks—asteroid strikes, nuclear war, genetically engineered plagues and the like—so it is perhaps not surprising that he concludes that, although super-intelligent machines could offer many benefits, building them would be risky. Some people worry that such machines would compete with humans for jobs. And pulp science fiction is full of examples of intelligent machines deciding that humans are an impediment to their goals and so must be wiped out. But Mr Bostrom worries about a more fundamental problem. Once intelligence is sufficiently well understood for a clever machine to be built, that machine may prove able to design a better version of itself. The cleverer it becomes, the quicker it would be able to design further upgrades. That could lead to an “intelligence explosion”, in which a machine arrives at a state where it is as far beyond humans as humans are beyond ants. For some, that is an attractive prospect, as such godlike machines would be much better able than humans to run human affairs. But Mr Bostrom is not among them. The thought processes of such a machine, he argues, would be as alien to humans as human thought processes are to cockroaches. It is far from obvious that such a machine would have humanity’s best interests at heart—or, indeed, that it would care about humans at all. It may seem an esoteric, even slightly crazy, subject. And much of the book’s language is technical and abstract (readers must contend with ideas such as “goal-content integrity” and “indirect normativity”). Because nobody knows how such an AI might be built, Mr Bostrom is forced to spend much of the book discussing speculations built upon plausible conjecture. He is honest enough to confront the problem

head-on, admitting at the start that “many of the points made in this book are probably wrong.” But the book is nonetheless valuable. The implications of introducing a second intelligent species onto Earth are far-reaching enough to deserve hard thinking, even if the prospect of actually doing so seems remote. Trying to do some of that thinking in advance can only be a good thing. 7

America’s bureaucracy

Sins of commissions Is Administrative Law Unlawful? By Philip Hamburger. University of Chicago Press; 638 pages; $55

B

OOKS that address not who but what runs America may lack for personal interest, but they do have a growing appeal. An interesting new work by Philip Hamburger, a law professor at Columbia University, dispenses with the tiresome back and forth between Republicans and Democrats. Instead, it focuses on Washington’s permanent administration—the everexpanding federal bureaucracies that have come to play a central role in health care, finance, housing and work, and large roles in education, energy and whatever else constitutes the American system. The title of Mr Hamburger’s book, “Is Administrative Law Unlawful?”, is both a strength and a weakness. It illuminates the shallow legal foundation of these agencies, but it also creates the misperception that the book deals merely with a subset of1


The Economist August 9th 2014 2 law rather than with how America is gov-

erned and how the current structure was anything but inevitable. This is particularly important because the conventional wisdom about this process, as Mr Hamburger documents, is wrong. At the core of this misperception is the idea that these agencies originated in the 1930s under Franklin Roosevelt as a necessary and pragmatic response to the complexities of modern life that could not have been envisioned by the 18th-century authors of America’s constitution. A more accurate accounting should date back to at least the Roman empire, with the jurist Ulpian’s observation (before he was murdered by an unpersuaded mob) that “what pleases the prince has the force of law.” The imposition of the Magna Carta in 1215 to limit the power of the English king, and continuous skirmishes in England over subsequent centuries, were well known to the constitution’s writers. Their response was to make three components of law distinct: enactment (granted to Congress in Article I), execution (granted to the presidency in Article II) and adjudication (granted to the courts in Article III). This limited the reach of any single part of the government, yet it was only a matter of decades before municipal governments started centralising legal power by setting up independent commissions with powerful mandates. Martin Kalbfleisch, a 19thcentury mayor of Brooklyn, decried their very existence as a “monstrous un-American compound”. The first large federal breach in the tripartite legal system came with the creation of the Interstate Commerce Commission in 1887, allegedly to limit the power of the railways. But in fact, as Mr Hamburger notes, it was created with the support of the railways in order to curtail other forms of regulation that threatened to be less easily controlled. Inspiration for a broad administrative structure came from Bismarck’s success in Prussia. That country’s political theorists had a large following in America, including Woodrow Wilson, who as president created the Federal Reserve to oversee finance and the Federal Trade Commission to oversee business. That this approach would come at a cost was no secret. Wilson worried that Prussian-style administration could “suffocate” America’s dynamism. Another supporter, Roscoe Pound, the highly influential dean of Harvard Law School, wrote in 1920 that the “genius of administrative action through commissions endangers the doctrine of the supremacy of law.” He was prescient. Many federal agencies now have the power to create, adjudicate and execute what are in effect laws, but are not actually the creation of Congress or the courts. “Americans”, Mr Hamburger writes, “must live under a dual system of government, one part established

Books and arts 69 by the Constitution, and another circumventing it.” The legality of this circumvention feeds ongoing litigation, but that may be the smaller of two problems with this approach. Mr Hamburger’s book is filled with details of how the centralisation of power divorced from a popular or court mandate leads to insularity and even insurrection as hopes of efficiency and expertise give way to bureaucratic inertia. Many advocates of the administrative state have regrets, or perhaps should, about the way power has seeped to inefficient entities. Ulpian’s fate was not unique, nor was Rome’s. 7

South Korea’s soft power

Soap, sparkle and pop The Birth of Korean Cool: How One Nation is Conquering the World Through Pop Culture. By Euny Hong. Picador; 288 pages; $16. Simon & Schuster; £14.99

F

ROM “Gangnam Style” and competitive electronic sports to kimchi-flavoured pot noodles, South Korea’s cultural exports are eagerly consumed around the world. Filipinos are hooked on its dramas. The French love its pop music and its films. Last year South Korea raked in $5 billion from its pop-culture exports. It has set its sights on doubling that by 2017. Much has changed since 1985, when Euny Hong, a Korean-American journalist and author of a new book called “The Birth of Korean Cool”, arrived in Seoul. South Korea was most definitely not hip. Its musicians had been muzzled by censorship, and busking, considered a form of protest, had been banned. The country had no mods, rockers or hippies. Dramas were

K-poppets

“provincial and tedious”. Over the next six years Ms Hong witnessed the swiftest part of the country’s economic development, “the painful period between poverty and wealth”. She recalls the anomalies of the time: newly wealthy women wearing mink coats at the fish markets; frequent power cuts in her family’s flat, the poshest in a posh district. From this unpromising position South Korea managed to charge past Japan to become Asia’s foremost trendsetter, and Ms Hong interviews superstars, chefs and cultural critics to discover why. She finds that cool can be manufactured, up to a point. South Korea’s is a side-effect of the cultureexporting machine that was created at the end of the 20th century and has been nurtured by the government ever since. The Asian financial crisis of 1997 revealed a weakness in Korea’s reliance on big conglomerates, and Kim Dae-jung, the president, responded by pushing the development of the IT and content (film, pop and video-games) industries. Firms folded or reorganised: Samsung moved into digital TV and mobile phones. According to Ms Hong, without the crisis there would probably have been no hallyu, the Korean cultural wave that has rolled through Asia for the past decade. Tax incentives and government funding for start-ups pepped up the video-game industry. It now accounts for 12 times the national revenue of Korean pop (K-pop). But music too has benefited from state help. In 2005 the government launched a $1 billion investment fund to support the pop industry. Record labels recruit teens who undergo years of gruelling training before their public unveiling. It is true that creativity can be limited by this work ethic and the accompanying fear of failure. (In Korea’s bubble-gum ballads and Europop-inspired tunes, voices come second to synchronised dance moves.) But this weakness has been turned to an ad- 1


The Economist August 9th 2014

70 Books and arts

Inside al-Qaeda

New American theatre

A 21st-century “Seagull”

There and back again

Fitting tribute to Chekhov’s work of grand gestures and missed connections

A

NTON CHEKHOV knew he was doing something different with “The Seagull”. “I sin frightfully against the conventions of the stage,” he told a friend while the play was still a work in progress. The drama, such as it is, involves the love triangles and familial tussles of a multigenerational gathering in the Russian countryside—with, as Chekhov observed, “much conversation about literature, little action and five tons of love”. All this aimless kvetching repelled the play’s first audiences in 1886. But what was audacious then feels timeless now. “The Seagull” may be Chekhov’s finest work. Much of the dialogue—which veers from grand questions about love and happiness to prosaic observations about money and horses—still feels fresh. So why mess with it? Imitations are as common as they are reliably disappointing. Playwrights tamper at their peril. This is what makes Aaron Posner’s “Stupid Fucking Bird” such a revelation. This irreverent update, playing at the Woolly Mammoth Theatre in Washington, DC, until August 17th, manages to capture the enduring essence of Chekhov’s classic even as it reimagines it for the 21st century. The original ingredients are all here, including the basic characters—an ageing starlet, her famous lover, her frustrated son and his ingénue girlfriend, among others—and all their messy pining (for love, fame, youth, “new forms of theatre” and anything else just out of reach). But the script is new and crackling, at once incisive, poignant and darkly funny. Like the original, it affords plenty of opportunities to chuckle with recognition. And like the original, it delivers an ending that

2 vantage: conservatism is now a conscious

strategy for the export market. K-pop has stronger global appeal than Japan’s J-pop, which tends to be less puritanical. Dramas focus on courtship and family roles. Actors and singers promote Korean tastes, in areas such as cosmetics, and in turn beauty businesses hire stars to promote their products. Ms Hong describes Korea’s approach to culture as “a full-on amphibious attack”. She talks to some of those who have worked behind the scenes: one official organised flash-mobs around France to demand a K-pop concert; another spirited “What Is Love”, South Korea’s first socalled K-drama, into Hong Kong inside a diplomatic pouch. The “attack” works because the pop culture it peddles is more palatable to other

is destined to make its audience weep. The play has scooped up plenty of awards since its debut last year. A dozen or so productions are now planned around the country. But the staging in DC, directed by Howard Shalwitz, the theatre’s artistic director, brings together the original cast, who work wonders with Mr Posner’s tender, profane script. Their fumbles at love and life may not offer the kind of life-changing theatrical experience the character Con spends much of the play banging on about. But the play’s artful, redemptive take on big feelings and small failures, grand ideas and botched gestures, make this a fitting tribute to Chekhov’s masterpiece.

Kitchen-sink drama Asians than that of former aggressors, such as Japan or China. Korean dramas are so popular in the Philippines that they have inspired local remakes in Tagalog. “Winter Sonata”, another drama, was a hit in Iraq and Uzbekistan. Japan is now using the Korean model as inspiration: in what is perhaps the best evidence of its own waning power as a trendsetter, it has launched a $500m fund to invest in “Cool Japan”. PSY, the rapper behind “Gangnam Style”, was not part ofthe national strategy. His song, with its 2 billion YouTube views, mocks the effeteness of a generation of South Korean nouveaux-riches. Its success may therefore testify to the limits of packaging cool, but it also shows the world’s readiness to revel in Korea’s cultural charms. 7

Agent Storm: My Life Inside Al-Qaeda. By Morten Storm with Tim Lister and Paul Cruickshank. Atlantic Monthly Press; 416 pages; $26. Viking; £16.99

E

VEN in a world of weird cultural crossovers, a life story that starts in a dysfunctional white family in Denmark, and climaxes in a nest of Islamism in the Arabian sands seems pretty unusual. Yet Morten Storm makes it appear almost natural. Helped by two writers specialising in terrorism, this one-time Nordic delinquent describes in this memoir how he entered a cohort of fanatical converts to Islam who congregated in Yemen. He recalls befriending Anwar al-Awlaki, a Yemeni-American preacher and mentor to terrorists. He recounts a change of allegiance that turned him into a CIA informant, and explains how he abetted the drone attack that killed the preacher in 2011. Given the ultra-sensitive nature of the topic, this is no tell-all biography. Presumably Mr Storm’s present masters have made calculated choices as to what can be expediently disclosed. A human emerges in the narrative, but only just. Much of the book’s interest lies in the puzzling questions it raises about the appeal of Islam to unlikely sorts. Conversion is often mysterious. Mystical Sufism attracts members of the Western elite, from diplomats to scholars. Harsher sorts of Islam, however, draw many drifting Westerners from the opposite social extreme. Such converts often play big roles in spectacular acts of terror. Mr Storm is part of a phenomenon that needs studying. He had an absent, alcoholic father and a brutal stepfather. The raging young Morten joined a gang whose members were of Muslim background. Then he read a library book that explained Islam “with seductive simplicity”. After converting at a local mosque, he kept guzzling beer for a while; the switch to a strict, puritanical path came during an early brush with jail. Some things are obvious: in a lonely, fractured world, the bonds of the ummah, a global chain of “brothers” who agree on ultimate matters, had great appeal to Mr Storm. But it still seems curious that this hulking youth, who deferred to no human power, found such peace in rigorously exercised submission to God. For Muslims, embracing Islam is a “reversion” to a natural state, mankind’s default mode. But that does not explain why some unlikely individuals take that course while others recoil. For the peace of the world, people need to understand the process better. 7


Appointments

71

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The Economist August 9th 2014

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72

The Economist August 9th 2014

Economic and financial indicators Economic data % change on year ago Gross domestic product latest qtr* 2014† United States China Japan Britain Canada Euro area Austria Belgium France Germany Greece Italy Netherlands Spain Czech Republic Denmark Hungary Norway Poland Russia Sweden Switzerland Turkey Australia Hong Kong India Indonesia Malaysia Pakistan Singapore South Korea Taiwan Thailand Argentina Brazil Chile Colombia Mexico Venezuela Egypt Israel Saudi Arabia South Africa

+2.4 Q2 +7.5 Q2 +3.0 Q1 +3.1 Q2 +2.2 Q1 +0.9 Q1 +0.3 Q1 +1.1 Q2 +0.7 Q1 +2.3 Q1 -0.9 Q1 -0.3 Q2 nil Q1 +1.2 Q2 +2.9 Q1 +1.3 Q1 +3.5 Q1 +3.9 Q1 +3.4 Q1 +0.9 Q1 +1.9 Q2 +2.0 Q1 +4.3 Q1 +3.5 Q1 +2.5 Q1 +4.6 Q1 +5.1 Q2 +6.2 Q1 +6.1 2013** +2.1 Q2 +3.6 Q2 +3.8 Q2 -0.4 Q1 -0.2 Q1 +1.9 Q1 +2.6 Q1 +6.4 Q1 +1.8 Q1 +1.0 Q4 +2.5 Q1 +3.5 Q1 +4.0 2013 +1.6 Q1

+3.9 +8.2 +6.7 +3.2 +1.2 +0.8 -2.5 +0.4 +0.2 +3.3 na -0.8 -2.4 +2.4 +3.2 +3.4 +4.5 +1.3 na na +1.0 +1.9 na +4.5 +1.0 +8.0 na na na -0.8 +2.4 +5.9 -8.2 -3.2 +0.7 +3.0 +9.7 +1.1 +3.6 na +2.9 na -0.6

+2.0 +7.3 +1.4 +3.1 +2.3 +1.1 +1.4 +1.3 +0.6 +2.0 +0.4 +0.2 +0.6 +1.1 +2.5 +1.5 +2.6 +2.3 +3.1 +0.6 +2.3 +1.9 +3.0 +3.0 +2.6 +6.0 +5.4 +5.7 +5.4 +4.2 +3.8 +3.2 +1.9 -1.2 +1.0 +3.2 +5.0 +2.4 -2.5 +1.8 +3.1 +4.0 +2.3

Industrial production latest

Current-account balance Consumer prices Unemployment latest 12 % of GDP latest 2014† rate, % months, $bn 2014†

+4.3 Jun +2.1 Jun +9.2 Jun +2.3 Jun +3.2 Jun +3.6 Jun +1.2 Jun +1.9 Jun +5.1 May +2.4 Jun +0.5 May +0.4 Jul -2.1 May +1.9 Jun +5.2 May +0.3 Jul -3.7 May +0.5 Jun +1.2 May +0.8 Jul +1.8 May -0.7 Jul +0.4 Jun +0.1 Jul +0.6 May +0.9 Jun +0.5 May -0.3 Jul +8.1 Jun nil Jun -2.7 May +0.5 Jun +11.2 Jun -0.3 Jun -6.8 May +1.9 Jun +1.7 Jun +0.3 Jun +0.4 Jun +7.5 Jul -2.2 May +0.2 Jun +0.5 Q1 nil Jul +1.6 May +9.3 Jul +5.7 Q1 +3.0 Q2 +2.1 Q1 +3.6 Jun +4.7 May +7.3 Jun +2.9 May +4.5 Jul +6.1 May +3.3 Jun +2.3 May +7.9 Jul +0.4 Jun +1.8 Jun +0.6 Jun +1.6 Jul +8.6 Jun +1.8 Jul -6.6 Jun +2.2 Jul -0.4 Jun — *** -6.9 Jun +6.5 Jun +0.8 Jun +4.3 Jun +1.8 May +2.9 Jul +1.6 May +3.8 Jun +0.8 Sep +60.9 May +8.2 May +8.2 Jun +0.8 May +0.5 Jun na +2.7 Jun -3.5 May +6.6 Jun

+1.9 +2.4 +2.8 +1.7 +1.8 +0.7 +1.6 +0.9 +0.8 +1.0 -1.1 +0.4 +0.8 +0.1 +0.6 +0.8 +0.3 +2.0 +0.6 +6.7 +0.1 +0.1 +8.7 +2.7 +3.6 +8.4 +6.4 +3.2 +7.7 +2.2 +1.7 +1.6 +2.5 — +6.6 +4.1 +3.0 +3.9 +64.4 +9.1 +0.9 +2.9 +5.9

6.2 Jul 4.1 Q2§ 3.7 Jun 6.5 Apr†† 7.1 Jun 11.5 Jun 5.0 Jun 8.5 Jun 10.2 Jun 6.7 Jul 27.3 Apr 12.3 Jun 8.4 Jun 24.5 Jun 7.4 Jun§ 5.1 Jun 8.0 Jun§†† 3.2 May‡‡ 12.0 Jun§ 4.9 Jun§ 9.2 Jun§ 3.2 Jun 9.0 Apr§ 6.4 Jul 3.2 Jun‡‡ 8.8 2013 5.7 Q1§ 2.9 May§ 6.2 2013 2.0 Q2 3.5 Jun§ 4.0 Jun 1.2 Jun§ 7.1 Q1§ 4.9 Apr§ 6.5 Jun§‡‡ 9.2 Jun§ 4.8 Jun 7.1 Apr§ 13.4 Q1§ 6.3 Jun 5.6 2013 25.5 Q2§

-405.9 Q1 +163.6 Q2 +2.6 May -117.7 Q1 -54.8 Q1 +310.1 May +8.8 Q1 -5.4 Mar -44.0 May‡ +266.1 May +2.8 May +30.3 May +86.3 Q1 +0.4 May +0.2 Q1 +24.4 May +4.7 Q1 +60.7 Q1 -3.9 May +51.5 Q2 +36.2 Q1 +105.4 Q1 -52.6 May -40.9 Q1 +4.5 Q1 -32.4 Q1 -27.3 Q1 +14.3 Q1 -2.9 Q2 +56.3 Q1 +87.8 Jun +61.9 Q1 +12.5 Q2 -5.7 Q1 -81.2 Jun -8.4 Q1 -13.2 Q1 -23.3 Q1 +6.9 Q3 -1.9 Q1 +7.4 Q1 +132.9 Q1 -19.0 Q1

-2.5 +2.1 +0.2 -4.0 -2.7 +2.6 +2.8 -0.8 -1.2 +7.1 +0.6 +1.1 +9.9 +0.8 nil +6.7 +1.5 +13.3 -1.8 +2.0 +6.3 +12.4 -5.8 -2.0 +2.8 -2.8 -3.3 +6.3 -2.1 +19.5 +4.5 +11.9 +2.5 -1.1 -3.7 -2.5 -3.8 -1.5 +1.4 -2.5 +2.5 +11.8 -5.5

Budget Interest balance rates, % % of GDP 10-year gov't 2014† bonds, latest -2.9 -3.0 -8.0 -4.6 -2.6 -2.5 -2.8 -2.6 -4.0 +0.5 -5.5 -3.0 -2.7 -5.7 -1.7 -1.5 -3.0 +12.2 -3.5 -0.6 -2.1 +0.3 -2.6 -1.2 +0.8 -5.2 -2.3 -4.0 -6.8 +0.7 +1.0 -1.4 -2.3 -1.8 -3.8 -1.3 -1.5 -3.6 -12.1 -11.9 -2.6 +2.2 -4.4

2.46 4.01§§ 0.52 2.63 2.11 1.09 1.38 1.55 1.52 1.09 6.56 2.81 1.36 2.50 1.47 1.46 5.18 2.38 3.44 9.84 1.59 0.60 9.56 3.51 2.05 8.87 na 3.88 13.08††† 2.41 3.10 1.61 3.46 na 12.07 4.62 6.71 7.75 15.81 na 2.73 na 8.10

Currency units, per $ Aug 6th year ago 6.16 102 0.59 1.09 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 0.75 20.8 5.58 237 6.28 3.15 36.2 6.92 0.91 2.16 1.07 7.75 61.5 11,750 3.20 98.8 1.25 1,034 30.0 32.2 8.27 2.28 577 1,889 13.3 11.0 7.15 3.43 3.75 10.7

6.12 98.6 0.65 1.04 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 0.76 19.6 5.63 226 5.95 3.19 32.9 6.60 0.93 1.93 1.11 7.76 60.9 10,285 3.23 102 1.27 1,114 29.9 31.3 5.52 2.30 512 1,883 12.7 6.29 6.99 3.56 3.75 9.87

Source: Haver Analytics. *% change on previous quarter, annual rate. †The Economist poll or Economist Intelligence Unit estimate/forecast. §Not seasonally adjusted. ‡New series. **Year ending June. ††Latest 3 months. ‡‡3-month moving average. §§5-year yield. ***Official number not yet proven to be reliable; The State Street PriceStats Inflation Index, June 39.46%; year ago 20.07%. †††Dollar-denominated bonds.


The Economist August 9th 2014

Markets Index Aug 6th United States (DJIA) 16,443.3 China (SSEA) 2,321.8 Japan (Nikkei 225) 15,159.8 Britain (FTSE 100) 6,636.2 Canada (S&P TSX) 15,202.1 Euro area (FTSE Euro 100) 996.2 Euro area (EURO STOXX 50) 3,050.4 Austria (ATX) 2,242.3 Belgium (Bel 20) 3,057.4 France (CAC 40) 4,207.1 Germany (DAX)* 9,130.0 Greece (Athex Comp) 1,093.5 Italy (FTSE/MIB) 19,509.8 Netherlands (AEX) 397.2 Spain (Madrid SE) 1,046.7 Czech Republic (PX) 949.6 Denmark (OMXCB) 656.4 Hungary (BUX) 17,346.6 Norway (OSEAX) 672.6 Poland (WIG) 50,611.3 Russia (RTS, $ terms) 1,160.9 Sweden (OMXS30) 1,344.3 Switzerland (SMI) 8,290.2 Turkey (BIST) 79,432.3 Australia (All Ord.) 5,504.0 Hong Kong (Hang Seng) 24,584.1 India (BSE) 25,665.3 Indonesia (JSX) 5,058.2 Malaysia (KLSE) 1,869.9 Pakistan (KSE) 29,383.0 Singapore (STI) 3,320.2 South Korea (KOSPI) 2,060.7 Taiwan (TWI) 9,144.0 Thailand (SET) 1,522.4 Argentina (MERV) 8,132.2 Brazil (BVSP) 56,487.2 Chile (IGPA) 19,133.2 Colombia (IGBC) 14,204.9 Mexico (IPC) 44,425.8 Venezuela (IBC) 2,185.4 Egypt (Case 30) 9,047.6 Israel (TA-100) 1,238.4 Saudi Arabia (Tadawul) 10,478.3 South Africa (JSE AS) 51,091.8

% change on Dec 31st 2013 one in local in $ week currency terms -2.6 -0.8 -0.8 +1.7 +4.8 +3.0 -3.1 -6.9 -4.5 -2.0 -1.7 -0.1 -2.1 +11.6 +8.5 -3.9 -2.3 -5.3 -3.8 -1.9 -4.9 -4.2 -11.9 -14.6 -2.2 +4.6 +1.4 -2.4 -2.1 -5.1 -4.8 -4.4 -7.4 -8.5 -5.9 -8.8 -6.6 +2.9 -0.3 -2.6 -1.1 -4.2 -6.2 +3.4 +0.3 -1.3 -4.0 -8.3 -2.7 +16.0 +12.5 -2.7 -6.6 -15.0 -2.0 +11.6 +7.8 +0.4 -1.3 -5.3 -5.0 -11.5 -19.5 -3.9 +0.9 -6.3 -2.4 +1.1 -1.2 -5.7 +17.2 +16.5 -2.0 +2.8 +7.9 -0.6 +5.5 +5.5 -1.6 +21.2 +22.0 -0.6 +18.3 +22.6 -0.4 +0.2 +2.6 -3.1 +16.3 +23.9 -1.0 +4.8 +6.0 -1.1 +2.5 +4.6 -3.2 +6.2 +5.5 +0.2 +17.2 +19.5 -9.0 +50.8 +18.9 -0.7 +9.7 +13.6 +0.3 +5.0 -4.5 +1.2 +8.7 +11.1 +0.3 +4.0 +2.7 +1.1 -20.1 na +3.6 +33.4 +29.6 -1.3 +2.5 +3.6 +2.6 +22.8 +22.8 -1.3 +10.5 +7.7

Economic and financial indicators 73

The Economist poll of forecasters, August averages (previous month’s, if changed) Real GDP, % change Low/high range average 2014 2015 2014 2015 Australia 2.7 / 3.5 2.6 / 3.2 3.0 2.9 Belgium 0.9 / 1.5 0.8 / 2.0 1.3 1.5 Britain 2.9 / 3.4 2.3 / 3.7 3.1 2.7 Canada 2.0 / 2.6 2.2 / 3.5 2.3 2.6 France 0.5 / 0.8 0.7 / 1.7 0.6 (0.7) 1.2 (1.3) Germany 1.7 / 2.2 1.5 / 2.4 2.0 (2.1) 2.0 Italy nil / 0.3 0.4 / 1.3 0.2 1.0 Japan 1.0 / 2.1 0.8 / 1.7 1.4 (1.5) 1.2 (1.3) Netherlands nil / 1.2 1.1 / 2.4 0.6 (0.4) 1.6 (1.5) Spain 0.7 / 1.4 1.0 / 2.3 1.1 (1.0) 1.7 (1.5) Sweden 2.0 / 2.8 2.1 / 3.5 2.3 (2.4) 2.8 Switzerland 1.7 / 2.3 1.8 / 2.8 1.9 (2.0) 2.2 United States 1.4 / 2.6 2.4 / 3.3 2.0 (2.1) 3.0 Euro area 0.9 / 1.4 1.1 / 2.1 1.1 1.6 (1.5)

Consumer prices % change 2014 2015 2.7 2.6 0.9 1.4 (1.3) 1.7 2.0 (1.9) 1.8 (1.9) 1.9 (2.0) 0.8 1.1 1.0 1.7 (1.6) 0.4 (0.5) 0.8 (0.9) 2.8 (2.7) 1.8 0.8 1.2 (1.3) 0.1 0.7 0.1 (0.2) 1.3 0.1 (0.2) 0.6 (0.8) 1.9 2.1 0.7 1.1

Current account % of GDP 2014 2015 -2.0 (-2.1) -1.9 -0.8 (-0.6) -0.5 (-0.3) -4.0 -3.7 (-3.6) -2.7 -2.5 (-2.4) -1.2 (-1.3) -1.2 7.1 (7.0) 6.7 (6.6) 1.1 (1.2) 1.3 0.2 0.5 9.9 10.0 (9.9) 0.8 (1.1) 1.0 (1.3) 6.3 6.3 (6.2) 12.4 (12.2) 12.2 (11.9) -2.5 (-2.3) -2.4 (-2.3) 2.6 (2.5) 2.6 (2.5)

Sources: Bank of America, BNP Paribas, Citigroup, Commerzbank, Decision Economics, Deutsche Bank, Economist Intelligence Unit, Goldman Sachs, HSBC Securities, ING, JPMorgan Chase, KBC Bank, Morgan Stanley, RBC, RBS, Schroders, Scotia Capital, Société Générale, Standard Chartered, UBS

The Economist commodity-price index

Other markets

Index Aug 6th United States (S&P 500) 1,920.2 United States (NAScomp) 4,355.1 China (SSEB, $ terms) 240.4 Japan (Topix) 1,251.3 Europe (FTSEurofirst 300) 1,323.7 World, dev'd (MSCI) 1,693.1 Emerging markets (MSCI) 1,056.8 World, all (MSCI) 418.0 World bonds (Citigroup) 945.2 EMBI+ (JPMorgan) 705.5 Hedge funds (HFRX) 1,230.9§ Volatility, US (VIX) 16.4 CDSs, Eur (iTRAXX)† 67.0 CDSs, N Am (CDX)† 65.8 Carbon trading (EU ETS) € 6.2

% change on Dec 31st 2013 one in local in $ week currency terms -2.5 +3.9 +3.9 -2.4 +4.3 +4.3 +2.0 -3.5 -5.2 -3.2 -3.9 -1.3 -3.1 +0.6 -2.5 -2.7 +1.9 +1.9 -2.0 +5.4 +5.4 -2.6 +2.3 +2.3 +0.2 +4.3 +4.3 -1.8 +8.3 +8.3 -1.0 +0.4 +0.4 +13.3 +13.7 (levels) +8.4 -11.9 -14.6 +9.2 -3.5 -3.5 +0.8 +23.5 +19.7

Sources: Markit; Thomson Reuters. *Total return index. †Credit-default-swap spreads, basis points. §Aug 5th.

Indicators for more countries and additional series, go to: Economist.com/indicators

2005=100

Jul 29th

Aug 5th*

166.1 182.8

166.0 183.8

% change on one one month year

Dollar Index All Items Food

-1.7 -2.5

+1.8 +0.9

Industrials All Nfa†

148.8

147.4

-0.7

+3.0

142.5

137.3

-4.6

-10.5

Metals Sterling Index

151.5

151.8

+0.9

+9.4

All items

178.3

178.9

-0.3

-7.2

Euro Index All items

154.0

154.3

nil

+1.4

1,284.2

-2.4

-0.2

97.4

-6.0

-7.6

Gold $ per oz 1,298.9 West Texas Intermediate $ per barrel

100.9

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.


74

Obituary

The Economist August 9th 2014 they would spend their leisure time. He soon changed his mind. Wherever that approach was tried—in Birmingham, or Glasgow, or around the elevated Westway in north-west London—it caused exactly the sort of ugliness and alienation he had hoped to banish. In the 1970s he began arguing that one way to deal with urban decay might be a bonfire ofregulations; the idea, he said, was to “recreate the Hong Kong of the 1950s and 1960s inside inner Liverpool or inner Glasgow”. That sort of fertile chaos, he came to believe, was exactly what made cities so important, and such exciting places to live. He was an early advocate of the view—these days the received wisdom—that by allowing people to form connections with like-minded colleagues, cities are the engines of a country’s economic, cultural and artistic life.

Peter Hall Sir Peter Hall, a champion of cities, died on July 30th, aged 82

O

NE of Peter Hall’s earliest memories was being lifted above a wall by his father so that he could see a London Underground train come rattling out of a tunnel. In 1931, a year before he was born, a Tube worker named Harry Beck had designed his now-famous schematic map of the system, the clean lines of which ignored distance and geography in favour of showing only the essential information of how the stations were connected. By the time he was six, Mr Hall later recalled, he could reproduce that map from memory. That fascination for the hidden structure of urban life never left him. The trainmad child grew into one of the world’s foremost town planners, a profession whose mostly anonymous practitioners shape and direct, for better and sometimes for worse, the lives of the half of humanity that makes its home in the world’s cities. He was a prolific author, and with a mix of data, tables and a journalist’s eye for anecdote his books charted the post-war history of Britain. They examined the long and fitful decline of the industrial powerhouses of the north—Newcastle and Sheffield and Leeds and Manchester, cities that had, quite literally, built Britain’s old industrial empire. And they studied the rise of London and England’s subsequent transformation from a country into a city-

state—a modern version of medieval Florence, as he described it, with London dominating more and more of national life. His hero was Ebenezer Howard, the founder of the “garden city” movement, whose vision of Utopia was of rationally planned, suburban towns of a limited size, surrounded by countryside and full of green spaces. A couple were built north of London before the second world war. But it was in the war’s aftermath that planning really came into its own. The conflict with Germany had shown just how much the state could accomplish when it was willing to take control of things, and amid the rubble ofvictory there was a desire to turn that power to constructive ends. At first, Mr Hall was an enthusiastic supporter of that top-down, rational approach. One of his early books, “London 2000”, published in 1963, argued that London and the south-east should be comprehensively rebuilt, with vast areas of the inner cities bulldozed and replaced by blocks of flats, winding streets by a rectilinear system of motorways and on-ramps, and pedestrians segregated from traffic by walkways in the sky. Detroit, the spiritual home of the motor car, was his guiding light. The planners, in their patrician wisdom, would determine where the people would live, where they would work, and how

Homo urbanus He was, above all, a pragmatist, willing to abandon ideas that didn’t work and to work with anyone who would listen. He pushed for the development of the great orbital motorway that encircles London, and for the Channel Tunnel, which allows passengers to board a train at St Pancras and alight over the sea in Paris. He advised Margaret Thatcher’s government on the (extremely successful) transformation of London’s derelict Docklands into the financial hub of Canary Wharf, and Tony Blair’s administrations on how to rejuvenate struggling northern cities. Despite his influence over generations of politicians, wonks and city planners, he was never quite happy with how Britain had turned out. These days many of Britain’s cities have grown vibrant and prosperous. But the divide between London and the rest has sharpened, and away from the thriving centres are stubborn pockets of poverty and despair. He criticised his country’s chronic inability to plan for the long term, its cramped and draughty houses, its jammed roads and creaking trains. He pointed out the superiority of the Netherlands and Germany, where modernism was not a dirty word and where planners were trusted to build, if not Utopia, then at least somewhere pleasant to live. But his enthusiasm was never dampened for long. Besides writing, Mr Hall lectured, read and talked to anyone who would listen about the virtues of cities and about how they could best be built. He took a palpable joy in his work, and his expertise was in demand from America to the Far East. Where other tourists in a new city might head for the town centre or the main shopping street, he would hop on a bus or a tram and ride it out to the suburbs, mapping out the city’s skeleton, studying its circulatory system, seeking to understand how it all worked. 7


The economist august 15 2014  
The economist august 15 2014  
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