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Volume 413 Number 8914

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Contents continues overleaf

Contents

1

Jerusalem The Israeli-Palestinian conflict is driftingdangerously towards religiouswar: leader, page 10. A deadlyattack on Jews at prayer raisesthe stakes in an alreadyturbulent city, page 41

On the coverRussia’s wounded economy:leader, page 9. For more thana decade oil and consumerspending have propped it up.Not any more, page 21. Russiaoverestimates the value of itsreserves, pages 22. Some ofRussia is business-friendly,page 24. Using the SWIFTfinancial-transfer mechanismagainst rogue states, page 53.Russia will test Europe’s newforeign-policy supremo:Charlemagne, page 49. A newbook on the networks thatcontrol Russia, page 77

7 The world this week

Leaders

9 RussiaA wounded economy

10 Murders in JerusalemKeep God out of it

10 Nuclear talksIran’s choice

12 Japanese electionsSame race, same horse

14 China’s monetary policyThe People’s Blank ofChina

Letters

16 On immigration, Ebola,marijuana, America,politics, China

Briefing

21 The Russian economyThe end of the line

22 Foreign-exchangereservesNot quite all there

24 Regional successesBright spark

United States

25 HeroinThe great Americanrelapse

26 Keystone XLBack in the pipeline

27 InfrastructureGoing their separate ways

28 Atlanta’s new tramsAll aboard!

28 Criminal citiesThe secret of success

29 Campaign contributionsLive together, votetogether

30 LexingtonBarack Obama runs a redlight

The Americas

32 ArgentinaCristina’s long farewell

33 Health in Central AmericaMisleading means

34 BelloSlowing economies

Asia

35 Japanese politicsPunting on polls

36 Energy in IndonesiaHigher prices

37 Australia and globalwarmingAn outlier

37 Elections in TaiwanTesting times

38 BanyanAshraf Ghani’s Afghandance

China

39 Higher educationLuring back talent

40 Inheritance lawComplex legacies

40 Hong Kong politicsBarricades come down

Middle East and Africa

41 JerusalemMurder in the synagogue

42 Islamic StateMore foes than friends

42 Zanzibar and TanzaniaImperfect union

43 Nigeria’s film industrySelling BlackBerry Babes

43 Defence spendingArms and the African

Europe

45 Germany’s economyThe sputtering engine

46 Romania’s electionA commonsense victory

46 Protests in HungaryOpposing Orban

47 France’s centre-rightSarko Redux

48 Spanish politicsA three-cornered hat

48 Portugal’s visa scandalBuying their way in

49 CharlemagneEuropean foreign policy

Japan’s snap electionShinzo Abe has called a poll toconsolidate power; votersshould give him one morechance: leader, page 12. Hisbig fight will be over economicreform, page 35

America’s heroin relapseAn old sickness has returnedto haunt a new generation,page 25

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6 Contents The Economist November 22nd 2014

China’s central bank It shouldcut interest rates and explainclearly why it is doing so:leader, page 14. It is wary ofeasing, but that is what theeconomy needs, page 65.Powerful central banks aresubject to their own biases andfailings: Buttonwood, page 66

Decline of state companiesThe performance of government-controlled companies has beenshockingly bad, page 57. The400-odd firms Vietnam wantsto privatise are mostlyunappealing, page 58

Short-termism Let’s not getcarried away by the tide ofcriticism of it: Schumpeter,page 64

Antibiotics and antibodiesA new way to fight bacterialinfections that could be theanswer to antibioticresistance, page 75

Britain

50 The NHSReform and reformation

51 Satellite industryStars in their eyes

36 BagehotBrand Britain abroad

International

53 Financial sanctionsA SWIFT response

54 FIFA and corruptionHear no evil

55 The war on obesityHeavy weapons

55 Paydays and mortalityCash to crash

Business

57 State-owned firmsIn the dock

58 Vietnam’s state firmsExcess baggage

59 The taxi-app marketUber-competitive

59 Executive compensationIf you hire them, pay willcome

60 Oilfield-service firmsKnowing the drill

60 Video gamesIn-console-able

60 Mobile telecomsThe endangered SIM card

62 Companies in PolandGrowing the Polish Apple

63 Minerals firmsReputation management

64 SchumpeterShort-termism: not all bad

Finance and economics

65 The People’s Bankof ChinaCovert operations

66 ButtonwoodCentral bankers’ foibles

67 Corporate venture capitalIf you can’t beat them, buy them

67 Business-developmentcompaniesShadowy developments

68 The Greek economyGrecovery

68 Behavioural economicsLying, cheating bankers

71 Mobile paymentsThe cheque is in the tweet

72 Free exchangeDemography and secularstagnation

Science and technology

74 Nuclear safetyThe ultimate securityblanket

75 How Tibet was wonThe barley mow

75 Antibodies v bacteriaMaking resistance futile

76 The fate of PhilaeWhere the shadows lie

Books and arts

77 Putin’s RussiaBand of brothers

78 Quantum biologyNature, the physicist

78 GermanyReformed and reluctant

79 Tove JanssonMoomins’ magic maker

80 English family lifeCommon people

80 Literary auctionsFirst editions, secondthoughts

84 Economic and financialindicatorsStatistics on 42 economies,plus a closer look at globalbusiness confidence

Obituary

86 Donald StookeyThe joy of glass


1

Five people were killed whentwo Palestinians attacked menat prayer in a synagogue inJerusalem with knives and agun. Both assailants weresubsequently killed in a shoot-out with the police. The as-sault, at a time ofheightenedtension over demands bysome Israelis for the right topray at Muslim holy sites in thecity, has raised concerns thatthe conflict between Israel andthe Palestinians is taking on areligious tint.

The scale ofEbola’s economicimpact was made clearer aftera survey for the World Bankfound that almost halfofLiberians who were employedbefore the outbreakare nowout ofwork. The bankreckons,however, that the disease isnow likely to trim economicoutput in the affected coun-tries by about $3 billion, whichis a tenth of its previous worst-case estimate.

France bolstered its ability tostrike at Islamic State by bas-ing six jets in Jordan (it alreadyhas nine fighter planes in theUnited Arab Emirates). Thiscame after the revelation thattwo Frenchmen were amongthe militants in a video de-picting the beheadings of18Syrians. Also murdered by IS

this weekwas Peter Kassig, anAmerican aid worker.

Not a good moveGuerrillas belonging to theFARC, which has waged a50-year war against the Colom-bian state, kidnapped a generaland two companions in thewestern part of the country.Colombia’s president, JuanManuel Santos, suspendedpeace negotiations, which

began two years ago, and saidthey would not resume untilthe captives were released. Theinterruption may be brief;mediators said an agreementto free the captives had beenreached.

Police investigating allegationsofcorruption at Petrobras,Brazil’s state-owned oil com-pany, arrested 18 people, in-cluding a former director at thefirm and executives fromseveral big construction andengineering companies. Theyhad allegedly participated in ascheme to inflate the cost ofcontracts and funnel the mon-ey to political parties, includ-ing the Workers’ Party ofPresident Dilma Rousseff.Authorities in the UnitedStates are also investigating,since some securities ofPetro-bras are traded in New York.

María José Alvarado, who wasto represent Honduras in theMiss World beauty pageant inLondon in December, wasmurdered along with hersister. Honduras’s murder ratein 2012 of90.4 homicides per100,000 people was theworld’s highest, according tothe UN.

A referendum on Abenomics

Japan’s prime minister, ShinzoAbe, called a snap election forDecember14th after figuresshowed that the economyshrankby1.6% on an annual-ised basis in the third quarter,after a contraction of7.3% inthe second. Most economistshad thought GDP would growin the latest quarter. An in-crease in the consumption taxin April has been widelyblamed for the country’s slideinto recession, prompting MrAbe to announce the post-ponement until 2017 ofplansto raise the tax again.

Police in Hong Kong beganremoving barricades erectedby protesters who are angeredby China’s plan to restrictdemocratic reform in theterritory and have occupiedsome major roads in the citysince late September. Thecourts ordered the barricadesto be taken down after com-plaints about the impact of theprotests on local businesses. Agroup ofstudents who tried totravel to Beijing to raise theirgrievances were barred fromboarding their flight.

Mahinda Rajapaksa, who hasruled Sri Lanka since Novem-ber 2005, called a presidentialelection to let him seekanunprecedented third term,after the country’s SupremeCourt cleared the way for himto stand. The president couldhave waited until 2016, but anearly poll lets him take ad-vantage ofa buoyant economy,weakopposition and ongoingsatisfaction among fellowSinhalese that he ended a longcivil war, by crushing Tamilseparatists, five years ago.

Unwelcome guestRussia’s president, VladimirPutin, left the G20 summit inBrisbane early after receiving abarrage ofcriticism from West-ern leaders, including Ger-many’s Angela Merkel, Brit-ain’s David Cameron andCanada’s Stephen Harper,who bluntly told Mr Putin to“get out ofUkraine”.

A few days later Germany’sforeign minister, Frank-WalterSteinmeier, visited Moscow tomeet the Russian foreign min-ister, Sergei Lavrov, as well asMr Putin. “There is no reasonfor optimism in the currentsituation,” Mr Steinmeier said,alluding to continuing Russiandestabilisation ofeasternUkraine. The EU extended itslist ofnamed Ukrainian sepa-ratists subject to sanctions.

The European Parliamentannounced that it woulddebate a motion ofno-confi-dence in the new president ofthe European Commission,Jean-Claude Juncker. MrJuncker, a former long-servingprime minister ofLuxem-

bourg, has been under fire overthe country’s many tax-avoid-ance schemes. European gov-ernments want to crackdownon such practices.

Portugal’s interior minister,Miguel Macedo, resigned overa scandal involving officialcorruption in the granting of“golden visas” to wealthynon-Europeans who invest acertain amount ofmoney inproperty in the country.

In a surprise result, Roma-nians elected Klaus Iohannis,an ethnic German who ismayor ofSibiu, as their nextpresident. Mr Iohannis handi-ly defeated the opinion poll-sters’ favourite, Victor Ponta,but Mr Ponta plans to remainRomania’s prime ministeruntil a general election in 2016.

Who likes to be in America?BarackObama prepared tooutline the details ofhis long-promised executive order torewrite America’s immigra-tion rules. Republicans,flushed with victory in therecent mid-term elections,expressed fury even before theannouncement was made,saying it would hinder biparti-san co-operation on othertopics when they take controlofCongress in January.

The number offoreignstudents at American collegesrose by 8% in the 2013-14 aca-demic year, according to areport sponsored by the StateDepartment. China was thetop country oforigin at 31%,followed by India at11.6% andSouth Korea at 7.7%. The num-ber ofstudents from SaudiArabia grew by a fifth. NewYorkUniversity hosted moreinternational students thanany other college: 11,000, a riseof19% from the previous year.

Politics

The world this week

8 The world this week The Economist November 22nd 2014

Other economic data and newscan be found on pages 84-85

Uber became mired in a pub-lic-relations mess after one ofits executives suggested thatthe firm should employ privateinvestigators to dig up dirt onjournalists who criticise it. Theremarkwas made by EmilMichael, a senior vice-presi-dent, who said it was “bornout of frustration” with mediasniping about the app-basedtaxi service. But even amongSilicon Valley’s thrusting en-trepreneurs Uber has a rep-utation for controversial busi-ness tactics, such as promotingrides with “incredibly hotchicks” at the wheel.

Left to its own devicesNokia surprised many techobservers by unveiling its firstAndroid-powered tablet, theN1, marking its return to con-sumer electronics. The Finnishcompany left that marketwhen it sold its wireless-de-vices business to Microsoft.The N1 is to be made through alicensing arrangement withFoxconn, which assembles theiPad for Apple.

Britain’s legal challenge to theEuropean Union’s cap onbankers’ bonuses suffered analmost certainly fatal blowwhen the advocate-general tothe European Court of Justicefound that the rule that limitsbonuses to 100% ofsalary (or200% with shareholders’approval) was valid.

The Shanghai-Hong KongStockConnect opened forbusiness with much fanfare.The scheme allows foreigninvestors in Hong Kong to buyA-shares on the Shanghaistockexchange without alicence and Chinese investorsto tap the Hong Kong market,subject to limits. Most of theinterest lies in accessing Shang-hai’s equity market, but after aboisterous start trading wassubdued on the second day.

The head ofRussia’s centralbankdefended her decision tolet the rouble float, saying ithad reduced speculative at-tacks on the currency. ElviraNabiullina also reiterated that

she would intervene to propup the rouble again “ifeventsdevelop negatively”.

The luck of the IrishBill Ackman, an activist in-vestor, and Valeant Pharma-ceuticals saw their joint bid forAllergan, the maker ofBotox,defeated by a $66 billion rivaloffer from Actavis. Mr Ack-man’s lengthy quest for Al-lergan had become increasing-ly hostile. Actavis will benefitfrom a lower tax bill, as it hasmoved its tax base to Irelandthrough an inversion takeover.

BakerHughes agreed to afriendly $38 billion takeoverfrom Halliburton, its biggerrival in the oilfield-servicesindustry. Both companies havetheir roots in the oil boom ofthe early 20th century (part ofthe Baker Hughes lineage canbe traced back to the family ofHoward Hughes) and bothhave a significant presence inthe fracking boom. But theirunion will be scrutinised byantitrust regulators.

A report by the Senate commit-tee on investigations sharplycriticised the “massive involve-ment” ofGoldman Sachs,JPMorgan Chase and MorganStanley with physical-com-modity markets. In one focus,Goldman’s acquisition of the

largest certified warehouse tostore aluminium in Americawas described as a conflict ofinterest, as it was trading heavi-ly in the metal as well as man-aging its availability throughthe storehouse. The bank isselling the business.

Australia signed a free-tradedeal with China, its biggesttrading partner. The agreementcuts tariffs for most Australianagricultural imports, includingwine but excluding rice andsugar, into China and eases therules for Chinese investmentin Australia. The deal is part ofthe Australian government’seffort to make the economyless reliant on commodities.

Britain’s House ofCommonsvoted to end the 400-year-oldrequirement that pub land-lords must buy their beer fromthe breweries that own theirpremises, allowing theminstead to purchase their beer

more cheaply on the market.Those who want to end the“beer tie” say it will reduce pubprices, but big brewers arguethat pubs will have to close.Share prices swooned amongthe firms that own most of thetenanted pubs.

A court in Mumbai ruled infavour ofRoyal Dutch Shell inits $3 billion tax dispute withthe Indian government. Shellwas accused ofavoiding taxwhen transferring shares fromits Indian subsidiary. Theprime minister, NarendraModi, has promised to bringorder to India’s capricious taxpolicies on foreign firms.

People get readyPrivateer, a private-equity firmbased in Seattle with roots inthe cannabis industry, an-nounced a deal with the BobMarley estate to sell marijua-na branded under the latesinger’s name. Cannabis isnow legal in several Americanstates and Uruguay. As well asselling the weed, the venturewill launch products such aslip balm. Privateer’s bosssubmitted that “Bob Marleystarted to push for legalisationmore than 50 years ago. We’regoing to help him finish it.”

Business


VLADIMIR PUTIN is notshort of problems, many of

his own creation. There is thecarnage in eastern Ukraine,where he is continuing to stirthings up. There are his fraughtrelations with the West, witheven Germany turning against

him now. There is an Islamist insurgency on his borders and athome there is grumbling among the growing numbers whodoubt the wisdom of his Ukraine policy. But one problemcould yet eclipse all these: Russia’s wounded economy couldfall into a crisis (see pages 21-24).

Some ofRussia’sailmentsare well known. Itsoil-fired econ-omy surged upward on rising energy prices; now that oil hastumbled, from an average of almost $110 a barrel in the firsthalfof the year to below $80, Russia is hurting. More than two-thirds of exports come from energy. The rouble has fallen by23% in three months. Western sanctionshave also caused pain,as bankers have applied the restrictions not just to Mr Putin’scronies, but to a much longer tally ofRussian businesses. Moregenerally, years of kleptocracy have had a corrosive effect onthe place. Much of the country’s wealth has been dividedamong Mr Putin’s friends.

Everybody expects continued stagnation, but the conven-tional wisdom is that Mr Putin is strong enough to withstandthis. The falling rouble has made some export industries likefarming more competitive. These exports combined with MrPutin’s import-blocking counter-sanctions mean Russia stillhas a small trade surplus. It has a stash of foreign-exchange re-serves, some $370 billion according to the central bank’s fig-ures. Add in the resilience of the Russian people, who are alsoinclined to blame deprivation on foreigners, and the viewfrom Moscow is that Mr Putin has time to manoeuvre. Peopletalk loosely about two years or so.

In fact, a crisis could happen a lot sooner. Russia’s defencesare weaker than they first appear and they could be tested byany one of a succession of possibilities—another dip in the oilprice, a bungled debt rescheduling by Russian firms, furtherWestern sanctions. When economies are on an unsustainablecourse, international finance often acts as a fast-forward but-ton, pushing countries over the edge more quickly than politi-cians or investors expect.

Putin a good man downThe immediate worry is the oil price. Mr Putin is confident itwill recover. But supply seems set to increase, with OPEC keento defend its market share. American government agenciespredict oil prices could average $83 a barrel in 2015, well belowthe $90 level Russia needs to avoid recession (and to keep itsbudget in balance). If global demand weakens—Japan hasslipped into recession since the latest round of forecasts—theoil price could fall further. That would immediately prompt in-vestors to reassess Russia’s prospects.

Then there are the debt repayments. Russia’s firms haveover $500 billion in external debt outstanding, with $130 bil-

lion of it payable before the end of 2015, at a time when fewWestern banks want to increase their exposure to Russia. Evenfirms that earn dollar revenues may struggle to pay their debts.Rosneft, an oil giant, recently asked the Kremlin to lend it $44billion. Mr Putin has so far resisted, but he cannot let a com-panythat is 70% state-owned and employs160,000 people fail.There is a lengthening queue of troubled Russian firms. Non-performing loans were rising even before interest rates wereraised to 9.5% to defend the rouble. Meanwhile Russian banksare relianton the central bankto replace deposits that theircus-tomers are understandably spiriting into dollars.

Directly or indirectly, many of these bills will end up withthe Kremlin, which is why its reserves will be vital. They areevaporating: down $100 billion in the past year, followingfailed attempts to defend the rouble. And the book-keeping isdodgy. Of the reported $370 billion reserve pile, more than$170 billion sits in the country’s two wealth funds. Some oftheir assets are iffy, including various stakes in Russia’s state-owned banks and debt issued by Ukraine that Mr Putin’s ownaggression is fast rendering worthless. One of the funds is ear-marked for pensions. In reality, Russia’s government has per-haps $270 billion of hard cash that is accessible and usablewithout massive cuts elsewhere—less than its external obliga-tions due over the next two years (see page 22).

All this spells trouble for Russia, but Mr Putin’s maraudingforeign policy could accelerate things. This after all is a manwho has invaded other countries and lied about it. A deeperforay into Ukraine would lead to stronger sanctions by West-ern countries. Some of them, such as barring Russia’s banksfrom the SWIFT international payments system (see page 53),could halt Russian trade altogether. A partial block on oil ex-ports would fell the economy, as it did Iran’s. And the moretrouble he faces, the more likely Mr Putin is to play thenationalist card—and that means more foreign forays, and yetmore sanctions.

From Russia to Rio, without much loveRussia’s biggest recent economic crisis, in 1998, led to a govern-ment default. This time a string of bank failures, corporate de-faults and a deep recession look likelier. Even so the pain fromthese could spread abroad quickly, both to countries that relyon Russian trade (exports to Russia account for fully 5% ofGDP

in the Baltics and Belarus) and through financial ripple effects.Banks in both Austria and Sweden are exposed. And iffirms inone badly run commodity-driven country start to default ontheir dollar debts, then investors will worry about others—such as Brazil.

IfRussia’s economy looks likely to collapse, there will be in-evitable calls in the West for sanctions to be cut back. ThisweekMr Putin pointed out that 300,000 German jobs dependon trade with his country. But Angela Merkel rightly stoodfirm. Actions, Mr Putin must finally learn, have consequences.Invade another country, and the world will act against you.And the same goes for the economy, too. Had Mr Putin spentmore of his time strengthening Russia’s economy than enrich-inghis friends, he would notfind himselfso vulnerable now.7

Russia’s wounded economy

It is closer to crisis than the West orVladimirPutin realise

Leaders

10 Leaders The Economist November 22nd 2014

1

THE sight of Jews lying deadin a Jerusalem synagogue,

their prayer-shawls and holybooks drenched in pools ofblood, might be drawn from theage ofpogroms in Europe. Sadly,it is an appallingly modern epi-sode, the latest in the intermina-

ble tragedy of Jew and Arab in the promised land. The slaugh-ter at the Kehilat Bnei Torah synagogue—four worshippers anda policeman were killed by two Palestinian men wieldingknives and guns, who were in turn shot dead—is hardly thedeadliest event in the annals of Israeli-Palestinian violence.And it pales in comparison to the mass slaughter taking placeacross the border in Syria and in otherparts of the Middle East.

Yet the synagogue murders matter, for several reasons. First,to judge from the scenes of some Gazans handing out ce-lebratory sweets and cartoons on social media glorifying thebloodletting, the lust for butchery that impels jihadists else-where is gripping Palestinians. Second, Palestinian Jerusale-mites who largely stood aside in past battles have taken up thefight. Third, the deaths in a house of prayer come at a timewhen Jerusalem is already astir over the status of holy sites.The conflict is thus beingpushed further from a dispute over ri-val nationalism and closer to one about religions and Jerusa-lem. That makes everything even more intractable.

It is still just about possible to imagine a peace settlement toresolve the nationalist strife through some kind of partition ofthe land between the Mediterranean Sea and the Jordan river.But the more religion infuses the dispute, the more impossibleit is to find a deal. That is why the status of Jerusalem has al-ways been one of the hardest issues to crack. Jews, after all,pray for the restoration of the temple every day; for Palestin-ians, the al-Aqsa mosque, built atop the ruins of the Jewish

temple, is the third-holiest site in Islam.Religion should make Jerusalem a place of sublime spiritu-

ality. All too often, though, it is exploited forpolitical ends. Reli-gious conflict would spread trouble beyond the holy land andwould bring a world of horrors. It was glimpsed in 1994, whena Jew killed dozens of Palestinians at prayer in Hebron; it wasglimpsed again thisweekin Jerusalem. SummoningGod sanc-tifies violence and intransigence; an equitable peace becomesimpossible when compromise is blasphemy.

A dry crust and peaceFor Binyamin Netanyahu, Israel’s prime minister, this week’smurders were the result of incitement by the Palestinianleader, Mahmoud Abbas, who urged Palestinians to defend al-Aqsa. For Mr Abbas the real problem is provocation by Jewsseeking the right to pray at the al-Aqsa compound (some wantto rebuild the temple there), in a growing campaign abetted bymembers ofMr Netanyahu’s government and his Likud party.

At such a moment it seems pointless to advocate a return topeace talks. Yet the need fora settlement, including a meansforIsraelis and Palestinians to share Jerusalem, is more apparentthan ever. Fornowboth leaders should at leastavoid demonis-ing each other because that only makes it harder to talk tomor-row. They must also speakto theirown people. MrAbbas musttell Palestinians that, no matter the injustices under occupa-tion, targeting innocent civilians is always unacceptable. MrNetanyahu must yet again make clear that the religious statusquo on the Temple Mount will not change; that Jewish attackswill be punished just as severely as Arab ones; and that there isa dignified place for Palestinians in a shared Jerusalem.

At times of sorrow and anger the wisdom of leaders is test-ed. They must abjure inflammatory language, resist overreac-tion and collective punishments—and stand up to radicals intheir midst. 7

Murders in Jerusalem

Keep God out of it

The Israeli-Palestinian conflict is drifting dangerously towards religious war

AFTER eight years of doublecrossing and frustration a

deadline looms. November24this the cut-off for a deal to ensurethat Iran’s nuclearprogramme ispeaceful. Much workremains. Isagreement possible and whatwould it encompass?

Iran is looking for three things from a deal. First, it wants nu-clear-related sanctions to be eased. Second, because it wouldbe a national humiliation to dismantle its programme entirely,it insistson preserving the enrichmentcapacity to meet what itcalls its “practical needs”. Third, it wants the prospect of being

treated as a “normal” signatory of the Nuclear Non-Prolifera-tion Treaty, with the right to a decent civil nuclear programme.

For the rest of the world the goal is simply to increase thetime itwould take for Iran to produce enough fissile material tofuel a bomb. Today that could be as little as two months; itshould be at least a year, so that any attempt at “breakout” or“sneakout” (in, say, a secret uranium-enrichment plant) wouldbe caught in good time. Only then would there be an opportu-nity to deter Iran through more sanctions or the credible threatof military action. A deal also needs to have a long enoughtime-horizon to establish that Iran no longer wishes to pre-serve the option ofbuilding nuclear weapons.

The talks have made progress. There is now a plan to con-

Nuclear talks

IranÕs choice

AFGHAN-

ISTAN

TURKMENISTAN

PAKISTAN

IRANIRAQ

SAUDI

ARABIA

Tehran

The Gu lf 500 km

Fora deal to be done both sides need to compromise, but Iran must give more ground

Arak

Bushehr

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2

WHEN Shinzo Abe madethe case, in late 2012, that

he was the man to save the econ-omy and revive Japan, votershanded him a landslide general-election win. This week, justtwo yearson, the prime ministerdissolved the Diet’s lowerhouse

and declared a snap election for December14th. “We cannot”,he thundered, “let this chance go.” Not surprisingly, many Jap-anese think they are being asked to buy the same horse twice.

The political calculations are clear. Mr Abe’s popularity hastumbled from the gravity-defying levels he enjoyed until thisautumn. Better to seek another four-year term now beforefights next year over defence policy and restarting Japan’sclosed nuclear plants—and before mutterings against Mr Abegrowinside hisown Liberal DemocraticParty (LDP). The oppo-sition is in disarray, unable even to field enough candidates forthe vote. Observers expect the ruling coalition to lose 30-40seats but still keep a handsome majority (see page 35). Some ofMr Abe’s people hope that the LDP might actually add seatsand govern without the help ofKomeito, its junior partner.

Yet there is no getting around it. Mr Abe is running on a pro-mise to revive the economy because his attempts to do so thefirst time round have largely failed. Countless times he

claimed to be putting an end to years ofdeflation and revivingthe economy. The Economist was among those who gave himthe benefit of the doubt by endorsing “Abenomics”, a slicklypresented campaign promoting radical monetary easing,more government spending and far-reaching structural re-forms. Soon after he came to office, Mr Abe famously declaredthat “Japan is back”. As awful GDP figures released for the thirdquarteron November17th underlined, he was half-right: Japanis indeed back—in recession. And many Japanese householdsfeel squeezed because wages are not keeping pace with prices.

Was Abenomics, then, all voodoo? Not entirely. Withoutthe Bank of Japan’s massive quantitative easing, who knowshow far the economy might have sunk? The first round of eas-ing in 2013 did nudge inflation expectations upwards. Its sec-ond round in late October was also right, because the econ-omy had stopped in its tracks, while core inflation, which hadbeen moving up to the central bank’s target of2%, had slipped.

As for fiscal policy, the problem was too little loosening.With hindsight, the government made a mistake in goingahead in April with a long-planned rise in the consumption(value-added) tax, from 5% to 8%. It knocked the stuffing out ofthe economy. MrAbe wasright to declare thisweekthat he willpostpone the next planned rise, from October 2015 until April2017 (though he wasdisingenuous in claimingthathe needed afresh electoral mandate to do so). In a stagnant economy put-

Japanese elections

Same race, same horse

Shinzo Abe has called a snap poll to consolidate power; voters should give him one more chance

vert the Arak heavy-water reactor so that it produces less plu-tonium. Iran is also ready to turn the enrichment facility at For-dow, almost impregnable beneath a mountain near Qom, intoan R&D site. The sticking point is Iran’s uranium-enrichmentcapacity, which, with the size of its stockpile of low-enricheduranium (LEU), determines how fast it can make the high-en-riched stuffthat goes into bombs.

The Russian optionAmerica and its partners say that Iran’s needs for the TehranResearch Reactor and Arak, if it becomes a light-water reactor,can be metwith fewer than 2,000 first-generation centrifuges—far fewer than the 10,200 now running and the 9,000 installedbut not yet spinning. Fuel for the Bushehr nuclear power sta-tion can come from Russia. America wants constraints onIran’s centrifuges to last for up to 20 years. Iran counters that itwill not dismantle any of its centrifuges and that it needsmore—to fuel Bushehr when a contract with Russia ends in2021. Thatwould, it says, take at leasta tenfold increase in its ca-pacity plus some new technology.

But there is room for compromise on the numbers. If Iranwere to agree to send its LEU routinely to Russia to be madeinto fuel rods, which cannot easily be further enriched intobomb-fuel, its negotiating partners would agree to its keepingabout half its operating centrifuges. The rest would be moth-balled at a secure site monitored by nuclear inspectors. Iran’sresearch into newer, more efficient centrifuges, which couldhelp it build a small secret enrichment plant (a big worry forWestern spooks), would be rigorously monitored.

The world could give ground over the length ofa deal. After,say, ten years, some constraints could relax in phases—thoughonly if the International Atomic Energy Agency (IAEA) couldcertify that Iran was honouring the agreement. To that end,Iran would have to submit to a uniquely intrusive inspectionregime. Lastly and crucially, Iran must demonstrate its faith inthe deal by admitting its past work on weaponisation. TheIAEA could treat such declarations in confidence—saying onlythat it had received a full accounting.

Some unilateral sanctions could be eased quite quickly be-cause both the European Union and America could reimposethem were Iran to cheat. The UN sanctionsshould be the last togo because they would be the hardest to restore.

Such a compromise would fall well short of the maximalistdemands of Iranian hardliners, including the supreme leader,Ayatollah Ali Khamenei, who continue to believe that Iranshould have a nuclear-weapons option, if not the bomb itself.It would also provoke outrage among sceptical members ofAmerica’s Congress and Israel’s prime minister, Binyamin Net-anyahu, who insist that Iran’s record of cheating means itshould have no enrichment programme at all. But that is thenature ofcompromises; neither side will get all it seeks.

The West would probably accept the deal outlined above.For all its protests, Israel would be much safer from attack thanit is now; so indeed would the whole region. Iran has a choice.It could keep an option on nuclear weapons, but suffer pover-ty; or it can rejoin the global economy and still have the pros-pect of the peaceful nuclear programme it says it has wantedall along. Which is it to be?7


2

ALAN GREENSPAN was amasterofabstruse language

as chairman of the Federal Re-serve. “Ifyou understood what Isaid, I musthave misspoken,” heonce joked. At least Mr Green-span spoke. In China the centralbank has made a habit of si-

lence. Policy announcements are rare and, if they are offered,come at unpredictable hours, often over the weekend. Suddenshifts in the value of the yuan always bear the central bank’sfingerprints, but are infrequently explained. The motto for thePeople’s Bank of China (PBOC) should be: “If you know whatwe did, we must have done it wrong”.

This taciturn tendency has long bemused people trying tounderstand the direction ofChina’s monetary policy (see page65). But recently it has reached new and dangerous extremes.Since June the central bank is widely reported to have injectedas much as 1.8 trillion yuan ($294 billion) to prop up the slow-ing economy through a mix of targeted liquidity facilities. Thatis a lot of money, equivalent to more than three months ofquantitative easing at the peak of the Fed’s bond-buying pro-gramme. Butonly in earlyNovember, halfa yearafter rumoursstarted, did the central bank provide some confirmation of itsactions, and even then it was only partial.

Worse, the PBOC deliberatelychoosesconvoluted means toloosen monetary conditions—in essence providing cheapermedium-term money to some banks, not others. And it is us-ing this as a first line of defence. Elsewhere, central banks cutinterest rates close to zero before turning to unconventionalpolicies. In China the benchmark one-year lending rates sit at6%. It would be better if China loosened monetary policy thetraditional way—by cutting interest rates.

The central bankis, to be fair, in a tough spot. It has been theboldest of China’s regulators in trying to curb soaring debts inthe shadow bankingsystem. It worries that a rate cut would beseen as a U-turn, signalling a retreat from its quest to rein in

borrowing excesses. Hence its preference for covert easing. This is the wrong choice, for two reasons. First, the central

bank’s meddlesome approach to providing liquidity risks un-dermining itsown reformistagenda. Instead ofletting the mar-ket allocate resources, the central bank is choosing whichbanks should be the beneficiaries of easing, and how theyshould direct their lending. It has, for instance, specified that abig chunk of its cash injections must go to the construction ofpublic housing. That may be a laudable goal for the govern-ment, but not the central bank.

Second, the failure to explain what it is doing diminishesthe central bank’s effectiveness. The point of easing is not justto pump money into the economy, but also to instil confidencein companies and consumers. By spelling out what they aredoing and why, central bankers help steer markets and reduceuncertainty. The recent slide in China’s growth shows that thePBOC is struggling to hit its mark. Short-term money rates havedeclined, but real bank-lending rates have risen.

The case forcutting and talkingThese shortcomingshurtChina’seconomy. Theyare also a glo-bal concern. Even as it slows, China still generates over a quar-ter of the world’s growth. Its financial system, sealed off be-hind capital controls for decades, is increasingly open. As ofthis week, anyone with a HongKongbrokerage account can in-vest on the Shanghai stock exchange. And the yuan is beingused more widely; central banks from France to Nigeria nowhold the Chinese currency in their foreign-exchange reserves.

As a central bankofglobal consequence, the PBOC needs toadopt the best practices of its peers. That means looseningmonetary conditions transparently and harnessing the powerof communication. It should combine a cut in interest rateswith a clear explanation of why it is cutting (to ward off thethreat of deflation) and a promise to greet any rush to greaterleverage with much stricter credit rules. Other big centralbanks have turned such “forward guidance” into a powerfulpolicy tool. The PBOC should too.7

China’s monetary policy

The People’s Blank of China

China’s central bankshould cut interest rates and explain clearlywhyit is doing so

ting fiscal consolidation before recovery can prove disastrous.Monetary and fiscal policy will remain loose after Mr Abe

is re-elected. Yet Abenomics may now pull less ofa punch. Per-haps its chief intention, in the words of one adviser, was as a“psychology-management exercise” to boost the stockmarketand shake Japanese households and businesses out of theirdeflationary gloom. That effect cannot be repeated again andagain. The Bankof Japan can act yet more boldly, but it will be-come harder to shockand awe.

That leaves structural reform, the third dimension to theplan to raise Japan’s long-run rate of growth. Here, spin racedmuch further ahead of substance. The government an-nounced fine-sounding proposals to improve a rigid employ-mentsystem, open marketsand even allowin more foreigners.A few of them have borne fruit: corporate governance is beingoverhauled to allow in more independent directors, morewomen are at work and agriculture is freer. But overall there

has been no sense ofurgency or priorities. Mr Abe’s advisers say that a second term will be different:

he will unblocktrade talks with America over farm protection;he will reform labour; he will change the taxsystem to spur jobcreation and stimulate spending. He may also get a little helpfrom the economy. Year-end bonusesatbigcompaniesare like-ly to be generous, thanks to profits from a weak yen. And in-ventories and labourmarkets are surprisingly tight. In Nagoya,for instance, wages for bar workers have doubled in the pastyear as construction firms have snapped up casual labour.

Time to upset peopleIn the long run, however, Japan can grow faster only if it has aleaderwho is prepared to make changes that upset old ways ofdoing things. Mr Abe has radical ideas, but he is too averse tospending his political capital to implement them. Great lead-ers have to take risks.7

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Crowded Britain

SIR – The finding in an aca-demic study by ChristianDustmann and TommasoFrattini that immigrants toBritain from elsewhere inEurope make a net fiscal contri-bution does not justify highlevels of immigration (“Whathave immigrants ever done forus?”, November 8th). Theirstudy does not cover the signif-icant non-fiscal costs of theresulting population growth.

Each added resident bringsforward the need for increasedcapital spending on services.Britain’s high-speed trainprojects are always justified byalready overcrowded networkcapacity. Because ofbudgetaryconstraints hospital beds andschool places are in shortsupply and becoming everharder to find. The supply ofsome assets, such as beachesand beauty spots, cannot beincreased, so they becomecrowded. More developmentto house more people bringslarge financial costs throughthe environmental damagethat the loss ofcountrysidewill bring. None of this iscovered in the report. Less netimmigration would havemeant these problems wouldnow be smaller; net emigra-tion could have helped curethem at low cost.

The study by Messrs Dust-mann and Frattini is about thequality of immigrants. But it isthe quantity of immigrantsthat is the bigger problem. Wealready have too much of thisgood thing.GEORGE ELLINGHAM

London

Tackling Ebola

SIR – The rejection by some ofeffective experimental treat-ments for Ebola lacks foresight(“Unchained malady”,November15th). The sacrificeofa few lives may be a neces-sary evil for the developmentofa drug to save thousands,which we have the ability todo right now at the early stageofEbola’s spread. Any delay,be it months, weeks, or even afew days, could cause thou-sands ofdeaths.

Throughout history we

have sent soldiers to sacrificetheir lives in battle for a greatergood, but in this case we recoilat the thought. With conscrip-tion a man has as much controlover his participation in war asvictims ofEbola have overtheir catching the disease. Howcan we sacrifice fellow citizensfor a greater good in war, butfind disgust when doing thesame with these patients? Weshould not be so quick to rejectthis notion ofsacrifice, for theresult could make a monu-mental difference.BRIEN COMEY

Gambier, Ohio

SIR – To your list ofdiseases inAfrica that have killed morepeople than Ebola you mightadd tuberculosis, which ac-cording to the World HealthOrganisation, killed over10,000 in Guinea, Sierra Leoneand Liberia in 2013, abouttwice the number ofdeathscurrently reported from Ebola.Tuberculosis also killed 460people in Britain that year.PROFESSOR PETER DAVIES

SecretaryTB AlertLiverpool Heart and Chest Hospital

Planting pot

SIR – Like others you writeabout the legalisation of thegrowing cannabis “industry”(“Marijuana milestone”,November 8th). But the lastthing this industry needs is tobecome like Big Tobacco. Can-nabis is not an easy plant tocultivate. It requires a lot ofattention and this is reflectedin the price. Because sales andinvestment between states inAmerica is banned it remains alocal industry that maintains ahigh quality. There are dozensofexamples ofmass-producedcannabis products that arebland, tasteless reflections ofwhat was once crafted orcultivated with care. W.J. TATE IV

Ewing, New Jersey

SIR – The United States hasalmost twice the rate ofmari-juana use as the Netherlands,where the drug has been legal-ly available for decades. Thecriminalisation ofpeople who

prefer marijuana to martinishas no basis in science. Thewar on cannabis is a failedcultural inquisition, not anevidence-based public-healthcampaign. It is time to stop thepointless arrests and insteadlegalise cannabis and tax it.ROBERT SHARPE

Policy analystCommon Sense for Drug PolicyWashington, DC

Election comedown

SIR – The American govern-ment faces a crisis ofculture, orto be more precise a crisis oftwo cultures (“Poweringdown”, November 8th). Theculture ofboth big parties haschanged for the worse over thepast15 years by becomingmore extreme in its views. Likemost organisational cultureissues this one is driven by theleadership ofeach party. HarryReid, Nancy Pelosi, JohnBoehner and Mitch McConnellhave proved to be hateful,bitter politicians who seem tobe more focused on their ownhubris and the Schadenfreudeof their political foes than onhelping their 316m fellowcitizens. But the “sand in thecogs” ofAmerican politics thatyou described is made worseby a shameful undercurrent ofprejudice against BarackObama.

When you take these fac-tors into consideration theonly hope America has tomend its bent political processis new leadership on bothsides, which will be extremelydifficult to achieve because wehave no congressional termlimits. I am not sure what itwill take to wake up my fellowcitizens from their politicalapathy but until that happens Isee little hope in progress.JAMES WILTON

Anthem, Arizona

SIR – The award for funniestcampaign advertisement ever(“Ofbridal dresses and sweat-shirts”, November 8th) must goto Tom McClintock, whocreated the fictional CousinAngus McClintock to attest tothe veteran politician’s innateunderstanding of thrift, givenhis Scottish heritage.

With a bellow on his bag-

pipe, the kilted Cousin Angusproclaimed that Mr McClin-tockwas “as tight as a bull-frog’s behind. And that, mefriends, is watertight.” Wealthtrumped thrift, however, as MrMcClintock lost to a venturecapitalist in that campaign. SUNITA SOHRABJI

Fremont, California

Political spinning

SIR – “Let them fly” (Novem-ber 8th) welcomed the arrivalofa “centrifugal mood”towards decentralisation inBritish politics. I found myselfpuzzled, as a centrifugal force iseither fictitious (a physicist’strick to account for how aproblem is framed) or is anopposing reaction to a centrip-etal force, in which case it,literally, leaves you goingaround in circles. May I askwhich concept you werewelcoming?JOE JACKSON

London

In case you weren’t sure

SIR – Any lingering doubts we,your readers, had about whowas whom in the photographof two of the world’s mostpowerful men that accompa-nied “The Chinese order”(November15th) must havebeen delightfully shattered byyour helpful clarifications:“President Xi Jinping (above,right)…BarackObama, Ameri-ca’s president (above, left).”ASAD HAIDER

New York7

16 The Economist November 22nd 2014

Letters are welcome and should beaddressed to the Editor at The Economist, 25 St James’s Street,London sw1A 1hg

E-mail: [email protected] letters are available at:Economist.com/letters

Letters

17

The Economist November 22nd 2014

Executive Focus

18


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1

MALINA, a trendy restaurant in a citysouth ofMoscow, was empty on a re-

cent Thursday evening. “A crisis,” the man-ager explained nervously. Some meat andfish dishes were missing. “Sanctions,” headded with a sigh. The signsofa country inthe economic doldrums are visible in Mos-cow, too. Tour operators are going out ofbusiness; shops and small businesses areup for sale; LED displays outside bureauxde change send spirits sinking.

Russia’s economy is teetering on theverge of recession. The central bank says itexpects the next two years to bring nogrowth. Inflation is on the rise. The roublehas lost 30% of its value since the start ofthe year, and with it the faith of the coun-try’sbusinessmen. Bankshave been cut offfrom Western capital markets, and theprice of oil—Russia’s most important ex-port commodity—has fallen hard. Con-sumption, the main driver ofgrowth in theprevious decade, is slumping. Money andpeople are leaving the country.

This is not the mid-1980s, when a col-lapse in the oil price paved the way for pe-restroika and the eventual collapse of theSovietUnion. Nor is it1998, when the coun-trydefaulted on itsdebts. While the overallmood is clearly depressed, it is a long wayfrom panic. Russia’s total foreign debt isjust 35% of GDP; it has a private sectorwhich can be surprisingly agile and adapt-

able and is contributing some growth bysubstituting things made at home for im-ported goods; most importantly, it has afloating exchange rate that mitigates someof the oil-price shock.

No longer affordableBut the oil-backed consumption-led econ-omy which has provided nearly15 years ofgrowth (it took a stumble in 2008-09, dur-ing the global financial crisis) has hit thebuffers. It was already slowing before theoil price began to fall and adventurism inUkraine was met by Western sanctions. In-deed some see the Ukrainian conflict as aresponse to the country’s economic

woes—an attempt to shore up through pa-triotic fervour the support that presidentVladimirPutin can no longerbuy by boost-ing living standards.

In 2007, when oil was $72 a barrel, theeconomy managed to grow at 8.5%; in 2012oil at $111 a barrel bought growth of just3.4%. Between 2010 and 2013, when oilprices were high, the country’s net outflowof capital was $232 billion—20 times whatit was between 2004 and 2008. Russianeconomistsare nowdebatinghowlongbe-fore the economy faces collapse. Mostthinkit can totteron for two yearsor so. Butthere is a real chance things could get a lotworse a lot sooner.

The depreciation of the rouble, whichclosely tracks the oil price, has helped Rus-sia cushion its budget as that price hasslumped (see chart). When the oil pricefalls, so does the rouble; thus in roubleterms the amount of money the oil bringsin stays roughly the same. But it cannot buyas much. Russia imports a great deal—thetotal value of imported goods, $45 billionin 2000, was $341 billion in 2013—and so adevalued rouble quickly stokes inflation. Itis predicted to reach 9% by the end of thisyear; for food the rate is higher still. If it is tocompensate the population for this loss inits spending power, the government willhave to run a bigger deficit. If it does not itwill face discontent.

The end of the line

MOSCOW

Formore than a decade oil income and consumerspending have delivered growthto VladimirPutin’s Russia. Not anymore

Briefing The Russian economy

1Plummeting

Source: Thomson Reuters

2013 2014

J F M A M J J A S O N D J F M A M J J A S O N

80

90

100

110

120

50

46

42

38

34

30

Brent oil$ per barrel

Roubles per dollarInverted scale

Also in this section

22 The state of the reserves

24 Struggling for success

22 Briefing The Russian economy The Economist November 22nd 2014

1

2 Aweakrouble also makes servicing for-eign debt more expensive. Russia’s sover-eign debt is just $57 billion, but its cor-porate debt is ten times as high. Some of ithas been racked up by state corporationsand national energy companies, whichgives it a quasi-sovereign status. And bythe end of 2015 Russian firms will have torepay about $130 billion of foreign debt.

Mr Putin, who came to power in thewake of the 1998 default, knows the valueof money and believes enough of it solveseverything. He started off strongly averseto low reserves and high debt, and sawthat the country’s reserves built up accord-ingly. In the run-up to the global financialcrisis Russia had reserves of $570 billion—almost a third of GDP. This served thecountry well after the crisis hit; the govern-ment spent $220 billion refinancing banksand defending the rouble.

In 2011, though, despite the high oilprice, Russia’s reserves stopped increasing.Money was spent instead on raising sala-ries and pensions and financing the armedforces. The increase in military spending,up 30% since 2008, was the main reasonAlexei Kudrin, Russia’s prudent financeminister, chose to resign in 2011.

At the same time Russian firms went ona borrowing spree. They have increasedtheir foreign-currency debt by some $170billion in the past two years. Yevgeny Gav-rilenkov, the chief economist at SberbankCIB, the largest state bank, says most of thismoney settled offshore; only a very smallpart was invested in the Russian economy.Kirill Rogov of the Gaidar Institute for Eco-nomic Policy points to one of the reasonswhy. When a company can be swallowedby the state at any time, more debt willmake it less appetising prey. This growing

debt meant, Mr Rogov notes, that insteadof preparing itself for a crisis, Russia hasprepared a crisis for itself.

This does not mean that Russia is any-where close to a sovereign default like thatof1998. Then government debt was 50% ofGDP and reserves just 5% of GDP. TodayRussia is still running a current-accountsurplus of about $50 billion because it isimporting less. Mr Putin’s restrictions onfood imports, presented as tit-for-tat coun-ter-sanctions, are more a way of preserv-ing currency reserves and stimulatingfarms; Russia imports half its food. Foodproduction is now growing at between 6%and 10%, albeit from a very lowbase. Otherimports, such as medicines, are not soquickly replaced; as in Soviet days, petro-dollars keep the shelves stocked.

The drop in oil prices in 2008-09 wasmet with a 40% increase in governmentspending. With reserves lower, and withthe government needing to either keepthose reserves available for bail-outs or torisk some big companies and banks goingbust, that is not an option this time. Insteadthe country faces a period of stagflation.Renewed growth will require new invest-ment and, most crucially, reform. WhatRussia needs most is what Mr Putin hasdone most to deny it: more competition.

A game offavouritesAt a recent conference German Gref, thehead of Sberbank, remarked that “[Sovietleaders] didn’t respect the laws of eco-nomic development. Even more, theydidn’t know them, and in the end thiscaught up with them. It is very importantfor us to learn from our own history.”

Even though his state is as reliant on oilmoney as the Soviet Union was, Mr Putinthinks he has done some of that learning.But as someone who believes that the statemust keep tabs on everything, includingthe free market, he remains mistrustful ofopen competition. While Russia has anominally free-market economy, it is onehighly skewed by the misallocation of cap-ital and resources to firms run by cronies.

The Kremlin distributesoil rentvia statebanks to firms and projects which it selectson the basis of their political importanceand theirpro-Putin stance. Most ofthe con-tractors for the Sochi Olympics, which costRussia a staggering $50 billion, were firmsrun by MrPutin’s friends; most of the mon-ey took the form of credit from state banks.A number of these loans are unlikely to bepaid back. Indeed, such loans are one ofthe reasons why the central bank has beenforced to triple its provision of liquidity tothe banks since the middle of last year.

Most of this money provided by thecentral bank, says Mr Gavrilenkov, endedup on the foreign-exchange market, put-ting pressure on the rouble. Since the cen-tral bank was known to intervene regular-ly to keep the rouble within a currency

Foreign-exchange reserves

Not quite all there?

“WE HANDLE our gold and curren-cy reserves and government

reserves sparingly.” So said VladimirPutin on November13th. Mr Putin iswrong. In the past year Russia’s foreign-exchange reserves have fallen by 20% asthe central bankhas tried to prop up therouble. They stand at around $370 billion,with $12 billion more at the IMF (seechart). The central bankclaims all of thisis readily available. But there is somereason to doubt that.

Foreign-exchange reserves have as-sumed a new importance for Russia inrecent months. As Western sanctionshave shut Russian companies out offoreign debt markets, they struggle toraise money. That makes it harder to payback the $130 billion ofexternal debt thatcomes due between now and the end ofnext year. The Kremlin can step in: but if ithelps Rosneft, a giant oil company, as it isbeing asked to, calls for more bail-outswill get louder.

Some people argue that Russia’sreserves are so big that they can accom-modate such demands and weather theeconomic storm. But the central bankexaggerates the reserves at its disposal.About $170 billion of its assets sit in twogiant wealth funds, the Reserve Fund andthe National Wealth Fund (NWF), andmuch ofwhat is in these funds couldprove illiquid or inaccessible if called onto meet short-term financing needs. Cashfrom the $82 billion NWF is committed tolong-term infrastructure projects, saysSergei Guriev ofSciences-Po, a Frenchuniversity. The NWF has also provided

money to VEB, the Russian developmentbank, to finance construction at the SochiOlympics. The loans by which it did sohave been “restructured” to allow de-layed repayment. Mr Guriev says manypeople believe the money to have beenembezzled. The NWF may thus be unableto offer any liquidity to the government.

In terms ofmoney that could actuallybe put to use, Russia’s reserves could bemore than $100 billion lower than theheadline figures suggest. Mikhail Zad-ornov, a former finance minister, said in arecent interview with Dozhd, a televisionchannel, that the usable amount could beas low as $200 billion. If current trendscontinue Russia may soon have enoughfor just three months’ worth of imports:below that level, financiers start to panic.That is bad news for a country that willstruggle to find cash elsewhere.

Russia’s official reserve figures overstate the funds it has at its disposal

Slippery

Source: Bank of Russia*Includes Special Drawing

Rights and IMF reserves

Russia’s international reserves, $bn

O N D

2013J F M A M J J A S O

2014

0

100

200

300

400

500

600

Foreign exchange* Gold

24 Briefing The Russian economy The Economist November 22nd 2014

2 corridor, the banks could place one-waybets on the devaluation of the rouble. As aresult the Russian financial sector expand-ed by 11.5% in 2013, although GDP grew byonly1.3%. In the past few weeks the centralbank said it will intervene in an ad hocway with as much money as it sees fit. Thismakes speculation a lot riskier. The centralbank said it would also curb the refinanc-ing of the banks. If it can stick to this in theface of lobbying pressure from state firmsand banks demanding cheap liquidity andfresh equity, the currency could stabilise.

That pressure, however, will be im-mense, particularly if the economy startsto shrink. Rosneft, Russia’s national oilcompany, run by Igor Sechin, Mr Putin’sclose confidant, is already asking the gov-ernment for money, in part to help it repay$30 billion of debt which it took on whenbuying a successful private company,TNK-BP. “We can easily utilise 1.5 trillion-2trillion roubles ($32 billion-$43 billion)from the National Wealth Fund,” Mr Se-chin said recently. If so, what is to stop thenext handout?

Pumping money into Rosneft would beexactly the sort of misallocation that un-derlies the economy’s weakness. The ener-gy sector, which accounts for 20% of GDP,grew by a meagre 1% on average over thepastdecade. The industryhasnotbeen cut-ting costs or developing new production; ithas been busy being nationalised instead,and offers textbook examples of the woesof state-owned enterprises (see page 57)While the state still had money, it could af-ford to buy out private owners, as it did inthe case of TNK-BP. Now it simply wrestlesoil firmsawayfrom theirowners, as it isdo-ing in the case ofBashneft, a medium-sizedbut fast-growing oil firm which is being ex-propriated from Vladimir Yevtushenkov, abillionaire who isunderhouse arrest. Polit-ical loyalty—and Mr Yevtushenkov wascertainly loyal—is no protection againstraiding.

During the fat years, Mr Putin had aneasy job satisfying all. Now he will face atough decision whether to support the in-efficient energy sector and the military-in-dustrial complex with public money orrely on the more dynamic flexible smalland medium-sized companies to pull Rus-sia out of the crisis. There have been re-ports that Mr Putin plans to give a speechon economic liberalisation to parliamentnext month. But, if he runs true to form,when faced with a crisis he will stick withthe state sector run by his friends ratherthan ceding control and trusting privatefirms which will demand reforms and, inthe end, political freedoms.

The echo of1913The state of the Russian economy will af-fect Russia’s actions beyond its borders. In2013 the Russian people were better offthan at any previous point in history. Their

priorities, says Mikhail Dmitriev, the headof New Economic Growth, a think-tank,switched from economic survival to impe-rial resurgence. Mr Dmitriev compares themoment to 1913—the Russian economy’slast successful year before the first worldwar and the Bolshevik revolution. Then,too, there was patriotic euphoria; it did notsurvive the onset of losses in the war.

While people still support MrPutin andRussia’s annexation of Crimea, they arestarting to calculate the costs. Mr Dmitriev,who accurately predicted street protests inMoscow in 2011, argues that economic dis-satisfaction is growing, although supportfor Mr Putin remains at a record high. “Peo-ple’s priorities are switching back to basic

survival needs,” he says: “salaries, socialbenefits, jobs.”

Protests driven by economic and alsosocial issues have already started. Even inMoscowwhere the mood forprotest is low,teachers and doctors have come out ontothe streets to protest against pay cuts andrestructuring. More protests are plannedbefore the end ofthe month. Opinion pollsshow that most people neither support areal war in Ukraine nor are prepared fortheir children to fight in it. Alexei Tsulik, asmall-time farmer who is counting on his22-year-old only son for help, speaks for anincreasing number when he says: “It isnone ofourbusiness. We have plenty to dohere on the farm.” 7

Regional successes

Bright spark

ANATOLY ARTAMONOV, the energeticand resolute 62-year-old governor of

Kaluga, knows what he wants: foreigninvestment, competition, an open rela-tionship with Europe and America. Andsome of it he’s getting. While moneygushes out ofRussia as a whole, foreigndirect investment in Kaluga, a region 150kilometres south ofMoscow, rose nearly13% year-on-year in the first halfof 2014.

In the Soviet days 80% ofKaluga’seconomy served the military-industrialcomplex. Now it is home to global carmanufacturers, including Volkswagen,Volvo and Renault, as well as high-endpharmaceutical companies. “This is notRussia; it is Singapore,” says DmitryPopov, the head of the local subsidiary ofMagna, a Canadian-owned car-partsmanufacturer.

Mr Artamonov’s parents were farm-

ers whose land and stockwere collecti-vised in the 1930s; he was a local partyboss running a collective farm when theSoviet Union collapsed. At that point heturned himself into a businessman andthen a governor. He learned English andsurrounded himselfwith bright youngmanagers.

“We have no natural resourceshere—so we had to attract investors bycreating a special environment,” says MrArtamonov. He and his team copiedthings they saw working in Turkey, Chi-na, America and South Korea. Foreigninvestors got tax breaks, infrastructureand protection against harassment bybureaucrats and officials, along with MrArtamonov’s phone number (he answerstheir calls). Kaluga has built industrialparks and technical colleges to supplyqualified labour. To do all this Mr Arta-monov has run up debt equivalent to 54%of the region’s annual tax take. He is nowfocusing on agricultural investment,subsidising equipment for dairy farms.

In the next few months Kaluga willhave its own international airport toreceive the private jets of foreign CEOs.The question is how many will land.Western sanctions, economic stagnationand the fall in the oil price puts every-thing Kaluga has achieved at risk. The carindustry has been hit by the doublewhammy ofslumping demand and therising price of imported parts. Sales offoreign cars assembled in Russia aredown by 22%. In the past few monthsVolkswagen has twice stopped its pro-duction line. The Western hope is thatpeople like Mr Artamonov will startputting pressure on the Kremlin to scaleback its aggression. There are few signs ofthat so far.

KALUGA

Some ofRussia is business friendly

Mr Artamonov looks out for opportunity


For daily analysis and debate on America, visit

Economist.com/unitedstatesEconomist.com/blogs/democracyinamerica

1

PICTURE a heroin addict. “A bum sittingunder a bridge with a needle in his arm,

robbing houses to feed his addiction,” iswhat many people might imagine, be-lieves Cynthia Scudo. That image mayhave been halfway accurate when heroinfirst ravaged America’s inner cities in the1960s and 1970s. But Ms Scudo, a smartlydressed young grandmother from a mid-dle-class Denver suburb, knows that thesedays it is not always like that. Until not solong ago, she was a heroin addict herself.

The face of heroin use in America haschanged utterly. Fortyorfiftyyears ago her-oin addicts were overwhelmingly male,disproportionately black, and very young(the average age of first use was 16). Mostcame from poor inner-city neighbour-hoods. These days, the average user looksmore like Ms Scudo. More than half arewomen, and 90% are white. The drug hascrept into the suburbs and the middleclasses. And although users are still mainlyyoung, the age of initiation has risen: mostfirst-timers are in their mid-20s, accordingto a study led by Theodore Cicero ofWash-ington University in St Louis.

The spread ofheroin to a new market ofrelatively affluent, suburban whites has al-lowed the drug to make a comeback, afterdecades of decline. Over the past six yearsthe number of annual users has almostdoubled, from 370,000 in 2007 to 680,000in 2013. Heroin is still rare compared withmost other drugs: cannabis, America’s fa-

of OxyContin, a popular brand of opioidpill. Her prescription was later reduced,but she was already hooked. On the blackmarket OxyContin pills cost $80 each,more than she could afford to coverher six-a-day habit; so she began selling her pillsand using the proceeds to buy cheaper her-oin. As if from nowhere, Ms Scudo had be-come a heroin addict.

Thousands more have gone down thispath. The 1990s saw a big increase in pre-scriptions of opioids for chronic pain. Insome states the number ofopioid prescrip-tions written each year now exceeds thenumber of people. That oversupply feedsthe black market: last year 11m Americansused illicitly-acquired prescription pain-killers, more than the number who usedcocaine, ecstasy, methamphetamine andLSD combined. People who would neverdream of injecting heroin seem to assumethat opioids in packets are safe.

But they aren’t. In 2012 prescriptionpainkillers accounted for 16,000 deaths—nearly four out ofevery ten fatal drug over-doses in America. As the toll grew, somestates tightened up the law. In many placesdoctors must now check databases tomake sure the patient has not already beenprescribed painkillers by another clinic.Prescriptions have been cut down to as lit-tle as a single pill, to reduce the supply ofunfinished packets. “Pill mills”, clinics thatchurned out prescriptions with no ques-tions asked, have been shut down. Anddrugmanufacturershave made theirmedi-cines harder to abuse: the latest OxyCon-tin pills, when crushed, turn into a gloopthat cannot easily be snorted or dissolvedfor injection.

These measureshave had some impact:rates of prescription-drug abuse and ofoverdose have dipped a little in the pasttwo years. But as the supply of pain pillshas dropped, and their black-market price

vourite (still mostly illegal) high, has nearly50 times as many users, for instance. Butheroin’s resurgence means that, by somemeasures, it is more popular than crack co-caine, the bogeyman of the 1980s and1990s. Its increased popularity in Americacontrasts strongly with Europe, where thenumber ofusers has fallen by a third in thepast decade. What explains America’srelapse?

A shot in the armLike many of America’s new generation ofusers, Ms Scudo never intended to take upthe drug. Her addiction began in 2000when, after a hip injury, a doctor pre-scribed her “anything and everything” torelieve the pain. This included a high dose

Drug addiction

The great American relapse

DENVER

An old sickness has returned to haunt a newgeneration

United StatesAlso in this section

26 The Keystone XL pipeline

27 Infrastructure spending

28 Atlanta’s new trams

28 Urban crime rates

29 Campaign contributions

30 Lexington: Barack Obama runs a redlight

New means, same end

Source: JAMA Psychiatry

Heroin-dependent sample that used heroin or aprescription opioid as their first opioid of abuse% of total

0

20

40

60

80

100

1960s 70s 80s 90s 2000s 10s

Heroin

Prescription opioid

Decade of first opioid use

26 United States The Economist November 22nd 2014

1

2 has risen, many addicts have turned to her-oin to satisfy their craving more cheaply.“We saw it coming at us at 90mph, like afreight train,” says Meghan Ralston of theDrug Policy Alliance, a drug-reform pres-sure group. The number of deaths fromheroin overdoses doubled between 2010and 2012, and many of those attending ad-diction clinics are college-age, middle-classtypes who started on prescription pills.

The Mexican waveJust as the demand side of America’s her-oin market was heating up, so too was sup-ply. Though Afghanistan accounts for 80%of global opium production, America getsmost of its heroin from Mexico. Historical-ly that has checked consumption, sinceMexico has long been a relatively smallproducer ofopium poppies.

In the past few years the Mexicans haveupped their game. One of the many unin-tended consequences of Mexico’s war onorganised crime in urban hotspots, such asCiudad Juárez, was that the army was di-verted from poppyeradication in the coun-tryside. Farmers in the Sierra Madre madethe most of this: by 2009 cultivation wasten times higher than in 2000. Althoughproduction has fallen back in the past fewyears, Mexico is now the world’s third-big-gest producer of opium, after Afghanistanand Myanmar.

Policy changes in America have givenMexico’s narco-farmers further incentivesto focus on opium. Until not so long ago,Mexican traffickers made a lot of theirmoney from cannabis. But these days mostof the cannabis in America is home-grown. Nearly half the states have legal-ised medical marijuana, and fourhave vot-ed to legalise it outright. Exporting pot tothe United States is now like taking tequilato Mexico. Facing a glut in the cannabismarket, Mexican farmers have turned topoppies.

America’s police have seen the impact.Seizures ofheroin at the border with Mexi-co have risen from 560kg (1,230lb) in 2008to about 2,100kg last year. And the smug-glers have become bolder. “Three or fouryears ago, 5lb was big. Now sometimes

we’re finding 20lb,” says Kevin Merrill, theassistant special agent in charge of theDrug Enforcement Administration on theoutskirts ofDenver.

The low transport costs faced by Mexi-can traffickers, who need only drive fromSinaloa to the border, mean that their her-oin is far cheaper than the Colombian orAsian sort. Agram ofpure heroin in Ameri-ca now costs about $400, less than half theprice, in real terms, that it cost in the 1980s.And whereas much of the heroin in thepast was of the “black tar” variety, which isusually injected, there is a trend towardsbrown heroin, which lends itself better tosnortingand smoking. Thatmatters to nov-ice heroin users, who may be skittishabout needles. “I somehow thought that ifI didn’t inject it, I wasn’t a heroin addict,”says Ms Scudo, who smoked it instead.

As fewer people are introduced to pre-scription opioids, the numberwho are vul-nerable to heroin addiction will also even-tually fall. “Things are getting a littlebetter,” says Patrick Fehling, a psychiatristat the CeDAR rehabilitation clinic in Den-ver, where Ms Scudo eventually kicked herhabit. Yet services like these are scarce, par-ticularly for the poor: a month at CeDAR

costs $27,000. Those with no money or in-surance are more likely to be put on metha-done, a heroin substitute which sates crav-ings but does not stop them.

Now that heroin addiction is no longera disease only of the urban poor, however,attitudes are changing. The Obama admin-istration’s latest national drug strategy,published in July, criticised “the miscon-ception that a substance-use disorder is apersonal moral failing rather than a braindisease”. It called for greater access to nal-oxone, an antidote that can reverse the ef-fects of heroin overdose, and backed state-level “good Samaritan” laws, which giveimmunity to people who call 911 to helpsomeone who is overdosing. Needle-ex-change services, which have cut rates ofhepatitis and HIV among drug users in Eu-rope, are expanding. These programmesare easier for politicians to sell now thatheroin addiction is no longer just the “bumunder the bridge”. 7

Altered states

Heroin users

Source: JAMA Psychiatry

Gender, % Race, % Average age of first use, years

0

20

40

60

80

100

1960 70 80 90 2000 10

Male

Female

0

20

40

60

80

100

1960 70 80 90 2000 10

White

Non-white 14

16

18

20

22

24

26

1960 70 80 90 2000 10

ACCORDING to Joe Manchin, a Demo-cratic senator from West Virginia, one

advantage of the Keystone XL pipeline isthat “wars could be prevented”. BarbaraBoxer of California, also a Democrat, saysthat the pipeline would bring Shanghai-like smog to America—her point illustratedwith a huge picture of Chinese people infacemasks.

So goes the hyperbole which surroundsthe proposed pipeline, which is intendedto link Canadian oilfields and tar sandswith American refineries. On November18th the Senate narrowly failed (59 votes to41, 60 being required) to pass a bill thatwould have authorised its construction.The tight vote, with 14 Democrats joiningall the Republicans to try to push itthrough, gave a hint of what may happenwhen the Republicans take over the Senatein January.

The Obama administration is not over-keen on the pipeline. The vote was mostlythe work of Mary Landrieu, a centristDemocrat from Louisiana. She is fighting arun-off election for her seat against BillCassidy, a Republican congressman whosponsored the passage of the same legisla-tion through the House. Oil is a big indus-try in Louisiana, and the president is deep-ly unpopular there: Ms Landrieu hopedthe vote on her bill would help to proveher independence and “clout”. Harry Reid,the Senate majority leader, apparently al-lowed the vote to bolster her campaign.

Keystone XL makes environmentalistslivid: many of them protested, inflating anenormous black plastic pipeline on MsLandrieu’s lawn in Washington. Oil ex-tracted from Canada’s tar sands producesabout 17% more carbon dioxide than con-ventionally-pumped supplies do—largelythanks to the energy needed to get it out of

Keystone XL

Back in thepipeline

Washington, DC

Congress has a fruitless fight overamodest proposal

Cushing

Port Arthur

Houston

Patoka

Gul f of Me xico

PACIFIC

OCEAN

Hardisty

U N I T E D S T A T E S

M E X I C O

C A N A D A

Tar sands

T E X A SLOUISIANA

Pipelines:

Source: CEPA

Keystone

Keystone XL(proposed)

1,000 km

The Economist November 22nd 2014 United States 27

1

2 the ground. The process uproots forestsand leaves toxic lakes behind. A pipelinecarrying Canadian oil to Gulfcoast refiner-ies would lower the cost of getting such oilto market, so it might encourage energyfirms to extract more.

Supporters point to the jobs that thescheme will create: some 42,000, accord-ing to estimates by the State Department(Ms Landrieu rounded this figure up to“millions” in the Senate debate). Some alsosuggest the pipeline will reduce America’sdependence on oil from the Middle Eastand lower petrol prices for Americans inthe states where the oil will be refined. Afew, such as Mr Cassidy, deny that globalwarming is a problem at all.

Yet the curious reality is that few ex-perts think the pipeline is all that impor-tant, either way. Canadian oil is alreadygetting to market, points out Charles Ebin-ger of the Brookings Institution, a think-tank—justmostlybybarge and train. Anewpipeline would ease the strain on Cana-da’s railways and increase the profitabilityof extracting the oil. But compared withswings in global oil prices, the effect will be

small. Nor will many jobs be created. Mostof those 42,000 are temporary posts; just35 full-time permanent employees will beneeded to run the pipeline.

Oddly, the project may not mattermuch in Louisiana. If completed, KeystoneXL will deliver oil to Texas, not its neigh-bour. Some voters do still care, reckonsPearson Cross of the University of Louisi-ana, but they are unlikely to switch alle-giance as a result of an ineffective vote inCongress. “The only way this could changeanything around ultimately is if this got toObama’s desk and he signed it,” says MrCross. Even then, he reckons, the effectwould be slight.

Mr Obama may well end up signing abill authorising the project. Just not yet. Al-lowing the pipeline to be built now wouldnot just upset the president’s few remain-ing fans, especially when he is trying tocheer them up with immigration reform(see Lexington); it would also throw awaya bargaining chip that could be useful inthe future. When Republicans take controlof the Senate, Mr Obama will want asmany of those available as possible.7

ENERGY has been an economic bonanzafor Texas in recent years, and a financial

headache for its transport planners. Thestate recently forecast that maintaining theroadsand bridges that serve itsoil- and gas-fields and wind farms, along with the restof the state’s vast network of highways,would outstrip dedicated transport rev-enues by $5 billion a year.

Relief, however, is on its way. On No-vember 4th Texan voters agreed to steer$1.7 billion of oil- and gas-production taxestowards the highway fund. By the middleofDecember the state hopes to start dolingout the money to local governments forhighway expansions, repairs and othermuch-needed projects.

Texas was not alone. On the same dayvoters approved 63 out of94 state and localballot initiatives providing nearly $15 bil-lion for various transport projects, match-ing the high approval rates in previousyears, according to the American Road &Transportation Builders Association, atrade group. Americans may be divided on

the wisdom of government spending, butthe tangible appeal of better roads andtransport crosses party lines. On the sameday that Texas voted for more spending,voters in Maryland and Wisconsin passedconstitutional amendments to stop politi-cians raiding highway funds for other pur-

poses—as they regularly do.State and local initiatives are becoming

increasingly important because federalspending on transport is hamstrung. Ofthe $142 billion that government spent onroads in 2012, the last year for which dataare available, the federal government con-tributed 28%, almost all of it from the high-way trust fund. That fund is financed prin-cipally by a petrol tax that has not risensince 1993. Petrol-tax revenue peaked in2006, and has since declined because carsare more fuel-efficient and younger peopleare driving less. Thathas lefta gap betweenfederal highway commitments and themoney available. Since Congress dare notincur drivers’ wrath by raising the petroltax, it scrounges money from elsewhere tofill the gap. The latest deviousness came inJuly, when an accounting gimmick wasused to cover a $10.8 billion shortfall andkeep the fund going until May.

The gap will only grow in comingyears,reaching $120 billion by 2024, according tothe Congressional Budget Office. Thatguarantees a near-permanent cloud of un-certainty over whether federal financingwill flow.

States have several ways of financinginfrastructure. Publicly-approved bond is-sues and partnerships with private consor-tia can support upfront capital outlays.Public funds and bonds plus private bondsand equity are financing a major bridge-and-road project between Indiana andKentucky (pictured). The public still pays,through tolls, taxes or fees. In the past threeyears six states have raised fuel taxes, twohave introduced wholesale taxes and fourhave brought in, or considered bringing in,a dedicated sales tax for transport, accord-ing to Ken Orski, who writes a newsletteradvocating more infrastructure.

Local governments have done thesame. In 2010 Clayton County, a suburb ofAtlanta which includes its airport, elimi-

Infrastructure

Going their separate ways

WASHINGTON, DC

States and cities seize the initiative on transport funding

On the banks of the Ohio

Correction: Our piece on the mid-terms in the November8th issue said that Carl DeMaio, a gay Republican inCalifornia, had been elected to Congress. In fact, itemerged after we went to press that he narrowly lost.Our apologies.


1

2

BETWEEN getting out ofhis car and start-ing work in the morning, Bashir Aki-

nyele, a beret-wearing history teacher inNewark, NewJersey, passes the sitesof twomurders. His school, Weequahic High,once taught Philip Roth, a giant amongAmerica’s novelists. Its entrance is nowblocked by a metal detector; armed copsshare the corridors with teenage girls. Inthe streets nearby almost every intersec-tion has been the site of a shooting. “I’vebeen a teacher for 20 years,” says Mr Aki-nyele. “And in that time, I’ve lost 38 stu-dents.”

Weequahic is only 30 minutes’ drivefrom Manhattan, but a world apart. In 1991Newark and New York City had roughlythe same murder rate: 32 and 29 per100,000 respectively. But by last year NewYork’s rate had fallen to four and Newark’shad jumped to 40, according to the latestdata published on November 14th by theFBI. On a night out in Brooklyn, the mainthreat is getting caught in a boring conver-sation with a hipster. In Newark, whendarkness fell, yourcorrespondentwas ush-ered backdowntown by police.

Over the past 20 years, crime has fallenspectacularly in America and across therich world. The FBI data suggest it is stillfalling: violent crime decreased by 4.4% be-tween 2012 and 2013, and murder is nowless common than at any time since theend of the 1950s. Criminologists havecountless plausible theories to explainthis, ranging from less lead-poisoning tothe rise of car immobilisers. Yet the differ-ence between cities such as Newark,which remain dangerous, and those likeNew York, which are safe, suggests a some-what subtler explanation.

In Washington, DC the murder rate has

Criminal cities

The secret of

success

NEWARK AND PHILADELPHIA

America’s great crime wave is recedingfrom some cities faster than others

Safer for some

Source: FBI, Uniform Crime Reports

Murders per 100,000 people

0

10

20

30

40

1991 95 2000 05 10 13

New York City

United States

Philadelphia

Newark

Atlanta’s new trams

All aboard!

ATINYscarlet hut on Auburn Avenuein Atlanta, Thelma’s Kitchen and Rib

Shack, serves up world-beating catfishand grits. Demand for its grub is about tosoar. The reasons why sit under a nearbybridge: four shiny new streetcars, each 80feet (24 metres) long and capable ofcar-rying 200 passengers, waiting for theopening, any day now, ofAtlanta’s tramsystem. The 2.7-mile (4.3km) route willbring new commuters, customers andvisitors to the district, and to Thelma’s.The area has already attracted $370m ininvestment since 2010.

Americans are slowly warming topublic transport, and used it for a record10.7 billion trips last year. Even thoseliving in the South and south-west—home to some of the country’s mostsprawling cities—are getting more of ataste for it. In Tucson, Arizona, Orlando,Florida and Dallas, Texas, light-rail sys-tems have been expanded recently, ac-cording to Art Guzzetti, a vice-presidentof the American Public Transport Associ-ation. He reckons transport links in Char-lotte, North Carolina are among the bestin the country.

In Atlanta, the social benefits could beconsiderable. It is one ofAmerica’s worstcities for upward mobility. A child borninto a family with an income in the bot-tom fifth has just a 4.5% chance ofmakingit into the top fifth; a baby born in SanFrancisco has a 12.2% chance. Many poorfamilies are stuck, unable to get goodjobs, partly because of the lackof publictransport. The new streetcar should helpby connecting residents to the city’s mainMARTA transport system. For some, itcould also save a fortune in petrol: theaverage driver wastes $1,000-worth offuel a year sitting in Atlanta’s traffic.

Not all southerners are on board, ofcourse. In 2010 campaigners chanting

“No tax for tracks” scuppered plans for alight-rail project in Tampa, and Rick Scott,who became Florida’s governor soonafterwards, rejected $2.4 billion in federalmoney for a high-speed railway lineconnecting Tampa and Orlando. But nowa private company intends to open AllAboard Florida, a passenger-rail projectbetween Miami and Orlando; parts ofthe line will welcome travellers by theend of2016. The Texas Central Railwaywants to build a high-speed line too, withtrains travelling at up to 205mph, to linkDallas and Houston by 2021.

Demographic trends make public-transport projects increasingly attractiveto private firms. Millennials (those bornsince the 1980s) drive far less than previ-ous generations: only 67% ofAmericansaged 16-24 have a driving licence, thelowest figure for 50 years. Cheap ticketsfor buses and trains appeal to them. Andthe Atlanta streetcar will go one better:trips will be free for its first three months.

ATLANTA

Southerners increasinglywant to be taken fora ride

A desire named streetcar

nated its entire public-transport system tocope with a budget crisis. On election daythis year its voters agreed to a one-centsales-tax increase to restore it. On the otherside of the country voters in AlamedaCounty, California approved a half-cent in-crease in the sales tax to finance transportimprovements.

Voters may be happier paying theirstate and local governments for transportbecause they see the benefits directly. Thishas prompted some to suggest that the fed-eral government should get out of the busi-ness altogether. That, however, runs intotwo problems. One, notes Adie Tomer of

the Brookings Institution, a think-tank, isthat federal funding makes interstate high-ways a priority, as the backbone of cross-country trade; states, left to their own de-vices, might not. The other drawback isthat states may not relish taking on thewhole transport burden, since they too of-ten face resistance to taxes. In 2013 Massa-chusetts indexed its petrol tax to inflation;this year, voters repealed that. One reasonthat Texas tapped oil and gas producers forroad money is that legislators dare notraise the state petrol tax, frozen since 1991,or the vehicle-registration fee, largely un-changed since 1987. 7

The Economist November 22nd 2014 United States 29

2Campaign contributions

Live together, vote together

ADEMOCRAT running for office innorthern California might consider

targeting the money pots ofSan Franciscoor San Jose. But the smaller, wealthiersuburb ofPalo Alto would be a surer bet.Palo Alto’s residents gave 3.5 times moreper head than San Franciscans during themid-terms campaign, and three-quartersof the total went to Democrats. Converse-ly, the residents ofwealthy Greenwich,Connecticut gave 14 times more per headthan New Yorkers, with nearly two-thirdsof their cash going to Republicans.

Americans who live and work togeth-er are often politically like-minded, ac-cording to The Economist’s analysis ofmore than 1.7m individual contributionsof$200 or more made during the 2014election cycle. The analysis also revealswhich cities and companies are mostpolitically engaged, financially speaking.

Famously liberal cities like Berkeley,California and Cambridge, Massachu-setts gave overwhelmingly (94% and 96%respectively) to Democrats. Older, whiter,conservative cities like Wichita, Kansas

and Oklahoma City donated almostexclusively (96% and 91%) to Republicans.Citizens ofSan Jose, Philadelphia andSan Francisco gave to Democrats by afactor of three to one; the three largestcities in Texas, Houston, San Antonio andDallas, favoured Republicans by thesame margins.

Workers in certain industries alsobunch together. Employees of tech com-panies, universities and law firms fa-voured the Democrats. The contributionsfrom Google employees averaged$2,000, with three-quarters going toDemocrats. Employees offinancial firms,energy companies and military contrac-tors largely supported the Republicans.Donors at Goldman Sachs far outspenttheir peers, with most of their averagedonations of$3,000 flowing to Repub-licans. Employees ofMorgan Stanley andCitigroup gave almost equally to bothparties, however. And the good folk ofBain Capital, solid supporters of theirformer boss Mitt Romney in 2012, gave65% of their money to the Democrats.

Washington, DC

The cosypolitical leanings ofcity residents and firms’ employees

Share of individual contributions* to political parties, % (2014 election cycle)

Sources: Federal Election Commission; The Economist *Of $200 or more

By city residents By employees

Party animals

DEMOCRATIC REPUBLICAN DEMOCRATIC REPUBLICAN

100 50 0 50 100+–

Goldman Sachs

Merrill Lynch

Wells Fargo

JPMorgan Chase

Morgan Stanley

Comcast

Blackstone Group

Citigroup

Podesta Group

Microsoft

Google

DLA Piper

Akin Gump

Stanford University

Harvard University

100 50 0 50 100+–

Jacksonville

Dallas

San Antonio

Houston

Indianapolis

Columbus

Phoenix

San Diego

Austin

Chicago

New York

Los Angeles

San Francisco

Philadelphia

San Jose

dropped from a terrifying 81per100,000 in1991 to a fifth of that now. In Los Angelesgang warfare has largely given way to or-ganic coffee bars, and burglaries and rob-beries have become rare. Yet cities like Phil-adelphia and Chicago have experiencedmore modest improvements. And inplaces like Baltimore, Newark and Detroitsome crime rates have barely fallen.

One possible explanation is the vary-ing quality of local government. In NewYork and Los Angeles, reformers such asRudyGiuliani, who wasNewYork’smayorin the 1990s, and Bill Bratton—chief of po-lice in both cities at different times—forcedcops out of their cars, adopted data-drivenpolicing and tried to make public spacesfeel safe. They reckoned that residents hadto trust the police for crime to fall—whichmeant purging corruption—and that crimi-nals had to be deprived of convenientplaces to hang out.

In Newark, by contrast, Sharpe James,the mayor until 2006, was imprisoned in2008 on fraud charges. His successor, CoryBooker, now a Democratic senator, didmuch to attract investment into down-town Newark, and managed for a shorttime to reduce crime and overhaul the po-lice department; but the money ran out,and he later had to cut the force sharply.The present mayor, Ras Baraka, a more tra-ditional rabble-rouser, has hired new cops,but the police force remains troubled (it is,uniquely, monitored by the federal JusticeDepartment). When The Economist visited,the newpolice directorand police chief ledofficers on a “community walk” around asketchy neighbourhood. They seemed tospend much of their time telling peoplehow excellent the new mayor is.

Some think that too much prisonbreeds nastier criminals: when released,they may be more dangerous than whenthey went in. In Philadelphia most homi-cides stem from stupid arguments, oftenbetween ex-convicts, says Lieutenant JohnStanford of the local police. Newark has278,000 people yet, each month, 1,400prisoners are released from the local jail.

However, incarceration rates are highthroughout America, so this cannot ex-plain the specific ills of its most crime-rid-den cities. Nor can poverty: unemploy-ment in New York City is not much lowerthan it was in the 1990s. Rather, accordingto John Roman, a researcher at the UrbanInstitute, a think-tank, crime is like a conta-gious disease. People who are vulnerableto criminality—poor, badly-educatedyoung men—are far more likely to becomecriminals when they are surrounded bymen much like themselves.

Although cities like New York and LosAngeles have plenty of poor people, theyare—by American standards—not unusu-allysegregated byrace or income. The pres-ence of ambitious new immigrants in de-prived neighbourhoods provides an

inoculation against crime. In Weequahic,by contrast, deindustrialisation led to de-population. Whites and many middle-class blacks have fled. Those who remainare mostly poor and desperate. Low prop-erty prices provide little incentive for peo-ple to clean up blight.

Even in the most dangerous cities, how-ever, there is hope. Urban populations arenowgrowingacrossmostofthe country. In

Philadelphia crime rates, though still high,dropped sharply last year. At a policetown-hall meeting in the west of the city,people complain about noisy bars, trou-blesome children and illegal parking. Anew charter school and a growing studentpopulation are changing the neighbour-hood. Shootings are still frighteninglycommon, admits the local police captain,but milder worries are creeping in. 7


THE right thing, done the wrong way. That may well be his-tory’s judgment on President Barack Obama’s plan to shield

millions of immigrants from deportation.Mr Obama’s executive action, due to be unveiled in a tele-

vised address on November 20th as this newspaper went topress, answers compelling calls to bring more order, compassionand even natural justice to a broken immigration system. Yet atthe same time the president risks breaking the doctor’s oath: first,do no harm. The political system—indeed the social contract thatbinds America’s leaders and an unhappy, anxious electorate—isalready in fragile shape. The president has spotted a real ill in theway that immigration laws function. But his proposed cure is un-precedented in its radicalism and scope. He seems set to grant le-gal papers to millions of foreigners, notably the parents of chil-dren who are citizens or legal residents. The reaction fromopponents in Congress and the country may leave deep scars.

If congressional Republicans attempt even a fraction of whatthe hard right isdemandingasrevenge—from impeachment hear-ings to passingbills that defund what they call an unconstitution-al “amnesty”—historiansmaypinpoint thisTV addressas the mo-ment that hopes for substantial bipartisan co-operation faded,just 16 days after mid-term elections that saw Republicans takethe Senate and increase their majority in the House of Represen-tatives. Before history-writers set to work, it is worth consideringhow Mr Obama decided that this was the right thing to do.

The case for action is not hard to make. Successive govern-ments have stood by as America became home to more than 11millegal residents. That is a huge number in a country ruled by law,and tantamount to a “de facto amnesty” as both Republican andDemocratic advocates for reform have said. Many of those for-eigners arrived years ago, working hard and bringing up Ameri-can children. But their families have enjoyed only provisional fu-tures, overshadowed by the original sin of a parent or parentswho arrived without the right papers. A traffic stop by police or araid on a workplace has been enough to drag car mechanics,plumbers and waitresses into a deportation system meant to tar-get convicted felons, recent border-crossers and threats to publicsafety. Since MrObama tookoffice, more than 2m foreignershavebeen removed. Every country has the right to police its borders,

but those removals divided a lot of otherwise law-abiding fam-ilies, punishing youngsters who had done no wrong.

Congress could and should have passed a comprehensive lawthat made Mr Obama’s unilateral actions unnecessary. In June2013 a bipartisan majority of senators passed an immigration re-form that—though unwieldy—would have brought millions ofmigrants in from the shadows and eased rules for some legalworkers while boosting the (already vast) funds spent on bordersecurity. Alas, the plan was deemed too close to an “amnesty” inthe House, a body crammed with members in super-safe districtswhose main fear is not general elections but internal party rivalstrying to grab their seats.

Congress is maddening, but it can’t just be ignoredEven before the president unveiled his plans, Republicans set outtheir objections. Many reek of opportunism, some of hypocrisy:plenty of Republicans accusing Mr Obama of poisoning the wellof bipartisanship have spent six years trying to thwart his everymove. But it is possible for predictions of future doom to be bothhypocritical and correct.

The strongest Republican charges concern precedent. Yes, asWhite House aides never tire of pointing out, other presidentsbackto Eisenhowerhave deferred deportation for specific groupsfacing wars or persecution. In 1990 George Bush senior also de-creed that the spouses and children of people legalised under a1986 immigration act should notbe deported. ButMrObama’sac-tions are set to dwarf anything tried before, and unlike Mr Bush’s1990 move, are not a tweak to fix an ill-drafted law. Many Repub-licans are sincerely aghast at the implications of letting MrObama offer legal status—even temporarily—to millions with apen-stroke (indeed, the president once seemed to agree, tellingimmigration activists who shouted that he had the power to stopdeportation, “Actually, I don’t”). Asone unhappyRepublican sen-ator put it privately this week, could a future president from hisparty scrap corporation tax? That too would be wrong.

Other Republican arguments are more self-serving. CentristRepublicans who favour immigration reform (not least becauseyelling about “amnesty” repels Hispanic voters) fret that MrObama is going to awaken their party’s angry nativists—but it ishardly the president’s job to save Republicans from themselves.A spokesman for John Boehner, the Republican Speaker of theHouse, said on November 19th that if “Emperor Obama” ignoreshis previous qualms about the limits of presidential power, hewill “ruin the chances” forcongressional action on immigration—though there is no evidence that Mr Boehner was about to askhisfractious members to help Mr Obama pass ambitious reforms.

Mr Obama’s biggest problem, however, is not Republicans. Itis his apparent certainty that he hears a mandate to act in the na-tional interest, because the country is tired ofgridlock. Adayafterthe Republicans’ recent victory he harked back to his presidentialwins, calling himself “the guy who’s elected by everybody, notjust from a particular state or a particular district.” He said heheard a message from voters but also from “ the two-thirds ofvot-ers who chose not to participate in the process yesterday.”

That is perilously close to politics by telepathy: a lethal delu-sion that can afflict embattled leaders. Mr Obama is right thatpresidents enjoy a unique role in American democracy. It is truethat voters are sick of gridlock. But many are also tired of him. Ifhe misreads his mandate and overreaches, even in the best ofcauses, he may do real harm.7

Barack Obama runs a red light

A frustrated president rewrites immigration rules

Lexington


THE pot-bangers are back. On Novem-ber13th several thousand gathered out-

side the Casa Rosada, the president’s resi-dence, in Buenos Aires to protest againstcorruption, runaway inflation, crime andabove all the government of Cristina Fer-nández de Kirchner. Judging by theirchants, “Argentina sin Cristina” (Argentinawithout Cristina) was their principal de-mand. Her approval-rating languishes at30%. But the crowd was nowhere near aslarge as the million who rallied in 2013.That is because the country will soon berid of Ms Fernández. She is not allowed torun in next year’s presidential election.Change will come, though just what sort isnow hard to say.

The underlying grievances are as sharpas ever. The vice-president, Amado Bou-dou, has been indicted twice this year,once for corruption and once for fraud, butcontinues in office. Argentina’s economy issuffering from a combination of a globalslowdown (see Bello) and a series of self-inflicted wounds, including the impositionof exchange controls, which worsened acrisis of confidence in the peso, and a debtdefault in July, which sapped confidencefurther and intensified the recession.

Official numbers say that the unem-ployment rate climbed from 6.8% in thethird quarter of 2013 to 7.5% a year later. But

mium—the gap between the official rate forthe United States dollar and the parallelfree-market rate—dropped from 90% inSeptember to 70% now. That improvementmay reflect a currency swap with China,which haseased fearsofa devaluation. Butconfidence in the economy and in the pesois still shaky.

The threat of social turmoil remains,too. December is a nervous month. It iswhen Argentines hoping to treat their fam-ilies to holiday gifts and meals feel moststretched and summer heatwaves triggerpower cuts. For the past two Decembers,police officers in various provinces havegone on strike for higher pay. Last yearmore than a dozen people were killed inlooting during the police walkout. A week-long strike by police in Santa Cruz, startinglast month, was a bad omen; it endedwhen the governor threatened them withsedition charges. Teachers in Buenos Airesprovince walked out on November11th and 12th.

The next big test will come in January,when the government must decide wheth-er to resume talks with creditors who holdbonds on which Argentina has defaulted.There is an opening, provided by the expi-ry on December 31st of the “Rights UponFuture Offers” clause of the bond con-tracts, which bars the government from of-fering one group of bondholders a betterdeal than the terms others received duringearlier debt restructurings. Argentina de-faulted rather than make an improved of-fer that had to be open to all bondholders.A deal with creditors could bring relief,however, by giving the country access todollars, which would in turn allow it toease controls on imports and on capital.But Ms Fernández’s government has sent

it is really 1.5-2 percentage points higher,private-sectoreconomists believe. Even forArgentines with jobs, living standards aredropping. The country’s inflation rate hassoared from 28% in 2013 to an annualised41% so far this year.

In real terms wages were 6.7% lowerthisSeptember than theywere lastyear, ac-cording to ACM, an economic consultancy.“Salaries had already started shrinking in2012 and 2013, but more or less kept pacewith inflation,” says Maximiliano Castillo,a director at ACM. “This year things gotmuch worse.”

Car sales have plunged by 35% from lastyear. Even more worrying is the slide inspending at supermarkets, which droppedby 4.3% year-on-year from September 2013,according to EconViews, a consultancy.That suggests that hard-pressed Argentinesare skimping on food.

The government’s counter-measuresare making matters worse. It has expandedstate employment by nearly 5% this year toblunt the rise in joblessness. But the defi-cits needed to pay for this are being fi-nanced by printing pesos, which worsensinflation. Import restrictions to control thetrade deficit are causing shortages of bothconsumer goods and the supplies thatmanufacturers need to maintain produc-tion. Unexpectedly, the “blue dollar” pre-

Argentina

Cristina’s long farewell

BUENOS AIRES

Long-suffering voters are looking to next year’s election forrelief

The AmericasAlso in this section

33 Health in Central America

34 Bello: The great deceleration

1

For daily analysis and debate on the Americas, visit

Economist.com/americas

The Economist November 22nd 2014 The Americas 33

1

IN FRONTofthe skyscrapers on the espla-nade in Panama City, joggers puffalong a

path in the morning heat, as men andwomen do push-ups and bench-presses.In this part of Panama the enemies are fatand diabetes. But a short flight away indig-enous communities living amid fearsomeovercrowding on the tropical islands of

Guna Yala (formerly San Blas) are so poorand malnourished that their young chil-dren can die for lack of a boat fare to get tothe nearest health clinic. Parts ofGuna Yalaare, says an official from the Inter-Ameri-can Development Bank(IDB), “hell in para-dise”. This disparity between the rich-world health worries of city dwellers and

the parlous situation of the poorest is prev-alent across Central America. But until re-cently the IDB says it has never been mea-sured or dealt with directly.

Enter two of the world’s richest men,Bill Gates, a founder of Microsoft, and Car-los Slim, a Mexican telecoms magnate. To-gether with the government of Spain, theIDB and eight regional health authorities,their charitable foundations set out in 2010to survey and tackle the problem. The alli-ance between billionaires and bureaucratshas been fruitful. It has revealed the depthof the inequality and shown how entre-preneurial thinking can be applied toseemingly intractable problems.

The programme, called Salud Meso-américa 2015, began by introducing thefirst large-scale health surveys of the poor-est one-fifth of the population in Panama,Costa Rica, Nicaragua, Honduras, El Salva-dor, Guatemala, Belize and the southern-mostMexican state ofChiapas. The results,from surveys of more than 20,000 house-holds by the University of Washington’sInstitute for Health Metrics and Evalua-tion, revealed what Julie Katzman, theIDB’s second-in-command, calls “the ty-ranny of the law ofaverages”.

In all ofthe poorestareas levels ofstunt-ing, a harbinger of ill health, were wellabove national averages (see chart). In in-digenous parts of Guatemala, for example,rates of stunting and anaemia among in-fants match those of some of the poorestareasofsub-Saharan Africa. In remote Pan-amanian areas like Guna Yala less than 10%of children under five are fully vaccinated.Mothers of the poorest children in Pana-ma, Guatemala and Chiapas have far lessaccess to family planning and hospitalsthan the rest of their compatriots. Yet be-cause national averages show impressiveimprovement, those on the margins re-ceive scant attention.

Armed with the data, the donors andthe IDB agreed on stringent 18-month tar-gets for improvement with the eight re-gional health authorities, giving them thefreedom to design theirown approaches to

Health in Central America

Misleading means

PANAMA CITY

An alliance ofbillionaires and bureaucrats makes a difference

Shortchanged

Source: Salud MesoamŽrica 2015 *Selected poor areas

Children younger than five with stunted growth2012 or latest, % of total

0 10 20 30 40 50 60 70

Guatemala

Panama

Honduras

Chiapas, Mexico

Nicaragua

El Salvador

*

Poorest 20% National average

Nice rich people are looking out for you

mixed signals about whether it will talk tothe bondholderswho refused earlierdeals.

The next presidential election, to beheld in October2015, will bringabouta big-ger change, with luck for the better. Allthree leading candidates say they wouldbreak with the populism and protection-ism that have prevailed during the presi-dencyofMsFernándezand thatofher hus-band, NéstorKirchner, who governed from2003 to 2007 and died in 2010.

The candidate closest to Ms Fernándezis Daniel Scioli, the governor of BuenosAires province, who belongs to her Pero-nist Front for Victory (FPV). But he is noclone. He is more pragmatic than the presi-dent. He would maintain the popular so-cial programmes she introduced andwould not reverse the nationalisation ofYPF, the biggest energy company. But hesays he would do a better job of fightingcrime and inflation.

He faces a charismatic rival in Sergio

Massa, a congressman who broke awayfrom the FPV last year, more to distancehimself from Ms Fernández than becauseof any profound disagreement with her.He is a gifted speaker and an astute politi-cal operator. So far his candidacy has re-volved more around his personality thanhis ideas.

The biggest and perhaps most encour-aging change would come from MauricioMacri, the popular mayor of the city ofBuenos Aires and the only non-Peronist inthe race. Republican Proposal, the centre-right party he founded, is pro-market andfavours greater openness to global and re-gional trading partners.

There is no clear front-runner in the ear-ly opinion polls. Much will depend onhow the economy fares between now andnext October. Relief from inflation and un-employment would help Mr Scioli. Fur-ther misery would play into the hands ofhis rivals—and bringout the pot-bangers. 7

2

34 The Americas The Economist November 22nd 2014

2

IT WAS great while it lasted. In a goldenperiod from 2003 to 2010 Latin Ameri-

ca’s economies grew at an annual averagerate of close to 5%, wages rose and unem-ployment fell, more than 50m peoplewere lifted out of poverty and the middleclass swelled to more than a third of thepopulation. But now the growth spurt isover. What some worried would be a“new normal” of expansion of 3% a yearis turning out to be far worse.

The region’s economies will on aver-age grow by only around 1.3% this year.Analysts continue to slash their forecasts,as they have done for the past two years(see chart). They now expect only the mil-dest of recoveries next year: both the IMF

and the World Bankforesee growth of just2.2% in 2015. Latin America is deceleratingfaster than much of the rest of the emerg-ing world, points out Augusto de la Torre,the bank’s chief economist for the region.Alejandro Werner, his counterpart at theIMF, sees growth averaging just 2.7% overthe next five years.

Some of the reasons are obvious. Thebiggest factor is the end of the commodityboom. As China’s growth slackens, com-modity prices have slumped back to theirlowest levels since the 2009 world reces-sion. Now the oil price has been hit, too,thanks mainly to increased output in theUnited States. All this has hurt the com-modity-producing economies of SouthAmerica, though some benefit fromcheaper oil. The outlook for Mexico, withits structural reforms and manufacturingties to North America, is slightly brighter.

Worst off are those countries withpopulist governments that squanderedthe windfall from the boom. Forecasterssee no let-up in the stagflation afflictingVenezuela and Argentina. Thanks to lackof investment and clumsy macroeco-nomic management, Brazil’s economy

will barely grow this year and faces a fiscalsqueeze in 2015. Yet the deceleration goesfar wider. The high-flying and well-runeconomies of Chile, Peru and Colombiaare all suffering. The growth rate this yearin Chile (2%) and Peru (around 3%) is halfthat of 2013. Contrast that with sub-Saha-ran Africa, which is also a big commodityproducer and where the IMF expectsgrowth of5.1% this year and 5.8% next.

A second oft-cited cause of the Latindoldrums is the move to normal monetarypolicy in the United States, which willraise the cost of borrowing in the region.But there are fewsignsofthishaving an im-pact yet. Latin American companies are is-suing bonds at an accelerating rate.

Some economists now reckon that theboom masked deep-rooted structural pro-blems. Latin America’s record in product-ivity may have been even worse than thedata seemed to indicate, says Mr de la Tor-re. The effect of changes in the terms oftrade, and the weight ofservice businessesand ofthe informal economy in the region,makes this especially hard to calculate.

Bello has two other hunches. One is

that the region’s pooreducation and skillsshortage have caught up with it. To watchand wait as staff in shops or at telecomscompanies battle with IT equipment thateither they don’t know how to operate oris frequently out of order is to wonderwhether technology is enhancing or un-dermining productivity. The second isthat the failure to invest in public tran-sport means that the region’s big cities,clogged with the new cars the boom af-forded, reap fewer economies of scaleand specialisation, because people find itso difficult to move around.

Whatdoesseem clear is that the regionis suffering a structural supply-side shock.Many economies have been operatingclose to capacity, pointsoutMrWerner. Sodemand-priming stimulus—such as Bra-zil’s loose fiscal policy or Peru’s recentgiveaway of an extra bonus to public em-ployees—looks mistaken. Fiscal balanceshave weakened by an average of threepoints ofGDP since the 2009 recession.

Nevertheless, low debt, strongerbanks and more reserves permit loosermonetary policy in some places. ManyLatin currenciesare depreciating, withoutprompting the panic of the past and thusoffering the hope ofgrowth in exports be-sides commodities (though it is unclearhow many companies may find it harderto repay their foreign bonds). With bor-rowing costs still low, now is the time forthese countries to step up investment ininfrastructure.

Such investments, like much-neededefforts to improve education and training,take years to bear fruit. The problem isthat Latin America’s leaders confront amobilised population that has grownused to the good times. This calls for polit-ically deft statesmanship. Where it is ab-sent, Latin America may become morecombustible in the next few years.

The great deceleration

The big dipper

Source: IMF

Latin America and the CaribbeanGDP growth forecasts, % increase on a year earlier

0

1

2

3

4

5

6

7

2010 11 12 13 14 15 16 17 18 19

Oct 2014

Date forecast made:

Apr 2014

Oct 2013Oct 2012Sep 2011

Bello

The region’s economies have slowed farmore abruptly than anyone expected

meet the goals. They offered a financial in-centive. The total programme was backedwith $142m from the donors, and $54mfrom local governments. Those countriesthat met their targets were to receive halfoftheir own disbursement back for unre-stricted use within the health services.

In all countries, officials say, there werestriking improvements, but not everyonemet the targets. Honduras, Nicaragua andEl Salvador did. Chiapas, Guatemala andBelize did not. Results are still not availablefor Costa Rica and Panama. Health au-thorities found creative ways to meet thetight deadlines. El Salvador, for example,

took just four months to grant regulatoryapproval for distribution of multivitaminsto the poor. Women in remote villages inNicaragua who had given birth to morechildren than they had wanted—becauseof the huge distances they needed to travelto obtain contraceptives—nominated oneperson to be paid a stipend to make thejourney on their behalf.

IDB officials, though advocates of “re-sults-based financing”, say money was notthe only motivator—indeed the cost of theprogramme was less than 1% ofthe region’stotal health spending. National pride wasalso at stake because countries competed

to meet the targets. One called it the “Con-cacaf of health”, after the region’s WorldCup qualifying tournament.

The health officialsofthe countries havesince met in Panama City to swap ideas.Those whose countries missed the targetscan improve their performance and moveon with the othercountries to a more exact-ing set of 18-month targets that have freshincentives. The biggest challenge of all willbe to keep the programme going withoutthe billionaires’ support. But if the lesson islearned thataveragesshould notbe the solebasis for making policy decisions, it willhave been a step in the right direction. 7


For daily analysis and debate on Asia, visit

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Economist.com/blogs/banyan

1

THE announcement on November 18thby Shinzo Abe, Japan’s prime minister,

that he was calling a snap general electionwas made to sound a bold one. The pollwould in effect be a referendum on post-poning a planned second rise in the con-sumption tax, Mr Abe declared—as if toshow that he was defying his country’s fis-cal hawks. He also urged citizens to usetheirvote to showwhat they thoughtof hisreform policies, commonly known as Abe-nomics, which he has presented as Japan’sonly means ofending years ofstagnation.

It was stirring rhetoric, yet in realitythere is little call for an election just now—and little risk of Mr Abe being defeated.After the surprise news a day earlier thatJapan had slipped into a technical reces-sion over the summer, not even oppositionparties now oppose delaying the tax in-crease. The elections will reconstitute thelower house of Japan’s parliament, theDiet. But Mr Abe’s government alreadywields a powerful majority in both housesthat is guaranteed until 2016.

The newly published data showed thatGDP had shrunk by 1.6% on an annualisedbasis in the third quarter (see chart). Thisfollowed a contraction of 7.3% in the sec-ond quarter that many blamed on an ini-tial rise in the consumption (value-added)tax, from 5% to 8%, in April. That made iteasy for Mr Abe to delay the next tax hikeuntil April 2017, when nothing short of afull-blown financial crisis, he pledged,would prevent a further rise—vital, as thefiscal conservatives see it, to repairing Ja-

weak to stand up to a second consump-tion-tax rise even a year from now wouldappear to signal that Abenomics is failing.

Hence the immediate reaction to thenews of a snap poll was one of bemuse-ment. The public at large, as well as manyin the LDP, are united in asking: why now?Polls show that there is little appetite for anelection. In some constituencies LDP offi-cials are even grumbling publicly. In Gifuprefecture, in central Japan, a party chapteradopted a formal resolution to opposeholdinga national poll. Iturged the govern-ment to dedicate itself to economic recov-ery instead of risking a political vacuum.

Mr Abe already has strong backing fordelaying the tax increase, but his electionmay have other uses. Many Japanese hopethat if he emerges, as expected, with a re-newed mandate, extended for anotherfour years, he may at last muster the cour-age to get on with badly needed reforms tothe labour market and to Japan’s agricul-ture. In addition, the LDP has an asset: itcan count on the opposition’s disarray.

Since its humbling defeat in 2012, thebiggest group, the Democratic Party of Ja-pan (DPJ), has struggled to find candidatesfoolhardy enough to stand against the LDP

in the countryside. Its support has dwin-dled to under 10%. You might expect theDPJ to co-operate with Ishin no To (JapanInnovation Party), the nextbiggest in oppo-sition. Yet Ishin no To’s more right-leaningleader, Toru Hashimoto, is resisting.

Voters’ lack of enthusiasm may notharm the LDP and its coalition partner, Ko-meito. Their powerful get-out-the-vote ma-chines in December 2012 earned them 325seats out of 480 in the lower house, givingthe government a majority of 67%, eventhough they won fewer votes in total thanin 2009, when the DPJ pulled off a land-slide. Since Mr Abe’s popularity has beenfalling in recent months, the LDP will prob-ably lose some of that huge haul, particu-larly from the proportional-representation

pan’s parlous public finances. Manypoliticiansare ill-prepared for the

rapid-fire campaign due to unfold after De-cember 2nd, the official start. MPs were notexpecting a snap election until next sum-mer, after a series of local polls in thespring. The news of recession certainlymakes it tricky to produce a slickcampaignmessage about Abenomics. The govern-ment had been expecting growth ofaround 1% in the third quarter. Politicianscould then have asserted that the economyhad pulled clear of the gloom that fol-lowed the first consumption-tax rise. As itis, many MPs are unsure about what to telltheir local vote-winning organisations,known as koenkai, says Kotaro Tamura, apolitical lobbyist and former legislator inMr Abe’s Liberal Democratic Party (LDP).The implication that the economy is too

Japanese politics

Taking up arms

TOKYO

Shinzo Abe is preparing to do battle in a snap general election. But the biggerstruggle will be overeconomicreform

AsiaAlso in this section

36 Energy prices in Indonesia

37 Australia and global warming

37 Elections in Taiwan

38 Banyan: Ashraf Ghani against thechaos

Shabbynomics

Sources: Cabinet office; NHK

Japanese economic and political indicators

2013 20148

4

0

4

8

50

40

60

70

+

–

GDP, quarterly % change on previous quarter at annual rate

Shinzo Abe’s cabinet-approval rating, %

36 Asia The Economist November 22nd 2014

2 slice of the vote, which elects 180 mem-bers. Yet if Mr Abe can limit the losses tofewer than 40 seats he will keep a satisfac-tory majority.

A strong result would help to strength-en Mr Abe’s position within his own party,says Kozo Yamamoto, an LDP politicianwho helped design Mr Abe’s economicstrategy last year. This would strengthenhis hand in shaking up his cabinet, whichhas been battered by scandals and resigna-tions since a reshuffle in September.

But there is still a risk that opponents ofAbenomics could muster enough strengthto weaken Mr Abe. The loss of an electionfor the governorship of Okinawa on No-vember16th, though chiefly the result oflo-cal opposition to the American army’s out-sized presence on the island chain, showedthat the LDP is vulnerable.

For those hoping that a strong electionresult might re-energise Mr Abe’s reformagenda, it was dispiriting that he made lit-tle directmention ofreforms thisweek. Butthis may have been tactical: it might repelrural voters, for example, if he were to em-phasise the need for progress in negotia-

tions with America and other importanttrading partners over the formation of theTrans-Pacific Partnership, a free-tradegrouping. Farmers worry that their liveli-hoods would suffer from the pact. A seriesof reform bills, including one dedicated towomen’s empowerment in the economy(a cherished project of Mr Abe’s and onewhere much has been accomplished) nowface deletion from the legislative calendarbecause of the looming poll.

Yet in delaying the consumption-taxrise against the wishes of the powerful fi-nance ministry Mr Abe has shown that hecan face down bureaucrats. It is inside theministries and the LDP that he encountersthe most entrenched resistance to his ef-forts at reform. His advisers are privatelymaking comparisons to the decision in2005 by a predecessor, Junichiro Koizumi,to call a snap election to seek backing forprivatising the postal service. Nothing asyet suggests that December’s election willbring Mr Abe quite the mandate that MrKoizumi won. But it would make littlesense for Mr Abe to seek re-endorsementbyvotersunlesshe had a grand purpose. 7

WHEN Joko Widodo, Indonesia’s pres-ident, who is generally known as Jo-

kowi, announced that petrol and dieselprices would rise by 2,000 rupiah ($0.16)per litre on November 18th, Hajji Zaenaland the world’s financial markets had op-posite reactions. Mr Zaenal, who fishes fortuna and bonefish offthe coast ofeast Java,was glum and worried. Overnight theprice of filling up his 1,000-litre tank hadrisen by 2m rupiah.

The markets, on the other hand, wereelated. Indonesia’s fuel subsidies arewasteful, expensive and poorly targeted—benefits overwhelmingly accrue to thecountry’s middle and upper classes, ratherthan the car-less poor. Between 2009 and2013 Indonesia spent more on fuel subsi-dies (over 714 trillion rupiah) than it did oninfrastructure and social-welfare pro-grammes combined. Subsidies threatenedto eat up more than 10% of total govern-ment spending next year, imperilling thecountry’s ability to pay for the ambitiousand necessary health-care, education andinfrastructure programmes that Jokowipromised in his election campaign. Theprice rise, modest though it may be, is fore-cast to save the government roughly 120trillion rupiah next year.

The day after Jokowi’s announcementIndonesian stocks rose, as did the rupiahagainst the dollar. Indonesian sovereign-bond yields tumbled. That was not just be-cause of the budgetary impact of this deci-sion, sizeable though it is. The increase alsoshowed that Jokowi had the stomach totake politically risky but economically nec-

essary decisions—an all-too-rare traitamong Indonesian politicians, and a nec-essary one for a president with reformistambitions.

Fuel subsidies are popular (seeminglyfree money usually is), and politicians cutthem at their peril. Jokowi’s predecessor,Susilo Bambang Yudhoyono, raised fuelprices in 2013. He was greeted with streetprotests that were tumultuous enough thatwhen Jokowi asked him to raise pricesagain as he was leaving office, he de-murred.

Jokowi’s announcement also sparkedanger—protests, largely peaceful, broke outin cities across Indonesia, and public-busand minivan drivers threatened to strike—but was not a surprise. Trimming the subsi-dies was a campaign promise. Last weekhis energy minister said there would be anannouncement soon after the new presi-dent returned from the G20 summit in Bris-bane, which ended on November16th (seenext page). His finance minister, BambangBrodjonegro, said in Brisbane that the risewould be no more than 3,000 rupiah per li-tre; pegging the increase at 2,000 may haveremoved some of the political sting. Subsi-dised petrol now costs 8,500 rupiah per li-tre—not far off the price of higher-octane,unsubsidised petrol which, thanks to lowoil prices, is selling for as low as 10,200 ru-piah per litre.

Another reason markets rejoiced wasthe swift action of Indonesia’s centralbank. To limit the inflation likely to resultfrom Jokowi’s action, the bank raised itspolicy rate to 7.75% on November 18th, thefirst such increase in more than a year. Thebank said it expected inflation to reach 8%by the year’s end, well above today’s rateof 5%. Despite the protests, Indonesiansseemed largely resigned to higher prices.Even Mr Zaenal said he understood whyfuel had to cost more, though now he saysthat he wishes the government could setthe market price offish.7

Energy prices in Indonesia

FuelÕs errand

MUNCAR, BANYUWANGI REGENCY

Jokowi trims Indonesia’s inefficient but popularpetrol subsidies

Queuing for the last of the cheap stuff

The Economist November 22nd 2014 Asia 37

AHEATWAVE hovered over Brisbane,the state capital of Queensland, as

world leaders gathered on November 15thfora Group of20 (G20) summit, the biggestsuch meeting Australia has hosted. TonyAbbott, the prime minister, had hoped tolimit their talks to topics that chimed withhis domestic political agenda: growth andjobs. Barack Obama, America’s president,had other ideas. On his way to the talks, MrObama delivered a speech to cheering stu-dents at the University of Queensland,calling on Australia to do more to tackle cli-mate change. To rub his message in, MrObama worried about the “incredible nat-ural glory of the Great Barrier Reef”, offthecoast of Queensland, which is threatenedby global warming.

The president’s speech was carefullycalculated. Three days earlier, Mr Obamahad struck a deal with Xi Jinping, China’spresident, at another summit in Beijing, inwhich the world’s two biggest emitters ofcarbon set targets to lower their outputs ofgreenhouse gases. The deal apparentlycaught Mr Abbott by surprise. He hadwanted to limit the G20’s climate commit-ments to a line about energy efficiency. Butclimate change dominated the Brisbanesummit in the wake ofMr Obama’s procla-mation that “here in the Asia Pacific, no-body has more at stake”. Few can recallsuch a sharp public rebuke from Austra-lia’s main strategic ally.

Australia is responsible forabout 1.5% ofglobal carbon emissions; measured by itsoutput per person, it is one of the highestpolluters. Yet Mr Abbott has staked his po-litical career on a combative approach toclimate action. As opposition leader fouryears ago, he unseated his predecessor asleader of the conservative Liberal Partyover a deal with the then Labor govern-ment for an emissions-trading scheme;that deal sank. Mr Abbott won power lastyear after waging a scare campaign againsta carbon taxLaborhad introduced instead;his government has since abolished it. MrAbbott argued in Brisbane that climatetalks should happen elsewhere, not atmeetings of the G20.

But the summit’s climate pledges leftAustralia isolated. Mr Obama pointedlyused his speech in Brisbane to announce a$3 billion contribution to the Green Cli-mate Fund, a UN body to help poor coun-tries deal with climate change. Japan, Ger-many and Canada also promised money.

Mr Abbott felt in warmer company

after Mr Xi and Narendra Modi, India’sprime minister, left Brisbane to addressAustralia’s parliament separately in Can-berra. As Mr Xi spoke, Australia concludeda free-trade agreement with China. It in-cludes tariff cuts on Australian shipmentsof coal, demand for which in China hasgrown rapidly in recent years. India is alsoa big market. Defiantly, Mr Abbott told theG20 leaders he would be “standing up forcoal”. But the summitry has left him withdifficult choices over Australia’s positionon global warmingascountriesprepare foranother summit in Paris next year—de-voted entirely to the climate. 7

Australia and global warming

Stranded

BRISBANE

TonyAbbott woos China and India asAmerica rebuffs his climate policy

THIS year is unlikely to be rememberedfondly by Taiwan’s president, Ma Ying-

jeou. He entered it with opinion polls at re-cord lows. Spring saw students occupyingthe legislature for more than three weeksin protest against his efforts to forge closerties with China; thousands took to thestreets to backthem. Local elections on No-vember 29th are likely to compound hismisery. Voters will choose more than 11,100mayors, town chiefs and councillors. Pros-pects for Mr Ma’s party, the Kuomintang(KMT), lookgrim.

With presidential elections due in Janu-ary 2016, the polls will be closely watched.A bad showing for the KMT would be agood presidential omen for the island’smain opposition group, the DemocraticProgressive Party (DPP), which lost thepresidency to Mr Ma six years ago. By thenMrMa will have served two terms in office,

so he will be constitutionally obliged tostep down.

The contest for the post of mayor in thecapital, Taipei, will be especially impor-tant. The city has remained a stronghold ofthe KMT ever since the party was forced toflee to the island from the mainland in 1949at the end ofthe Chinese civil war. The DPP

has won in the city only a single time: 20years ago, when the KMT vote was split bya spin-off party. Now Ko Wen-je (pictured),an eminent surgeon who is without politi-cal experience and is running as an inde-pendent, is pollinghigher than Sean Lien, ascion of one of the KMT’s richest politicalfamilies.

The KMT chose Mr Lien as its candidatethrough a ballot of its members in the capi-tal. But many Taiwanese see him as a privi-leged princeling. His father, Lien Chan, is aformer vice-president who has helpedforge closer ties between the KMT and Chi-na. The younger Mr Lien decided to enterpolitics after a lone gunman shot him at anelection rally in 2010. Before that heworked in business, including in invest-ment banking—experience, he says, thatwill help him manage Taipei’s economy.But many of Taipei’s young people, whowere out on the streets in strength duringthe “sunflower movement” in and aroundthe legislature in spring, resent the busi-ness elite. Mr Ko, who is often affectionate-ly called “Ko P” (short for professor), ap-peals to those Taiwanese who are fed upwith bickering between the two main par-ties. Being a doctor (he is chairman of thetraumatology department at National Tai-wan University Hospital), not a politician,appears to have helped him.

The DPP decided not to field a candi-date in Taipei after the party’s pollsshowed that Mr Ko was more popularwithin the DPP than any candidate it couldfield itself. Mr Ko appeals not only to mid-dle-of-the-road voters, but also to some inthe DPP who want formal independencefor the island. Mr Ko has given support inthe past to the DPP but has tried to avoidthe question of independence during hiscampaign.

The ruling party is also lagging behindin the contest for mayor in the central cityof Taichung, which it has held since 2001.In addition, it could lose an importantmayoralty in Keelung, a northern port, be-cause ofa split within its camp there: a can-didate ditched by the KMT is running as anindependent. Meanwhile DPP candidatesin the south, where the opposition is at itsstrongest, still enjoy comfortable support.

Being local elections, thismonth’svotesare more about housing and city infra-structure than relations with China. Butthey still hold implications for cross-straitrelations. Although the DPP ismore accom-modating towards China than it was be-fore Mr Ma took office, if it gains a boost,China will lookaskance at it. 7

Elections in Taiwan

Political surgery

TAIPEI

Taiwan’s ruling party faces a challengein local polls

38 Asia The Economist November 22nd 2014

WHAT would Afghanistan look like now ifAshrafGhani, notHamid Karzai, had been the Anglophone Pushtun promot-

ed by America, back in 2001, to lead the country? Afghanistan’snew president, a frail figure in white salwar kameez, grins, eyestwinkling, tantalised by the suggestion. “Let’s not discuss whatwe cannot change,” he then says, seated, for his first interview aspresident, in the shoddy grandeur of his palace in Kabul. So letBanyan attempt an answer.

On the basis of his first month in office and, more important,his two years as finance minister in the government of warlordsand technocrats formed after the Taliban’s fall, Afghanistanwould be in much better shape than it is. That is not only becauseMr Ghani achieved a lot in a short time, setting up computer sys-tems and a single Treasury account where there had been onlypaper files and broken chairs. It was also because the formerWorld Banker had a vision for how Afghanistan should seize thegreat opportunity, including billions in aid money, suddenly af-forded it. He promoted road-building, to restore ancient trade-routes. He denounced the regional strongmen suckingup his cus-toms revenue. He was not universally liked. He could seem arro-gant and was hot-tempered; many thought him Utopian. ButafterMrGhani left the government in a huffhe wasbadly missed.

Mr Karzai was a disaster. He offended Afghanistan’s benefac-tors and neighbours even as, presidingovercorrupt elections anda spreading kleptocracy, he encouraged Afghans to consider theirdemocracy a fraud. Today’s strongmen control more than bordertrade; they have grabbed property in Kabul worth billions ofdol-lars, run a drugs business equal to perhaps 15% of economic out-put and enjoy blissful impunity—as displayed in the protractedtheft of nearly a billion dollars from Kabul Bank. Despite the tril-lion-dollar cost of Afghanistan’s 13-year war and reconstruction,the poverty rate has been static—at around 36%—for years. That isfuel for an insurgency which, even as foreign troops withdraw,ravages the country. Mr Ghani’s plans for reforming Afghanistanwere always optimistic. They might now seem fanciful.

That is even before considering the weakness of his govern-ment, which, after a dispute over the election result, Mr Ghaniwill preside over with his erstwhile rival and now chief execu-tive, Abdullah Abdullah. “The risks are enormous,” he concedes.

“Criminal networks pose a major challenge to the functioning ofour legal economy, we have no peace, and if we fail, our peoplecould lose several generations.” Yet Mr Ghani, who has co-writ-ten a thoughtful bookon fixing failed states, relishes his task.

Given better government, he believes, most Afghans wouldembrace the rule of law. To that end he has ordered a retrial of theaccused in the Kabul Bank heist: “I’ll put them in prison for doz-ens of years, and never will there be another banking crisis.” Hehas reformed the attorney-general’s office and set about appoint-ing new Supreme Court judges. Bigger reforms, including to taxcollection and the land registry, will follow. “Most of Kabul is in-formal, that is, illegal, and people in illegal circumstances arepreyed upon. Our aim is not only to clean the government butmake people more independent of it.”

On travels abroad he has given other clues to his plans. In Sau-di Arabia he made plain that, though partly Western-educatedand married to a Lebanese Christian—whom, momentously, hethanked in his inauguration speech—he is a Muslim leader. InBeijing he raised access to Afghanistan’s mineral resources andthe mutual threatofjihadism; both reasons, he suggested, forChi-na to lean on Pakistan to stop succouring the Taliban. Mr Ghani’ssubsequent visit to Islamabad was a success, however. “Thechoice for us both is to become the Asian economic roundaboutor to sink,” he says of his country’s enemy. Your columnist won-dered how the Pakistanis viewed him. “As a partner and an Af-ghan nationalist, who’s secure in the sovereignty of his country,”he says, which is as near as he gets to knocking his predecessor.

Where Mr Karzai called the Taliban his brothers and beratedthe Western troops who shed much blood, including their own,Mr Ghani has signed a defence pact with America and praisedthe sacrifices ofWestern and Afghan soldiers. The Taliban are hisfoe—yet he promises a fresh push for a negotiated peace. “Weneed it, we are keen on it, and we will move in this regard.”

A merit-based failing stateThese are big claims for a man battling to form a government, adeadline for the new cabinet having lapsed as negotiations be-tween Mr Ghani and Mr Abdullah drag on. Mr Ghani retorts thatrelations between the two men are excellent and that15 new min-isters will be named before a conference of donor countries inLondon on December 4th. In due course he promises a biggerclear-out—“the government is dysfunctional. We need freshfaces”—and that his appointments will be based on “merit, inclu-sion, representation and gender.” Banyan suggests that leavesopen a possibility of one or two villains. “I’m not preparing youfor villains! I’m preparing you for a team that can function,” hesays. “You know there’s a complex spatial and social balance, asLincoln observed backwhen the population ofthe USA was30m,the same as ours.”

That was typical Ghani—learned, right-minded and defiant;but also prone to a sort of development gobbledygook that canraise doubts about the feasibility ofhis plans. Perhaps it will turnout he neverwas the rightman to lead Afghanistan. He is still iras-cible. Yet the cautious, court politics many ofhis critics advocatedwas exemplified by Mr Karzai. In his analysis of Afghanistan’sproblems and the likeliest solutions, moreover, Mr Ghani has theadvantage of being right. That is why Afghans, the subject of allmanner of half-baked experiments, are right to be hopeful. In hissecond coming, Mr Ghani could again leave Afghanistan lookingmuch better than when he found it.7

Ashraf Ghani against the chaos

Afghanistan’s newpresident could be the onlyman up to an almost impossible job

Banyan


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Economist.com/blogs/analects

1

FINE porcelain, Chinese-landscapescrolls and calligraphy adorn the office

of Shi Yigong, dean of the School of LifeSciences at Tsinghua University in Beijing.Little about his ornamentation hints at MrShi’s 18 years in America, where, like thou-sands of Chinese students, he decampedfor graduate study in the early 1990s. MrShi eventually became a professor atPrinceton University but he began to feellike a “bystander” as his native countrystarted to prosper. In 2008, at the age of 40,he returned to his homeland. He was oneof the most famous Chinese scholars to doso; an emblem for the government’s at-tempts to match its academic achieve-ments to its economic ones.

Sending students abroad has been cen-tral to China’s efforts to improve its educa-tion since the late 1970s, when it began try-ing to repair the damage wrought by Mao’sdestruction of the country’s academic in-stitutions. More than 3m Chinese havegone overseas to study. Chinese youthsmake up overa fifth ofall international stu-dents in higher education in the OECD, aclub mostly of rich countries. More than aquarter of them are in America.

Every country sends out students.What makes China different is that most ofthese bright minds have stayed away. Onlya third have come back, according to theMinistry of Education; fewer by somecounts. A study this year by a scholar atAmerica’s Oak Ridge Institute for Scienceand Education found that 85% of thosewho gained their doctorate in America in

abroad will not be enough to turn Chinainto an academic giant. Many of thosewho return do so on a part-time basis. Ac-cording to David Zweig of the Hong KongUniversity of Science and Technology,nearly 75% of Chinese nationals who werelured by a “thousand-talent” programmelaunched in 2008 did not give up tenureelsewhere. Such schemes have oftenbought reputation rather than better re-search. They typically target full professorswhose more productive, innovative yearsmayalreadybe behind them. (Theyalso fa-vour experts in science, technology andmanagement; the Communist Party is lessinterested in attracting scholars in morepolitically controversial fields.)

Chinese universities have great difficul-ty fostering talent at home. The premiumon foreign experience in China has createdperverse incentives, says Cao Cong of Not-tingham University in Britain. It sends themessage to today’s best and brightest thatthey should still spend their most produc-tive years abroad. More than 300,000 stu-dents leave each year.

Research inside China is moulded bythe heavy hand of the state. Many grantsare allocated by administrators who lackexpertise in evaluating proposals, ratherthan by open, competitive peer review.Staff are not encouraged to be scepticalabout existing theories, especially thoseheld by senior staff who control resources,says Mr Cao. The result is management bynumbers: academics are rewarded for thequantity of their publications instead ofquality. This creates incentives to eschewlong-term, open-ended exploration.“Sometimes guanxi [connections] are allyou need” to get promotions and grants,says Tsinghua’s Mr Shi, who since return-ing has recruited Chinese scientists fromprestigious universities in America andelsewhere to work in his labs. In sciencethe Communist Party has picked six mainspheres of research to fund, including na-

2006 were still there in 2011. To lure experts to Chinese universities,

the government has launched a series ofschemes since the mid-1990s. These haveoffered some combination of a one-off bo-nus of up to 1m yuan ($160,000), promo-tion, an assured salary and a housing al-lowance or even a free apartment. Some ofthe best universities have built homes foracademics to rent or buy at a discount. Allare promised top-notch facilities. Manycampuses, which were once spartan, nowhave swanky buildings (one of Tsinghua’sis pictured above). The programmes havealso targeted non-Chinese. A “foreign ex-pert thousand-talent scheme”, launched in2011, has enticed around 200 people.Spending on universities has shot up, too:sixfold in 2001-11. The results have beenstriking. In 2005-2012 published researcharticles from higher-education institutionsrose by 54%; patents granted went up eight-fold.

But most universities still have far to go.Only two Chinese institutions number inthe top 100 in the Times Higher EducationWorld University Rankings. Shanghai’sJiao Tong University includes only 32 insti-tutions from mainland China among theworld’s 500 best. The government fretsabout the failure of a Chinese scholar everto win a Nobel prize in science (althoughthe countryhasa laureate for literature andan—unwelcome—winner in 2010 of theNobel peace prize, Liu Xiaobo, an impris-oned dissident).

Pulling some star scholars back from

Higher education

A matter of honours

BEIJING

China is trying to reverse its brain drain

ChinaAlso in this section

40 Inheritance law

40 Hong Kong politics

40 China The Economist November 22nd 2014

2 notechnology, climate change and stemcells. But lettingofficialsdecide on researchis a poor recipe for innovation.

Until recently universities routinelyhired their own students upon graduating.Many staff did not have doctorates, lectur-ers were given jobs for life with no motiva-tion to excel and all promotion was inter-nal. Ten years ago, when Peking Universitytried to replace this system with limitedemployment contracts and open competi-tion for posts, it faced such resistance fromits own staffthat it had to shelve its plans.

Today the signs are more encouraging.Some universities are changing the waythey recruit and hence finding it easier toattract staff from abroad. At Peking Univer-sity departments now hire and promoteusing international evaluation-methods.They advertise jobs and academics applyfor promotion and are rewarded accordingto their achievements.

Departments such as Mr Shi’s at Tsing-hua have attracted private funding to topup salaries for tenured positions. Assistantprofessors at some elite institutions arepaid as much as $70,000-80,000 a year, upto 80% of which comes from donations.But academic institutions the world overare notoriously slow to reform. China hasmore than 2,400 universities and researchfacilities—and so faronly a few minds havebeen changed.7

IN RECENT weeks China’s leaders havebeen talking up the need to enhance the

rule of law. Their aim is to strengthen theCommunist Party’s grip on power while atthe same time ensuring that justice isserved more fairly. This may improve thelives of some. Many people complain bit-terly that courts often pay more heed to thewhims of officials than to the law. But inthe realm of death, it is the law itself that isthe problem. The country’s statutes on in-heritance remain little changed from thedays when few had any property to be-queath. The rapid emergence in recentyears of a large middle-class with complexproperty claims has been fuelling inheri-tance disputes. The crudity of the law ismaking matters worse.

Today’s inheritance law was adopted in1985 when divorce and remarriage wererare and international marriage nearly un-known. Few owned homes, cars or othervaluable property. The law does at leastgrant men and women equal rights to their

kin’s estates, but otherwise it is basedlargely on tradition. It is specific when itcomes to handing down “forest trees, live-stock and poultry” but runs out of steamwhen it comes to newfangled notions suchas intellectual property; never mind do-main names and digital photographs. Asweeping reference to “other lawful prop-erty” is its unhelpful attempt to cover alleventualities. What counts as property? Bywhose laws? The statute has no answers.

Modest changes were approved in2003, but woolly areas remain such as inprocedures for registering wills. This hasled to rancorous court cases like one thatlast month attracted much public atten-tion. It involved a disputed will and theembattled surviving family members of afamous calligrapher and his estate worthabout 2 billion yuan ($326m).

Since the last revisions to the law, soci-ety has kept up its blistering pace ofchange. The divorce rate has risen in eachof the past ten years. In 2009 divorces out-numbered marriages. Thus there are nowex-spouses and stepchildren among thosesquabbling over estates. China’s embraceof globalisation means that some assets(and indeed, clamouring relatives) are lo-cated in other countries.

China’s one-child policy has some-times complicated matters. State media re-ported on a car crash in 2012 in which bothparentsdied several hoursbefore their solechild, a six-year-old girl. She automaticallyinherited their assets in that short intervalbut had no legal heir herself, meaning theassetswent to the state instead ofother kin.

At a meeting in October Chinese lead-ers expressed support for amending the in-heritance law (though a long-mooted planto introduce an inheritance tax still looksfar from being put into force: the middleclass does not want that). Yang Lixin ofRenmin University in Beijing says that de-spite this resolve it could still be severalyears before the law catches up with reali-ty. It is enough to send legal drafters to anearly grave. 7

Inheritance law

A lack of willpower

BEIJING

Inheritance lawneeds to catch up witheconomicand social change

THE change in tone in Hong Kong news-papers that are sympathetic to the

Communist Party says it all. Once hysteri-cal about the territory’s pro-democracyprotests, their commentators are nowsmugly dismissive and condescending.The “Occupy” demonstrations had begun“with madness”, declared an editorial inTa Kung Pao, one of Hong Kong’s staun-chest pro-party rags, on November 19th,and were “ending in failure”. A few daysearlier Global Times, a nationalist newspa-per in Beijing, had crowed that the protes-ters had been “forgotten” by the world.

Nearly two months after the use of teargas by police drew more than 100,000 de-monstrators onto the streets and promptedprotesters to set up barricaded encamp-ments on several major roads, the authori-ties are beginning once again to step uppressure, this time with little resistance.

The protesters, now numbering only afew hundred, are demoralised. On No-vember18th police, enforcinga court order,quietly cleared some of the barricadesfrom in front of an office building near thegovernment’s headquarters. They have or-ders to do the same at other protest sites. Itlooks like the beginning of the end for theunexpectedly protracted standoff. Protestleaders watched the police without inter-fering. They still have the support of youn-ger Hong Kong residents, who resent Chi-na’s refusal to allow free elections for theterritory’s leader. But many others havetired of the protests. More than four-fifthsof respondents in a recent poll wanted thedemonstrators to go home.

A handful of protesters chafed at themeek response to the police action. Aftermidnight on November19th a small groupofmasked demonstrators tried to ram theirway into the offices of the nearby Legisla-tive Council building, using a metal barri-cade to smash a glass entrance. Police usedpepper spray and batons to stop them andarrested six people. The governmentcalled them “violent radicals”.

But the protesters’ three encampmentslook unlikely to last for much longer. Sincethe police’s counter-productive tear-gas at-tack on September 28th the governmenthas tried to wait out the “Umbrella Move-ment”, as it was dubbed because ofprotes-ters’ use of umbrellas to protect them-selves. The government hoped that thepublic would grow impatient with the dis-ruption to traffic and business. The signsare that this strategy is working.7

Hong Kong politics

Clearing up

BEIJING AND HONG KONG

Police begin dismantling protesters’barricades, but grievances fester


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WORSHIPPERS were back at KehillatBnei Torah synagogue in Jerusalem’s

Har Nof neighbourhood just a day aftertwo young Palestinian men attacked itwith knives, axes and a gun. The signs ofthe assault were apparent: a security guardstood at the door; bullet holes pockmarkedthe building’s stone façade. But it was a farcry from the carnage on November 18th,when emergency workers found victimslying in pools of blood, still wrapped intheir prayer shawls, with phylacterieswound around their arms and heads.

Residents said life must go on, evenafter the murder offour worshippers and apoliceman; the two attackers, cousins be-longing to an ostensibly leftist Palestinianfaction, were shot dead by police. Jerusa-lem is living its worst days ofviolence aftermany years as an island of relative calmamid the violent turmoil in the West Bankand the Gaza Strip.

Nine Israelis have been killed in a rashof stabbings, shootings and hit-and-run at-tacks in Jerusalem over the past month.Each has brought changes to daily life. InJewish districts, concrete barriers havebeen erected to shield commuters standingat light-rail stations. Hundreds of extra po-lice officers have been deployed across thecity. Israeli commuters disembarkfrom thelight railway before it crosses Palestinianareas, fearing that the train will be attackedwith stones and firebombs. At night Pales-tinian taxi driversdecline to drive into Jew-ish areas. The violence has also changed

president, Mahmoud Abbas, on whom thevitriol is now concentrated.

Mr Abbas condemned the synagogueattack, reportedly under pressure fromAmerica, but his statement also urged Isra-el to halt its “provocations” at the Haramal-Sharif, the “Noble Sanctuary”, the third-holiest place in Islam, built atop the ruinsof the former Jewish temple. Jews pray atthe base of the complex, before the West-ern Wall. But a growing number of activ-ists, among them politicians, want to havethe right to pray on the Haram (some hopeto rebuild the temple there). Last month aPalestinian shot and wounded a leadingtemple campaigner, Yehuda Glick.

Mr Netanyahu has said, ever more firm-ly, that he will not change the status quo, amessage he repeated in an Arabic-lan-guage video. Palestinians do not trust him,though, and the call to defend the Muslimholy places has featured in the propagandaofHamas, an Islamist movement, and oth-er groups. Mr Abbas has followed, issuingwarnings that Israel risked sparking a “reli-gious war.” Hence the charge of incite-ment: Mr Netanyahu said the synagogueattack was a “direct result” of Mr Abbas’swords, though the charge was apparentlycontested by the head of the Shin Bet intel-ligence service.

Yet MrAbbas has little influence in Jeru-salem, a city he cannot visit without Israelipermission. Its Palestinian residents, livingin worse conditions than their Israelineighbours, scarcely look to him for guid-ance; on the contrary, many feel Mr Abbashas been too pliant and is concerned onlywith his fief in the West Bank. Last sum-mer, when his prime minister, Rami Ham-dallah, paid a condolence visit to the fam-ily of the teenager killed by Jewishextremists, neighbours heckled his motor-cade. Just as worrying as the rising blood-shed is the fact that the attacks do not seemto be directed by anyone. 7

life in Palestinian areas ofJerusalem, hometo all of the attackers. In Jabal al-Mukaber,where the synagogue attackers lived, bull-dozers laid concrete blocks to cut off roads;for the first time in decades, police estab-lished checkpoints at the entrances to oth-er districts.

On November 19th Israel blew up thethird-floorapartment ofAbdel-Rahman al-Shalloudi, who had killed two people onOctober22nd by ramming them with a car.It marked a full return to the practice of pu-nitive home demolitions (initiated by theBritish) that had been mostly halted since2005, when the army concluded they hadlittle deterrent value. Israel also declined torelease the bodies of the synagogue attack-ers to their families.

None of this has stanched the violence,nor reassured Jerusalem’s jittery residents.The unrest in the city started in July, afterthe murder of a Palestinian teenagerburned alive in an act of revenge for thekilling of three Jewish seminary studentsin the occupied West Bank. Large-scale ri-ots followed for a week, and smaller clash-es have continued almost every nightsince. More than 1,300 people have beenarrested, many of them children. Such tur-moil has become a growing liability for theIsraeli prime minister, Binyamin Netanya-hu, who has made security the centrepieceofhis tenure. Hisallies in government haveblamed many groups for inciting the vio-lence—Hamas, Islamic Jihad, even Euro-pean diplomats—but it is the Palestinian

The conflict over Jerusalem

Murder in the synagogue

JERUSALEM

A deadlyattackon Jews at prayerraises the stakes in the alreadyturbulent holy city

Middle East and AfricaAlso in this section

42 The unloved Islamic State

42 Tanzania’s strained union

43 Nollywood goes digital

43 Africa’s arms splurge

42 Middle East and Africa The Economist November 22nd 2014

1

THERE is no cause yet for cheer, but forthe first time since last summer’s blitz-

krieg by Islamic State (IS) the news fromIraq and Syria has been less than uniform-ly grim. General Martin Dempsey, Ameri-ca’s chairman of the joint chiefs of staff, onNovember 15th told American troops inIraq that the battle is “starting to turn”—though it will take time to defeat the jiha-dists. The UN’s envoy for Iraq, NickolayMladenov, assured the Security Councilthat the strategy of enlisting local forceswas showing signs of progress. “We’re notlooking at the collapse of the Iraqi state,”he said. “We’ve turned the tide.”

After months of setbacks the wobblyAmerican-led coalition battling IS has halt-ed the group’s momentum and begun toseize the initiative. Relentless air attackshave depleted the group’s arsenals, re-duced its mobility and reportedly killedseveral of its senior commanders. The co-alition’s campaign has grown in scope andsophistication. A single raid on November19th, targeting a complex of IS fortificationsnorth-west of Kirkuk, involved aircraftfrom seven countries.

There is movement on the ground, too.On November 14th Iraqi governmentforces scored their most hopeful battlefieldadvance to date: the recapture of the giantoil refinery at Baiji, a town along the Tigrisriver between the Iraqi capital, Baghdad,and its rebel-held second city, Mosul. Thesuccess not only returned a big economicasset to government hands, but also sev-ered the link between a pocket of IS forcesin Tikrit and a larger zone under its sway tothe north. Kurdish and Iraqi governmentforces and allied militias are said to bepoised for an offensive from the east intothis area. Tikrit, largely abandoned by itspeople, may not stay long in IS hands.

Iraq’s internal politics may also be lesspoisonous than before. Unlike its narrow-mindedly pro-Shia predecessor, the gov-ernment of Haider al-Abadi has made aneffort to win over the minority Sunnis,whose anger at being marginalised fuelledIS’s rise. It has also acted to heal rifts withthe Kurds’ autonomous region, transfer-ring an initial $500m tranche of federalfunds that had been withheld by Baghdadin protest against Kurdish efforts to exploittheirown oil resources. This improvingpo-litical climate should foster closer militaryco-operation between the Kurds and thecentral government, and raises the chancethat more Sunni tribes can be coaxed onto

the government’s side in a repeatofAmeri-ca’s belated but ultimately successful effortto subdue restless Sunni regions during itsoccupation of Iraq.

Coalition bombing in Syria, mean-while, has sharply reduced the flowof con-traband oil, a bigsource ofIS funding. Ithasalso halted IS’s two-month-long offensiveagainst the Kurdish-controlled town of Ko-bane (also known as Ayn al-Arab). LocalSyrian Kurdish forces, now reinforced byother Syrian rebels and Peshmerga troopssupplied by Iraqi Kurdistan, are slowlypushing IS fighters out of the besieged city.The jihadists have paid a heavy price. OnNovember16th the Syrian Observatory forHuman Rights, a British-based monitoringgroup, put IS losses at over 700 dead andthe Kurds’ at fewer than 400.

That said, while a winning strategy inIraq seems to be in sight, the same is nottrue of Syria, where there are few groundforces to take on IS. The policy of focusingonly on IS (and at times on another jihadistgroup, Jabhat al-Nusra), while leaving Pres-ident Bashar Assad undisturbed, risksweakeningmainstream rebels and causinga dangerous Sunni backlash.

For now, faced with worsening odds inbattle, IS has responded with more intensepropaganda. Countering rumours that hehad been injured or killed, the IS “caliph”,Abu Bakr al-Baghdadi, vowed on Novem-ber 13th in a rare recorded speech that hismen would fight to the death. Alater IS pro-paganda video showcased the group’sgore, including carefully choreographedslow-motion close-upsofthe beheading of18 captured Syrian air force officers (see pic-ture, above) and the purportedly severedhead of an American ex-soldier turned aidworker, PeterKassig. IS’s unflinchingkillersincluded several Western recruits.

The videos sought to project terror bysuggesting the widening reach of IS. “Wewill begin to slaughter your people onyour streets,” warned a masked fighter inone scene; a map in another showed IS’sblackflag unfurling across the region to thesound of recordings by Islamist rebel lead-ers in Algeria, Egypt, Libya and elsewhere,declaring allegiance to the caliphate. MrBaghdadi stressed his mission’s pan-Islam-

ic nature by calling on Sunnis in Yemenand in “the Land of the Sanctuaries”, ie,Saudi Arabia, to kill Shias in their midst.

Such savage fanaticism may have a lim-ited audience. Masked gunmen, probablyinspired by similar views, did in fact killfive Shia worshippers in Saudi Arabia onNovember 4th. But the attack, as well asIS’s own actions, has generated public re-vulsion rather than admiration. Fear of IShas also spurred Gulf states on November16th to end a bitter dispute between Qatarand its neighbours over the small emirate’salleged support for Islamist groups. What-ever its claims, IS is generating enemiesfaster than friends. 7

The war against Islamic State

Gaining more foesthan friends

CAIRO

The tide mayslowlybe turning againstthe jihadists in Iraq and Syria

IN APRIL Tanzanians celebrated the 50thanniversary of the union between main-

land Tanganyika and the islands of Zanzi-bar. In honour of the occasion, the East Af-rican nation came together to rewrite its1977 constitution. But instead of strength-ening the union, the process may be tear-ing it apart.

A draft based on public consultationswas rewritten by a constitutional assem-

The status of Zanzibar

Imperfect union

DAR ES SALAAM

Tanzania’s constitutional crisis

I N D I A N

O C E A N

KENYA

NairobiUGANDA

T A N Z A N I A

ZAMBIA

MOZAMBIQUE

BURUNDI

RWANDA

Mombasa

Dar es Salaam

DodomaCONGO

ZANZIBAR

200 km

The Economist November 22nd 2014 Middle East and Africa 43

1

2 bly dominated by members of the rulingParty of the Revolution (CCM). Oppositionparties abandoned the process amid alle-gations of intimidation and abuse.

Their protest was dealt with harshly:opposition members have been arrestedand the leader of the main oppositionparty, Chadema, was summoned for ques-tioning by police.

At the centre of the dispute is Zanzibar’sdesire for greater autonomy. At the mo-ment Zanzibar has its own semi-autono-mous government, but many islanders feelthat the mainland still wields far too muchpower. The Constitutional Review Com-mission, which held public consultationsand wrote a working draft of the new con-stitution, found that at least 60% of Zanzi-baris were unhappy with the terms of theunion. It proposed more autonomy.

Rather than the two-tier status quo, thecommission proposed implementing athree-tier structure with semi-autono-mous governments for both mainlandTanganyika and Zanzibar, and an over-arching Tanzanian government.

The rulingparty argued this would leadto increased demands for Zanzibari inde-pendence and the eventual dissolution ofthe union. Critics claim that CCM is op-posed to the new structure because itwould make it more difficult for it to retainpower.

The dust-up over Zanzibar has over-shadowed a number of improvements tothe constitution, in the areas of humanrights and gender equality. However, crit-ics say that not enough has been done tolimit the president’s powers. Provisions fora limited tenure for members of parlia-ment, mechanisms for recall, elections andan independent public service commis-sion—which had all been suggested by thereview commission—failed to make it intothe final draft. 7 THE north-eastern Nigerian town of

Chibok is spared little. Earlier this yearfighters from the extremist group, Boko Ha-ram, abducted more than 200 local school-girls. In the past week insurgents and gov-ernment troops have traded possession ofurban districts and surrounding farmland,leaving much of it burnt.

The Nigerian army, one of the biggest inAfrica, should have little difficulty scatter-ing the amateur jihadists. But its arsenal isdecrepit and its troops poorly trained.Hence the government’s decision to spend$1 billion on new aircraft and training,among other things. Critics question howmuch will go towards appropriate kit (nev-er mind how much gets stolen by corruptgenerals) and whether it is sensible to lav-ish resources on a force implicated in atroc-ities and human-rights abuses.

These questions resonate across Africa.Last year military spending there grew by8.3%, according to the Stockholm Interna-tional Peace Research Institute (SIPRI), fast-er than in other parts of the world (see

Defence spending

Arms and theAfrican

GOMBE and KAMPALA

The continent’s armies are going on aspending spree

VENDORS snake their way betweencars in the Lagos traffic, hawking the lat-

est Nollywood DVDs to tired drivers. Nige-ria’s film industry churns out up to 50 titlesa week. Most go straight to DVD to be soldon the streets for the equivalent ofa coupleof dollars. But the market can be slow.Taiwo, a hawker in the commercial capital,says that on a good day he might sell fivefilms. “When it’s quiet, maybe two.”

Nollywood isa bigbusiness—contribut-ing1.2% to Nigeria’s gross domestic product

and employing more than a million peo-ple—but the distribution of its films poses abarrier to the industry’s growth. Sales ofDVDs account for more than 90% of rev-enue but film-makers complain that poorregulation of street markets leaves themopen to piracy. That, combined with oftenlow sales volumes, means that little cashreaches their pockets.

The saving grace is that most of Nolly-wood’s output is shot on a minuscule bud-get. Nollywood productions, including se-ries such as “BlackBerry Babes” (pictured)or “Lekki Wives”, are often filmed in justten days and cost some $40,000, yieldingnotoriously low-end content. “Makingmoney is tough, especially for film-makerswho are increasing the budget, payingmore attention to the quality, and makingmovies that can travel,” says Obi Emelo-nye, a director. “Distribution is hands-down the biggest problem...Solve that, andNollywood will explode.”

Across the world, the film industry hasbeen threatened by online distribution,which leads to plummetingDVD sales, fall-ing cinema attendance and internet piracy.But Nollywood is hopeful that the internetcould be the answer, not the problem.

Streaming services have been operat-ing in Nigeria for several years, but are onlynow beginning to gather momentum. Thebiggest of those is iROKOtv, which hasmade some 5,000 titles available to onlineaudiences. Others such as Pana TV, whichsecured the rights to stream “Half of a Yel-low Sun”, a film based on a Nigerian novel,and iBAKATV are expanding fast.

Jason Njoku, the British-Nigerian foun-der of iROKO, said that when he first start-ed buying streaming rights from Nigerianfilm-makers four years ago, the industryhad almost no concept of online distribu-tion. “It was almost like I’d come from the

future,” he says. Today online portals are acrucial source of cash. IROKO, for instance,pays between $8,000 and $25,000 per filmfor a set period of time. Film directors likeMr Emelonye often sell to several onlineplatforms. Going online has “absolutely”made business more profitable, he said.

It is also giving film-makers the chanceto export their art. iROKO has more view-ers in London today than in Nigeria. Carib-bean and Latin American audiences alsolap up Nollywood films. Witnessing theappetite for such content among diasporacommunities, Africa Magic, a pay-TV chan-nel airing African movies and soaps, hasalso launched a streaming service for Afri-cans living abroad.

So far, video-on-demand services havestruggled to create much of a market athome, where power is intermittentand thevast majority of the population does nothave access to a computer. Streamingto the100m smartphones in sub-Saharan Africais a mouth-watering prospect.

Most DVD vendors do not yet feel athreat from streaming services. But eventhe hawker Taiwo admits to watching Nol-lywood online. As internet access rises, di-rectors are hoping that new distributionavenueswill unleash the potential of Nige-ria’s film industry. It is a gamble, Mr Emelo-nye said. “But we have to take a risk.”7

Nigeria’s film industry

Selling BlackBerryBabes

LAGOS

Internet streaming, a threat to manyfilm-makers, maysave Nollywood

Full stream ahead

44 Middle East and Africa The Economist November 22nd 2014

2 chart). Two out of three African countrieshave substantially increased militaryspending over the past decade; the conti-nent as a whole raised military expendi-ture by 65%, after it had stagnated for theprevious15 years.

Angola’s defence budget increased bymore than one-third in 2013, to $6 billion,overtaking South Africa as the biggestspender in sub-Saharan Africa. Othercountries with rocketing defence budgetsinclude Burkina Faso, Ghana, Namibia,Tanzania, Zambia and Zimbabwe. Thecontinent’s biggest spender by far is Alge-ria, at $10 billion.

“Some countries are buying reallyamazing stuff,” says David Shinn, a formerAmerican diplomat, now a professor atGeorge Washington University. Ethiopialast year took delivery of the first of about200 Ukrainian T-72 tanks. NeighbouringSouth Sudan has bought about half asmany. Coastal states such as Cameroon,Mozambique, Senegal and Tanzania aresprucing up their navies. Angola has evenlooked at buying a used aircraft-carrierfrom Spain or Italy.

Chad and Uganda are buying MiG andSukhoi fighter jets. Cameroon and Ghanaare importing transport planes to boosttheirability to move troopsaround and de-ploy them abroad, which they have beenill-equipped to do. Forpeacekeepingdutiesthey generally ask friendly Western gov-ernments for help in airlifting troops, or

MAURITANIAM A L I

GABON

NIGERIA

SENEGAL

GUINEA

SIERRA LEONE

LIBERIAIVORYCOAST

TOGO BENIN

BURUNDIRWANDA

CONGO-BRAZZAVILLE

N I G E R

C.A.R.

C H A D

E G Y P TL I B Y AA L G E R I A

TUNISIA

KENYA

TANZANIA

BOTSWANA

SOUTHAFRICA

ANGOLA

ZIMBABWE

LESOTHO

SWAZILAND

NAMIBIA

E T H I O P I A

ERITREADJIBOUTI

C O N G O

MADAGASCAR

MALAWI

CAMEROON

MO

ZA

M

B I Q U E

M

O RO C C O

GH

AN

A

500 k

m

750 km

S U D A N

ZAMBIA

SOUTHSUDAN

SOMALIA

UGANDA

BURKINAFASO

SEYCHELLES

MAURITIUS

COMOROS

SÃO TOMÉ & PRÍNCIPE

EQUATORIAL GUINEA

GUINEA-BISSAU

THE GAMBIA

CAPEVERDE

*In real terms †Or latest available

Chibok

Mombasa

Nairobi

0-50

50-100

100-200

> 200

< 0

no data

Military spending*% change, 2004-13†

Source: SIPRI

Military spending*2004=100

90

100

110

120

130

140

150

160

170

2004 05 06 07 08 09 10 11 12 13

Africa

Asia and Oceania

Europe

Middle East

World

North America

South America

SA

HE

L

charter civilian planes.Despite such handicaps, many are par-

ticipating in a growing number of AfricanUnion and UN peacekeeping missions.Once rarely seen in blue helmets, sub-Sa-haran soldiers are increasingly replacingtroops from Europe and Asia. Ethiopiansand Rwandans have acquired a reputationas reliable peacekeepers, all the while ben-efiting from training as well as from reim-bursements for purchases of weapons. Anew “business model” for African defenceministries is taking shape.

Many African armies are becomingmore professional, too. Their troops aremore often paid on time, get decent foodand go on regular leave, all ofwhich boostsmorale and discipline. “Even small coun-tries like Benin and Djibouti now field re-spectable forces,” says Alex Vines of Chat-ham House, a think-tank in London.

A big issue is whether troops haveenough training to handle sophisticatednew gear. Chad makes good use of its Suk-hoi SU-25 jets—with the help of mercenar-ies. On the other hand, Congo-Brazzavilleonly manages to get its Mirage fighter jetsinto the air for national-day celebrations.South Africa bought 26 Gripen combat air-craft from Sweden buthasmothballed halfof them because of budget cuts. Ugandaspent hundreds of millions of dollars onSukhoi SU-30 combat aircraft but little onthe precision weapons to go with them.

The reasons for African governments to

boost arms spending vary. High commod-ity prices over the past decade (they arenow falling) have filled the coffers of many.Some leaders have been tempted to buyexpensive arms to gain prestige. Other aresuspected of inflating deals to siphon offmoney for themselves.

Tanks for everythingBut some spending is prompted by genu-ine security threats. The Sahel and parts ofeast Africa face a range of extreme jiha-dists. Coastal states have seen piracy soar,most recently in the west. Offshore discov-eries ofoil and gas have increased the needfor maritime security. More traditionalthreats, internal as well as external, persistin countries such as South Sudan, wherethe government is fighting rebels whilealso facing a hostile northern neighbour.

Industrial ambition also plays a part. Anumberofcountrieshope to fosterdefencemanufacturing at home. A huge South Af-rican purchase of arms from, among oth-ers, Germany and Britain, agreed to morethan a decade ago, included promises of“offsets” whereby local firms would helpassemble jets and ships. Angola plans tobuild its own warships. Nigeria and Sudanmake ammunition. Four European armsmanufacturers set up African subsidiariesthis year: Antonov is going into Sudan; Eu-rocopter is in Kenya’s capital, Nairobi; Fin-cantieri, an Italian shipbuilder, is in thecountry’s main port, Mombasa; and Saabis setting up a plant for its military aircraftin Botswana.

These military improvements carryrisks. Ambitious officers may misinterpretnew might for political right—and may betempted to seize power, as many havedone before. Sophisticated arms may alsofall into the wrong hands; witness the ar-ray of Libyan weapons that have fuelledconflicts across Africa, from Mali to the

Central African Republic, since the fallofMuammar Qaddafi.

These structural changes to Afri-can armies may gradually alter thetype of war that could be fought onthe continent. Since the anti-colo-

nial guerrilla wars of the past cen-tury, most African conflicts have been

internal. Few countries previously hadthe ability, let alone the inclination, tofight their neighbours. In the late1990s, several countries, includingAngola and Zimbabwe, sent forcesto take part in Congo’s civil war—tolittle avail. Ethiopia and Eritreafought each other in 1998-2000.Tanzania sent its army into Ugan-da, along with guerrillas returningfrom exile, to overthrow Idi Aminin 1978. In general, however, fewdisputes between African countries

have been liable to spark wars. Butthe build-up of beefier armies isbound to carry a risk. 7


For daily analysis and debate on Europe, visit

Economist.com/europe

1

“THE world cannot afford a Europeanlost decade,” says Jacob Lew, Ameri-

ca’s treasury secretary. The latest Europeanfigures were uninspiring. In the third quar-ter the euro zone grewbyjust0.6% atan an-nualised rate. This sluggishness was notprimarily due to the countries hit hardestby the crisis—Greece’s economy grew fast-er than any other euro-zone country (seepage 68), and Spain and Ireland are recov-ering. Rather, it is the core countries thatareexhausted—and few more so than the big-gest, Germany. It grew by just 0.1% in thethird quarter, after contracting by the sameamount in the previous three months.

Angela Merkel, the German chancellor,has been subject to a rising chorus of for-eign criticism. Germany should do more tostimulate domestic consumption and in-vestment, goes the refrain. Thiswould helpcountries like France and Italy as they un-dergo tough structural reforms. Higher im-ports would also reduce Germany’s cur-rent-account surplus, the largest in theworld and a cause of imbalances withinEurope and beyond. Stimulating demandwould push up prices, which could savethe euro zone from tipping into deflation.Prices in the zone rose at an annualised0.4% in October, far below the 2% ceilingset by the European Central Bank (ECB).

Such demands are echoed by some athome. Marcel Fratzscher, an adviser to Sig-mar Gabriel, the economics minister, saysthat Germany should boost investment for

the government, suggests that “the blackzero should not be a fetish”. Germany’smunicipal governments, not the federalone, should be the ones to raise public in-vestment. But the bigger problem, hethinks, is that private investment is too low.In a free-market economy such as Ger-many’s, the government cannot commandfirms to invest more at home than abroad.If businesses have chosen another course,he says, it must be because, for whateverreasons, they find Germany an unreward-ing place for investment.

As it may indeed be, Mr Schmidt’scouncil of five sages scolded Mrs Merkel’sgovernment this month. Businesses worryabout its largesse in public pensions,which defies Germany’s mix of an ageingpopulation and shrinking workforce. Hercoalition with the centre-left Social Demo-crats is raising pensions for mothers andletting people retire as young as 63 if theyhave worked for long enough.

Entrepreneurs also fret about the newminimum wage, due to take effect in Janu-ary at the relatively high level of €8.50 anhour. Contrary to hopes that this mightboost domestic demand, says Mr Schmidt,some workers will simply lose their jobs.Moreover, those whose pay goes up willthen claim less in welfare top-ups, so theywill not have much extra income to spend.Afurthermisstep, MrSchmidt believes, is amuddled energy policy—subsidising solarand wind powerand phasingoutnuclear—that is merely raising companies’ energycosts. And yet another is a law to cap risingrents, which is likely just to discourage thebuilding ofnew properties.

The differences between foreign econo-mists who want more stimulus and Ger-man ones who think the problems lie else-where partly reflect divergingphilosophies. Anglo-Saxon economists as-sess the problems of Europe and Germany

its own good. Much of Germany’s recentsuccess, he argues, has been an “illusion”bought by underinvestment in everythingfrom roads to education to factories. Wolf-gang Schäuble, the finance minister, has re-sponded by pledging an extra €10 billion($12.5 billion) in investment by the federalgovernment over three years from 2016, ontop of €5 billion already earmarked forroads and bridges. Yet at barely 0.1% ofGDP, that is more symbolic than substan-tial. And it will not raise the budget deficitbecause Mr Schäuble’s top priority re-mains the “black zero”: balancing the bud-get from 2015.

Christoph Schmidt, chairman of thecouncil of economic experts that advises

Germany’s economy

The sputtering engine

BERLIN

Is Germany’s economygetting too weakto pull Europe out of its crisis?

EuropeAlso in this section

46 Romania’s presidential election

46 Protests in Hungary

47 France’s centre-right

48 Spanish politics

48 Portugal’s visa scandal

49 Charlemagne: Europe’s foreign policy

Down, up, down again

Sources: Eurostat; Haver Analytics

GDP, % change on a year earlier

2011 12 13 144

2

0

2

4

6

+

–

Germany

France

Italy

Spain

Britain

46 Europe The Economist November 22nd 2014

1

2 in terms of insufficient demand. Most Ger-man economists do not. “We don’t have aKeynesian crisis in Europe, so Keynesianmeasures won’t work,” says Hans-WernerSinn, boss of the CES-Ifo Institute in Mu-nich. German economists worry moreabout the conditions, or “order” of theeconomy, in the tradition ofOrdoliberalismthat disdains state intervention and datesback to an early 20th-century economist,Walter Eucken.

In practice, says Mr Schmidt, the dicho-tomy is exaggerated. “We don’t deny Key-nesianism” when appropriate, he says—asit was in 2009, when Germany respondedto a demand shock with a hefty stimulus.Demand-side sceptics respond that “Key-nesianism is not the answer” when what ismost urgently needed is structural reformin crisis-hit countries.

Yet low inflation in Germany is both asign of weakness and a source of pain forperipheral countries. The ultimate aim ofreforms, says Mr Sinn, is to lower prices inthe south of the euro zone relative to thosein the north, so as to reflect lower produc-tivity. He reckons that would require Ger-man inflation of 5% for ten years, or a simi-lar level of deflation in the south, or somecombination of the two.

Progress towards that goal is slow. Theeconomics think-tank of the Hans-Böcklerfoundation, which is tied to the trade un-ions, says German wages are growing onlyslightly faster than the euro-zone average.Unit labour costs in Germany rose by 2.3%in 2013 and 1.7% in the firsthalfof2014, com-pared with the euro zone’s 1.2% and 0.7%,respectively. At that snail-like pace, Europemay be lucky only to lose a decade. 7

AS VICTORY speeches go, it was the leastbombastic that Romanians had heard

in a long time. “The campaign is over, wemade our choice. Now let’s get to work. Iam very serious and determined,” saidKlaus Iohannis, the liberal mayor of Sibiu,in Transylvania. He is the first Romanianfrom the country’s ethnic German Protes-tant minority to be elected president. Thatis quite a shock for such a conservative,majority-Orthodox country.

That Mr Iohannis won on November16th was thanks largely to a turnout of 62%,the highest in 14 years. This reflected a prot-est vote against Victor Ponta, the Socialistprime minister who was the front-runnerin all the opinion polls and ran a fiercely

nationalist campaign. Another factor wasthe sight of thousands of Romaniansabroad (mainly Iohannis voters) queuingfor hours at overcrowded embassies andunable to cast their votes, which encour-aged more voters at home. Despite protes-ters against Mr Ponta claiming electoralfraud, Mr Iohannis emerged as a big win-ner, with 54.5% of the vote.

“Mr Iohannis’s German ethnicityproved an asset not a burden. Germanyhas not ceased to be admired as a moder-nising force in this part of Europe,” saysTom Gallagher, an Edinburgh-based politi-cal analyst. He adds that Mr Iohannis’s re-cord in Sibiu eclipses anything that MrPonta managed as prime minister. Mr Io-hannis promises to “change the way wemake politics,” with a focus on the rule oflaw and safeguarding the independence ofthe judiciary, perceived as vulnerable hadMr Ponta won. He wants to stick to astrongly pro-Western foreign policy, afterattempts by Mr Ponta at opening up to Chi-na, and to a lesser extent, Russia.

With a general election due only in late2016, the new president must now workwith a Ponta-led government. The firstsigns are encouraging: Mr Ponta was gra-cious in defeat. One of the president’spromises has already been fulfilled withthe withdrawal of a draft bill that wouldhave freed convicted criminals, includinghigh-level politicians jailed for corruption.The Romanian parliament has also liftedthe immunity of several MPs under inves-tigation for corruption.

Mr Ponta has vowed to work with MrIohannis. He sees no reason to resign. Hehas told party rebels to “have the wisdomto shut up” and insists that, as long as hehas a big parliamentary majority, he willcarry on as prime minister. But he has tak-en a one-week holiday, citing his sadness

after losing the presidential election. “The main goal of these elections has

been fulfilled: not to give the entire powerto Mr Ponta…what comes next is a cohabi-tation which is likely to run more smooth-ly than with the outgoing president, TraianBasescu,” says Cristian Ghinea from theRomanian Centre for European Policies, aBucharest think-tank. He says the mostpressing challenge for the government isthe budget for2015, since the figures for thisyear were massaged to look good for theelection. “They managed to hide the bud-get deficit this time, but they won’t be ableto do so next year,” says Mr Ghinea.

The economy was a big election issue.Mr Iohannis accused Mr Ponta of drivingRomania into recession. Mr Ponta ripostedwith figures from the statistical office(ahead of publication) showing that GDP

rose by 1.9% in the third quarter over theprevious one. The IMF, whose precaution-ary loan programme with Romania is dueto expire next year, is urging the govern-ment to keep a tight lid on spending. In thecampaign Mr Ponta promised an increasein pensions next year and accused Mr Io-hannisofwanting to slash them. Ironically,it may now fall to him as prime minister topush through more cuts in 2015. 7

Romania’s presidential election

A commonsensevictory

BUCHAREST

A surprise winnermaymarkawelcome shift to pragmaticpolicies

Iohannis, a Teutonic winner

HUNGARIANS are taking to the streets.More than 10,000 gathered outside

the parliament in Budapest on November17th to protest against alleged corruptionand the centralisation of power. Similarprotests took place in other cities, includ-ing Miskolc in the east and Szeged and Pecsin the south. Several hundred Hungarianseven gathered in London’s TrafalgarSquare. The habit is catching: this weekalso saw big protests in neighbouring Slo-vakia and in the Czech Republic.

Hungary’s protesters were encouragedpartly by America’s rising criticism of theirgovernment. Six Hungarian officials havebeen banned from entering the UnitedStates on suspicion of corruption, a rare re-buff to a NATO ally. American officials re-fuse to name them, on privacy grounds.However Ildiko Vida, head of the tax au-thority, told Magyar Nemzet, a pro-govern-ment newspaper, that she was one. Shestrongly denies any wrongdoing.

Hungarian officials have asked formore information from the Americans.They reject claims that the country is slid-ing into authoritarianism. The protests are

Protests in Hungary

Opposing Orban

BUDAPEST

More anti-government protests, butlittle change from the prime minister

The Economist November 22nd 2014 Europe 47

2 proof that Hungary remains a democracy,where people are free to express their opin-ion as long as they abide by the law, saysAntal Rogan, parliamentary leader of theruling right-wing Fidesz party.

This week’s protests followed a biggerone on October 28th, when as many as100,000 people filled central Budapest todemand the cancellation ofan internet taxthat they saw as an attack on free speech.The crowds were mostly young, educatedand middle class, the sort ofpeople that Fi-deszneeds to attract. And theyforced a rareU-turn by the government, when ViktorOrban, Hungary’s prime minister, said theinternet tax would be dropped in its cur-rent form. Instead he would launch a “na-tional consultation” to consider ways inwhich to tax online profits.

The latest protesters have a harder taskbecause their demands, including the res-ignation of the government, are unrealis-tic. This yearFidesz has won national, localand European elections. As the Organisa-tion for Security and Co-operation in Eu-rope noted, the victories were due in partto the government’s tinkering with elec-tion rules in its favour. Yet the fractured lib-eral and left-wing opposition means thatthe alternative lacks appeal.

Demographic change is also workingagainst the opposition. The Hungarian em-bassy in London says that around 100,000Hungarian citizens live in Britain, but thetrue figure could be higher. Many expatri-ate Magyars are young, multilingual, edu-cated and entrepreneurial. Agood numberhave left Hungary because they see no fu-ture under Fidesz rule.

Mr Orban has long made clear his dis-dain for liberal norms, never more so thanin his speech in Baile Tusnad, Romania, onJuly 26th when he said that Hungarywould remain a democracy, but becomean “illiberal state”. The European Unionhas proved unwillingorunable to rein himin. Instead, as the entry-ban row shows,the pressure is mostly coming from Ameri-

ca. PresidentBarackObama recentlybrack-eted Hungary with Egypt and Azerbaijanas countries in which civil society felt in-timidated. Concerns are growing inside Fi-desz about the wisdom of taking on theworld’s superpower.

Younger members of Fidesz are criticalof the government’s policies, says Akos Ba-logh, of Mandiner.hu, an influential con-servative blog. Hungary is losing friendsand allies, he adds. It will struggle on theEuropean and world stage if it acts with thearrogance that Fidesz shows at home. 7

Budapest boogie-woogie

TEN years ago this month a dynamicyoung French politician ran for the

leadership of the Gaullist UMP party, andswept into the job after winning 85% of thevote. On November 29th the party willelect a new leader and the same politician,Nicolas Sarkozy, is (one French presidencylater) again campaigning for the post. Theodds are heavily in his favour. But the con-test is not turning out to be quite the land-slide he had expected.

When Mr Sarkozy first announced hispolitical comeback, in September, the pollsmade him the hands-down favouriteamong party supporters. Neither of histwo rivals, Bruno Le Maire and Hervé Ma-riton, both one-time ministers, had cap-tured the public imagination. The partyseemed in need of a strong unifying figureafter the in-fighting that followed the resig-nation of its previous head, Jean-FrançoisCopé, amid party-financing irregularities.And Mr Sarkozy still has star appeal.

More than a dozen town-hall meetingsaround the country later, however, Mr Sar-kozy’s campaign is not running as smooth-ly as he might have hoped. In October hispopularity among UMP supportersdropped by 13 points from the previousmonth, to 71%, according to BVA, a pollster.He was overtaken by Alain Juppé, a formerprime minister, who is not running for theparty leadership but is a rival candidate forthe 2017 presidential nomination. AmongUMP deputies, Mr Sarkozy’s return has notbeen universally welcomed. “Even if he iselected with 70% of the vote,” says one, “itwill be a big disappointment for him.”

No single momentexplains this. Mr Sar-kozy was not at his best during a televisioninterview last month. This week heprompted consternation, even amongsome supporters, by suggesting that hemight repeal the law legalising gay mar-riage. Yet he has put in energetic perfor-mances in school gyms and exhibitionhalls around France, and at times been anincisive critic of President François Hol-lande’s unpopular Socialist government.

Mr Sarkozy’s team is still talking up hisexpected win as a triumph. If he is electedwith 60-70% of the vote, this would still be“an enormous victory”, Guillaume Peltier,a UMP deputy, insisted this month. The dif-ficulty for Mr Sarkozy is that a less convinc-ingwin in 2014 than the one he achieved in2004 will reflect the tougher battle that hefaces on the way to the presidential elec-tion. In the fight for the UMP nomination,he is up against two formidable veterans:Mr Juppé, formerly his foreign minister,and François Fillon, who was his primeminister for five years.

Mr Sarkozy has been well served, how-ever, by a recent scandal involving Mr Fil-lon and Jean-Pierre Jouyet, an old friend ofMr Hollande and the president’s chief ofstaff, who despite his ties to the left servedas Europe minister when Mr Fillon was inoffice. Mr Fillon this week sued two jour-nalists at Le Monde, as well as Mr Jouyet,for libel. The journalists claimed that MrJouyet told them that, during a lunch inJune, Mr Fillon had asked him to speed upjudicial investigations involving Mr Sar-kozy. Having initially denied that the sub-ject was even raised, Mr Jouyet admittedthat it was—but stressed that the judiciarywas independent. The journalists say theytaped their conversation with Mr Jouyet.Mr Fillon denies making any such request.

The affair has grabbed headlines inFrance, and distracted attention from thesubstance of Mr Sarkozy’s judicial tangles,which could yet be the main obstacle be-tween him and the presidency. So far, saythe polls, Mr Fillon has been most dam-aged. Mr Juppé has gained ground. But heis not the only beneficiary. A scandal thatinvolves France’s inward-looking web ofelitist cross-party ties isalso a gift to MarineLe Pen’s populist National Front. 7

France’s centre-right

Sarko Redux

PARIS

A formerpresident finds the comebacktrail tougher than he expected

48 Europe The Economist November 22nd 2014

Portugal’s visa scandal

Buying their way in

AMONG the rising number of impover-ished European governments that

offer residence permits to rich non-Euro-peans, Portugal has been perhaps themost successful. In return for investmentstotalling over €1billion ($1.25 billion), thePortuguese authorities have issued 1,775“golden visas” in the past two years,four-fifths of them to Chinese investors.

But success turned to scandal onNovember13th, when the police de-tained 11people, including the head ofPortugal’s border agency. The police areunderstood to suspect that some proper-ties supposedly bought to obtain a gold-en visa may have gone for far less thanthe €500,000 minimum the schemerequires; some of the difference mayhave been used to finance dodgy pay-offs. On November16th the interiorminister, Miguel Macedo, resigned.

The investigation in Portugal couldhave wider ramifications across Europe,where countries from Greece and Spainto Latvia and Hungary run similarschemes. As in these countries, Portugalwas trying to make up for a sharp drop ininvestment during its economic crisis.Under the scheme, a minimum amountspent buying a property entitles non-European families to live in the countryfor five years, after which they can apply

for permanent residence. Paulo Portas,deputy prime minister and main ad-vocate of the Portuguese scheme, creditsit with reviving a moribund propertymarket. Mr Portas is being questioned bya parliamentary committee.

The entire concept of trading resi-dence permits for cash, albeit in the formofproperty investment, has long beenunder attack. Ana Gomes, a PortugueseSocialist member of the European Parlia-ment, is calling for an inquiry into goldenvisas, which she says are “highly condu-cive to corruption and criminality”. Withpoor migrants risking their lives daily toenter Europe, she asks if it is morally rightto give the well-offunequal treatment.Some left-wingers are calling for Portu-gal’s scheme to be scrapped.

Neither Mr Macedo nor any otherminister is suspected ofdirect involve-ment in the deals being looked at by thepolice, according to the attorney-gen-eral’s office. But the case is still an embar-rassment for the prime minister, PedroPassos Coelho, whose government hadtrumpeted golden visas as a resoundingsuccess. The scheme has cost him a min-ister less than a year before an election.Only a few months ago Portugal trium-phantly exited its bail-out programme.Now scandal could tarnish his party.

LISBON

Schemes that, in effect, sell visas to rich foreigners come underfire

THEY chanted and sang and promisedhappiness. But after Spain’s radical Po-

demos (“We Can”) party chose its leaderson November15th it remained remarkablythin on policy. “There is still much to do,”admitted the party leader, Pablo Iglesias,after 89% of the party’s 107,000 internetvoters had ticked his name.

The rise ofPodemos is a triumph for MrIglesias and the technologically astute uni-versity lecturers and activists who de-signed, launched and kept control of theparty in its first ten months. It also marksthe resurgence ofthe indignados, protesterswho peacefully took over city squares inMay 2011, two-and-a-half years after Spainfirst plunged into the economic dumps.

It has taken years ofchronic unemploy-ment, a banking bail-out, a second dip intorecession (now over) and a flood ofcorrup-tion cases to see the amorphous indigna-dos take shape in party politics. In opinionpolls support for Podemos has surged ashigh as 28%. But turning this into real votesmay yet prove difficult.

Podemos stood for its first elections, tothe European Parliament, in May and took8% of the vote. Just six months later it isneck-and-neck in the polls with both thePopular Party (PP) led by Mariano Rajoy,Spain’s less-than popular prime minister,and the stuttering opposition Socialists.Along the way it has sunk Spain’s commu-nist-led United Left (IU) coalition.

Mr Iglesias promises a new politics, be-

yond the left-right paradigm. Yet many aresceptical. Some senior party memberscome from groups with names like Youthwith No Future or the Anti-Capitalist Left.Others have worked with Venezuela’s Bo-livarian left. On November15th Mr Iglesiasrailed against Spain’s “regime” and “oligar-chies”. He was greeted with cries of “Yes,we can!” and “Let’s get them!” The guestspeaker was Alexis Tsipras, leader ofGreece’s radical Syriza party.

Mr Iglesias’s main demand is for a re-write of Spain’s constitution to scrap the“regime of 1978” and get rid of a casta ofsupposedly self-serving, corrupt politi-cians. Podemos would solve the Catalanproblem by allowing an independencevote. On the economy, Mr Iglesias wants arestructuring of Spain’s public debt, gov-ernment intervention and tax rises (espe-cially for the rich) to pay for better publicservices. He also wants Spaniards to workfewer hours, as a way of reducing unem-ployment that is still running at 24%. Econ-omists whom he cites include such well-known names as Joseph Stiglitz, Paul Krug-man and Kenneth Rogoff.

IU and the Socialistsare watching Pode-

mos closely. The head of IU, Cayo Lara, an-nounced on November16th that he wouldnot lead the party into elections next No-vember. Mr Lara is likely to be replaced bya 29-year-old economist, Alberto Garzón,who is another star from the ranks of theindignados. Mr Garzón is even youngerthan the most visible Podemos leaders,who are mostly in their 30s. Like the pony-tailed Mr Iglesias, he is popular on televi-sion talkshows. The two could yetwork to-gether. The Socialists have their own new-ish leader, Pedro Sánchez. They may haveto decide whether to ally with Podemos or,if it takes enough of their votes, to join agrand coalition with the PP.

The PP sees Podemos as a radical partythat weakens its main Socialist rival. Butthe government also frets that it may scareoff investors. Mr Rajoy is a dogged devoteeof the constitution and a system that hasseen the PP and the Socialists take it inturns to rule Spain for 32 years. He accusesPodemos of seeking to destroy progressmade since Spain shed dictatorship. “Ifsomeone wants to undo all that and chuckit overboard, I suppose it is through igno-rance, but it makes no sense,” he says. 7

Spanish politics

A three-corneredhat

MADRID

Podemos’s leaderseeks to sustain itsposition as Spain’s third party

Hey, Pablo Iglesias

The Economist November 22nd 2014 Europe 49

ALL of Europe rejoiced when the European Space Agency de-posited Philae, a probe the size ofa kitchen appliance, on the

surface of a comet 300m miles (480m km) from the Earth. It waslike throwing a dart blindfolded across an ocean and hitting thebullseye. Philae fell silent soon afterwards, but not before dis-patching reams ofdata and a shot ofoptimism to a continent thathashad little to cheer. Closer to home the European Union finds itharder to exert influence—even over its neighbourhood.

Russia’s intervention in Ukraine is providing an early test forthe EU’s new high representative for foreign policy, FedericaMogherini, who previously served (albeit briefly) as Italy’s for-eign minister. NATO is warning ofa renewed build-up ofRussiantroops and kit in eastern Ukraine. The recent sham elections intwo pro-Russian separatist regions in the Donbas were “respect-ed” if not recognised by Moscow. The Minsk ceasefire accordssigned in September by Ukraine, Russia and the separatists arebeing honoured only in the breach. Petro Poroshenko, Ukraine’spresident, is preparing for “total war”.

How did Europe allow such devastation on its doorstep? EU

officials cite the claim that, whereas in 1989 Ukraine was atroughly the same level as Poland, today it is three times as poor.The implication is that with the right policies Ukraine’s turn fromits European destiny may be corrected. It was this thought that in-spired the brave protesters, many flying EU flags, who filled theMaidan in Kiev a year ago. They sought not just the downfall ofMr Poroshenko’s predecessor, Viktor Yanukovych, who hadbowed to Russian pressure to reject an EU trade deal, but an endto the corruption and thievery that had defined their countrysince independence. The real battle-cry of the Maidan was for amodern, European-style state. Instead, Ukraine has become abloody war zone and an economic basket-case.

Ukraine was always going to be difficult. By late 2004, whenthe Orange revolution brought pro-Europeans to power in Kiev,the EU had begun its expansion to the east. Then “enlargement fa-tigue” left poorer ex-Soviet countries like Ukraine in the cold. TheEuropean neighbourhood policy, designed to bring about politi-cal and economic change in the EU’s neighbours without the of-ferofmembership, wasa dismal failure. It substituted technocrat-ic gradualism for hard-headed politics and so failed to respond to

the needs of individual countries and regions.But the trickiestproblem isRussia. VladimirPutin decided that

a Europe-leaning Ukraine was a threat to Russian interests. Hismeddling, notably the annexation of Crimea and the invasion ofthe east, has been unpredictable and opportunistic, and embla-zoned with nationalist ideology, whetherrevanchist talk ofNovo-rossiya or attacks on America. His “Eurasian Economic Union”has ambitions to rival the EU, even if its membership is limited sofar to Armenia, Belarus and Kazakhstan.

The scales have certainly fallen from European eyes. On No-vember 16th Mr Putin left a G20 summit early after being ha-rangued by his fellow leaders. Soon afterwards Angela Merkel,Germany’s chancellor, issued an unusually forthright assess-ment of the Russian threat, not only to Ukraine but also to Geor-gia, Moldova and the Balkans. Mr Putin’s willingness to escalatein Ukraine has outstripped Europe’s ability to respond, notwith-standing the sanctions the EU has put in place. At their meetingthis week EU foreign ministers agreed merely to condemn theDonbas votes and to extend sanctions to a few more separatists.

This was also the first foreign ministers’ meeting to be chairedby the redoubtable Ms Mogherini. Many analysts, and evensome EU governments, were against choosing her, fearing thatshe would exemplify her country’s long-standing pro-Kremlintilt. Some added that, like herpredecessor, CathyAshton, she wastoo inexperienced for the job—though she hasa longpolitical andinternational background on Italy’s centre-left.

As well as convincing naysayers, she faces the hard task ofmaintaining unity among EU member countries. Many chafeagainst the damage that they claim sanctions on Russia are caus-ing to their economies. With Europe’s larger countries, now in-cluding Germany, increasingly forging their own foreign policy itis not clear what difference Brussels can make.

The tools for the jobYet the EU is not toothless. Ms Mogherini has many “instru-ments”, in the jargon, at her disposal, including a well-staffed,brainy diplomatic service and the European Commission’s fi-nancial clout. She is a commission vice-president, who despiteher peripatetic job promises to attend every weekly meeting ofthe college. She has some shrewd ideas about how to make bestuse of the EU’s unwieldy bureaucracy. Senior officials hint thatthey are ready to provide more economic assistance if the Ukrai-nians get serious about judicial reform, business liberalisationand so on. Yet it is hard to think of a country in which Europe’smoney, or the power of its example, has proven transformativewithout there being an offer of membership, however remote. Itis not clear if it can workany better in Ukraine.

Ms Mogherini’s best hope may be to buy time. Mr Putin’s end-game is not clear, perhaps even to himself. Some fear that hewants a land bridge to Crimea. Others suggest that, despite ap-pearances, he may be starting to engage more with the West. Per-haps most likely is a continuation of low-level fighting, as the sep-aratists try to secure or expand their territory. The EU’s sanctionswill remain in place until next spring, and may well be extended.Andrew Wilson, a Ukraine expert at the European Council onForeign Relations, a think-tank, suggests that Russia may then bemore vulnerable to pressure, particularly ifoil prices stay low. Butwill Ukraine’s economy last that long? 7

Cold comfort

Russia will be the biggest test forEurope’s newforeign-policy supremo

Charlemagne

Economist.com/blogs/charlemagne

http://Economist.com/blogs/charlemagne


For daily analysis and debate on Britain, visit

Economist.com/britain

1

ASENIOR Conservative politician oncedescribed England’s beloved National

Health Service (NHS) as “the closest thingthe English have to a religion” (Scotland,Wales and Northern Ireland run their ownservices). Yet, as with many religions, pas-sionate devotion can often stand in theway of serious analysis. Public discussionis too often reduced to an absurd competi-tion about who can express support for theinstitutions of the NHS in the most unqual-ified terms, says Stephen Dorrell, a formerConservative health secretary. Anyonewho tries to introduce nuance “quicklyfinds out what it must have felt like to be re-garded as a heretic in a more religious age”.

With a general election looming, allparties want to look righteous, and are notthinking critically. The Labour Party, mosttrusted by voters to run the NHS, wants tomake it the primary issue. The Tories,though supportive of the service, don’twant to talk about it. Whichever party suc-ceeds stands a better chance of winning inMay. But the result is an unholy mess.

Tight budgets and increasing demandfrom Britain’s greying population have putthe NHS under huge strain. But unlike oth-er departments, forced to cut and reform, itlacks a clear consensus and firm directionon howit should adjust to straitened times.National targets for waiting times andlength ofstay in hospital do notnecessarilylead to better care. Emergency wards are

in patients. But with 3m people still wait-ing for care, the highest total in six years,more is needed. Even if spending keeps upwith inflation, the NHS claims its budgetmay fall short by £30 billion a year by 2021.

The Conservatives’ main move hasbeen to backaway from theirown reforms,passed in 2012, which increased competi-tion, gave health officials more autonomyand handed control over the purchase ofcare to groups of local doctors. Never un-derstood by voters, these are now seen as apolitical disaster. But some aspects—likeexperiments in integrating services andmoving care out ofhospitals—deserve sup-port. Labour, meanwhile, wants to mergethe NHS with “social care”—looking afterthe elderly, disabled and mentally ill—which is run by local authoritiesand isalsocash-strapped. That is a laudable goal, butit would probably involve another reorga-nisation and huge cost. So would a plan byAndy Burnham, the shadow health secre-tary, to take the service back in time by fa-vouring NHS providers over private com-petitors for contracts. Spending onnon-NHS services ticked up slightly, to 9.5%ofnet NHS expenditure in the last financialyear, according to Reform, a think-tank.

Otherwise, the parties have simplypromised to throw more money at the pro-blem. Labour says it would boost theNHS’s budget, which sits at £110 billion, by£2.5 billion a year if itwins the election. TheConservatives say they would continuewith real-term increases, which have aver-aged £1 billion a year under this govern-ment. The trouble is neither of thesepledges would come near to closing thefunding gap, nor would they maintain thecurrent rate of spending when accountingfor the ageing population (see chart). Thelonger-term trend is yet more worrying.England spends just over6% ofnational in-

clogged and the money is about to run out.Yet the NHS wastes over £2 billion ($3.3 bil-lion) a year on expensive or unnecessarytreatments, like overprescribed drugs andpointlessX-rays, according to the Academyof Medical Royal Colleges. While politi-cians, afraid of being accused of heresy,make timid suggestions, Simon Ste-vens, the NHS’s innovative new boss, hasoffered his own ideas for reform.

NHS spending is up 3.6% in real termssince the Conservative-Liberal Democratcoalition government came to power in2010, according to the King’s Fund, a think-tank. Even so, the service is struggling tohold itself together. Occasional cash injec-tions have helped it cope with an increase

National Health Service

The English reformation

As politicians squabble overEngland’s ailing health service, the bureaucrats haveoffered some promising medicine

BritainAlso in this section

51 A stellar satellite industry

52 Bagehot: Brand Britain

Under the knife

Source: The Nuffield Trust*Adjusted for expected

demand based on age

NHS spending in England per person*, £

1,800

1,850

1,900

1,950

2,000

2010 12 14 16 18 20

Current plans

Lib DemLabour

Pledge:

Conservative

http://Economist.com/britain

The Economist November 22nd 2014 Britain 51

2 come on the NHS. If this continues theshare would rise to 20% and account forhalfofgovernment spending by 2061.

Defenders of the NHS have had suspi-cions about Mr Stevens ever since he start-ed work in April. He arrived from United-Health, a private American health-carefirm. Before that, he worked on TonyBlair’spro-market health reforms. Recognisingthat advocating change to the NHS is inev-itably political, he has stepped carefully.Nevertheless the five-year plan he pub-lished last month looks to change the ser-vice in a big way.

Mr Stevens reckons he can save £22 bil-lion a year by 2021 through curbing hospi-tal admissions and limiting demand forservices. This would involve better public-health efforts, but also a major restructur-ing of existing institutions to break downbarriers between family doctors and hos-pitals, physical and mental health, andhealth and social care. For this he will relyon local efforts, but he has given officials amenu of models from which they couldchoose. These include allowing hospitalsmore freedom to provide primary care andhelping them to support care homes to pre-vent emergency admissions. Others in-volve allowing local doctors to providesome services normally done in hospitaland getting smaller hospitals to team upand share administrative costs.

The plan is politically astute. It does notmention competition or privatisation,which raise hackles. But many of its ambi-tions can be achieved only through greateruse of the private sector, says ThomasCawston of Policy Exchange, a centre-rightthink-tank. Mr Stevens also calls for con-solidating services, pointing to how 32stroke units in London were reduced toeight, with positive results. He does notsuggest closing facilities, though officialsmay have to. Nor does he propose endingfavourable contracts for staff, or considercontroversial userchargesand higher taxesto make up the remaining £8 billion gap.

Mr Stevens has so far avoided any bigfights, but he will face resistance from en-trenched interests. Take the situation inBedfordshire, where the group responsiblefor purchasing services has bundled 20contracts for musculoskeletal care into onethat was won by Circle, a commercialhealth group. Mr Stevens is supportive ofsuch agreements to integrate services. Butthe local NHS hospital has so far refused towork with Circle, lest it lose customers (ie,patients) and upset its balance-sheet, onwhich hospitals are, in part, judged.

For now, though, it is perhaps enoughthatMrStevenshaspleased the politicians.Labour and the Tories continue to sparover the NHS, but both parties have ex-pressed support for his plan. He will needit. Past attempts to reform the system havefailed. The difference this time, says Mr Ste-vens, is that the NHS has little choice.7

IN A clean room at the Airbus Defence &Space (ADS) factory north ofLondon, sci-

entists are working on LISA Pathfinder (pic-tured), a hexagon-shaped satellite due tobe launched next year. The aim of the am-bitious space mission is to try, for the firsttime, to find and measure gravitationalwaves—ripples in space-time predicted byEinstein’s general theory of relativity. Ifthat’s possible, earthlings would have fur-ther evidence that the theory is true, andthey should also, eventually, be able to lo-cate blackholes more accurately.

To do all that, however, LISA first has toget to a “Lagrange point”, a place wherespacecraft can float stably while getting nofarther from the earth. This is essential fordetecting the gravitational waves. The onlyforce that could then ruffle LISA would besolarwind, explains Justin Byrne, a deputydirectorofADS. Solarwind is so light, how-ever, that developing thrusters soft and ac-curate enough to counteract it has been“the trickiest bit of all”. It would take 1,000of the thrusters developed for LISA to lift asingle piece ofpaper; LISA has just four.

This is the kind of technologicalachievement that has made Britain aleader in satellite design and construction.This week ADS was celebrating the Euro-pean Space Agency’s Rosetta mission tocomet 67P/Churyumov-Gerasimenko (seepage 76). The probe, Philae, that landed onthe comet, was assembled largely in Ger-many. But Rosetta itself was, for the mostpart, constructed in the same clean room

where LISA is being built; Mr Byrne himselfwas one of the designers of Rosetta whenthe mission was first conceived about 20years ago. Altogether ten British compa-nies were involved in the Rosetta mission,making up 20% of the contractors usedamong14 European countries. Some of thefancy kit on Philae was British, such as theminiature laboratory built at the Ruther-ford Appleton laboratory near Oxford to adesign from the Open University.

This outsized contribution to the Roset-ta mission is now typical of Britain’s placein the firmament of satellite construction.About one-quarter of the world’s commer-cial communication satellites are built inBritain and 40% of the world’s small satel-lites. Most of those are built by Airbus’sSurrey Satellite Technology Limited (SSTL),the world leader in the field. It haslaunched 43 satellites since it was startedby an academic at Surrey University, SirMartin Sweeting. The whole space sectordirectly employs 35,000 people, and thesupply-chain accounts for thousands morejobs. London-based Inmarsat is one of theworld’s largest satellite operators, special-ising in mobile telephony. The space sectorhas a turnover ofabout £11billion a year.

Things have not always been so rosy.The ADS plant in Stevenage has itself beena graveyard for Britain’s ambitions in airand space. Originally owned by De Havil-land, an aircraft company, it was here dur-ing the 1950s that parts for the Comet, theworld’s first passenger jet, were made. TheBlue Streakmissile was also built here. Sev-eral fatal crashes, however, ended produc-tion of the Comet and, with it, Britain’slead in commercial airliners. Blue Streakwas cancelled due to spiralling costs, effec-tively ending the country’s interest inlaunching rockets.

Silver liningThese were disasters at the time, but in ret-rospect also rather fortuitous. Britain’sspace industry was consequently forced tolook at small-scale projects and to surviveon tight budgets, unlike America’s. It alsomade the British more commerciallyminded in financing the industry.

The satellite maker SSTL, for example,argues one of its directors, Andrew Brad-ford, is largely about “changing the eco-nomics of space”. It has virtually inventedthe niche market for less expensive, small-er satellites, selling a lot to developingcountries. And it works on science mis-sions like Rosetta. Mr Byrne also arguesthat ADS has been successful partly be-cause it has a good commercial business,making big satellites for customers likeBSkyB, a broadcaster. The innovative tech-nology developed for the government-funded science projects like Rosetta istransferable to business, maximising thereturn on the intellectual investment. Fornow, it looks like a stellar formula.7

Satellite industry

Stars in their eyes

STEVENAGE

As the Rosetta mission shows, Britain isgetting it right in space

52 Britain The Economist November 22nd 2014

THE campus ofthe Department ofManagement Studies (DMS)is a vision of India’s future disguised as the past. Shoeless gar-

deners sprawl on dusty grass or haul ancient mowers. Yet thebusiness school, a faculty of the elite Indian Institute of Technol-ogy in Delhi, is one of India’s best and its students among In-dia’s—which means the world’s—brightest and most driven.

Oxford and Cambridge accept one in five of their applicants.The DMS interviews 3,000 candidates for 65 places. All computeraces—the school specialises in data analytics—its students aretypically in their mid-twenties and have spent a couple of yearswith a top Indian technology company. After their MBA, they goon to global IT or consulting firms, such as Accenture or KPMG.They are the sort of high-flying Indians who helped build SiliconValley, are remaking India’s global image and whom David Cam-eron yearns to impress. Wooing the new India is “at the top of thepriorities of the UK’s foreign policy,” the prime minister told hisIndian counterpart, Narendra Modi, on November16th. The DMS

is therefore a good place from which to gauge his progress. Agroup ofstudentsgathered to enlighten yourcolumnist after

hearing a pitch from an American analytics firm. Their hungerwas visible: they craned to hear Bagehot speak. But he was thereto listen, and what he heard was a masala of ideas about Britainwhich, though mostly positive, had bad news for Mr Cameron.

All the students wanted to work abroad, where, said Konark,“the levels of innovations are much higher than in India.” Two-thirds wanted to work in America, and a third in Europe, whichgenerally meant Britain. Of 34 students, 21 had a “strongly posi-tive” impression of Britain and nine a “positive” one. Only twofelt “neutral” towards it, and two “slightly negative”. This sunnyview was not mainly for professional reasons; asked how theyfelt about Britain as a place to study and work, only one felt“strongly positive” and 14 “positive”. Their regard was mainly cul-tural: “I’m not an extrovert,” said Konark, who had visited bothcountries, “So I prefer British manners to American ones.”

None of the students was interested in India’s colonial past,but many liked the shared inheritance it had left: “Our politicalsystem and institutions are from Britain,” said Rahul. Just asBritons often overestimate how well they understand India be-cause of this, so the students had one or two odd notions. “Tradi-

tionally, Irish and Scots like India but the English and Welshdon’t,” said Abhishek confidently. Yet the advantage Britain en-joys from its far-flung culture was more obvious. It was the coun-try most of the students most wanted to visit on holiday—to seeStonehenge, Old Trafford, the home of Manchester United, andLord’s Cricket Ground. Some said they wanted to watch Indiaplay Australia there, which represented either the apogee of glo-bal sportingculture, orpoorknowledge ofIndia’s favourite game.

Yet there was a cloud on their western horizon, in the form ofMr Cameron’s immigration policy. As Britain’s visa regime hastightened on his watch, the number of Indians studying in Britishuniversities has more than halved. Rahul was offered a place bythe London School of Economics, but denied a visa to take it up—“because they didn’t think I would leave, even though I go to oneof the best business schools in India,” he said crossly. Most saidBritain was still accessible for study but, because foreign studentsmust find employment within a month of graduating, hard towork in. “Study abroad is a long-term thing for us because weneed to work to pay off the debt,” Utsav complained. “So peopleare less interested in going to the UK,” said Pavan. Half the stu-dents had a more negative view of Britain because of this. Onlythree realised Mr Cameron wanted to improve British-Indianties, and one assumed that meant “trying to sell us jet fighters”.

Senior Tories acknowledge the problem. When Mr Cameron,in opposition, pledged to bring annual net migration below100,000, Britain’s net immigration from EU countries, which itcannot control, was around 60,000. Because of the euro crisis, ithas soared, to around 130,000 immigrants this year, forcing theTories to squeeze non-EU immigration in a failing effort to keeptheir pledge. This is self-defeating. On his first visit as prime min-ister, Mr Cameron dared to imagine a new “special relationship”with India; on two later trips he was barracked over visas.

Viewed generously, his recent pledge to curtail EU freedom ofmovement is an effort to fix this. “If we have fewer low-skilledEuropeans we’ll have more high-skilled Indians,” says a Toryminister. But that is not straightforward. With other Europeangovernments primed to slam Mr Cameron’s proposals, which hepromises to unveil shortly, it risks leading Britain out of the EU.That is not something Mr Cameron or most ofhis ministers want;Philip Hammond, the Eurosceptic foreign secretary, may be astrangely placed exception. Another problem is that, even if MrCameron believes he is attacking Britain’s policy ofopen bordersin order to improve it, most people only see the attack.

Listen to what the geeks are saying“Britain is becoming more closed as an economy,” said Konark. “Ialso gather there’s a xenophobic shift there. Afriend faced a racialattack, which you expect in France, but not Britain, which hassuch a long history with India.” Would this stop him comingback? “That’s a cost-benefit analysis I need to do,” he said, sug-gesting an understanding of riskofwhich Mr Cameron is bereft.

The DMS folk underlined how damaging that could be. Askedwhether India was well understood in the West, they shook theirheads. “People know about Indian IT but not that other indus-tries are coming up,” said one of their professors. Graphic design,advertising, film production, even aerospace: in such industries,in which Britain excels, India is rising, and as the irreversible logicof globalisation unfolds, so global competition will increase. MrCameron should worry a lot more about competitiveness, andnot trash the global brand Britons are lucky to have.7

How not to treat Brand Britain

Some Indian students have advice forDavid Cameron on reputation management

Bagehot


1

IN 1973 global finance saw a back-roomrevolution when a group of banks

formed a co-operative to offer those mov-ing money across borders a slick alterna-tive to the clunky old telex. Today the elec-tronic financial-messaging system of theSociety forWorldwide InterbankFinancialTelecommunication (SWIFT) transmitsmore than 5 billion bank-to-bankmessageseach year. In 2013 it oiled the transfer of tril-lions of dollars globally by the 10,500banks, assetmanagersand firms thatare itsmembers. SWIFT does not initiate trans-fers, hold customers’ money, or clear or set-tle payments. Rather, itprovidesa templatethat helps international transfers flowsmoothly and be tracked.

Without SWIFT, global trade and in-vestment would be slower, costlier andless reliable. But the network’s very useful-ness means it is increasingly being cast in anew role, as a tool of international sanc-tions. In 2012 it was obliged, under Euro-pean law, to cut offaccess for Iranian banksthathad been subjected to sanctionsby theEuropean Union. Now there are calls forRussian banks to be banned from SWIFT inresponse to Russia’s invasion ofUkraine.

A group of American senators is argu-ing for the measure, which could be insert-ed into a broader bill on sanctions againstRussia that has a good chance of beingpassed in the next session ofCongress. TheEuropean Parliament passed a resolutionin September calling on the EU to consider

would suffer, too. Countries that tradeheavily with Russia, such as Germany andItaly, are therefore none too keen. Nor aremany in the financial sector. SWIFT is lessinsulated from such pressure than its coun-terparts in other sectors, such as the Inter-national Telecommunication Union, a UN

agency which is governed by an interna-tional convention. But it is a crucial part ofthe world’s financial plumbing system.

SWIFT’s own rules allow it to cut offbanks involved in illegal activity, and it hasoccasionally done so. But if it ends up be-ing used frequently for sanctions, it couldcome to be seen as an instrument of for-eign policy, thereby weakening its cher-ished neutrality. Already there are calls forit to be used in other conflicts: pro-Palestin-ian groups have recently sought for Israel’sbanks to be shut out, for instance. And asChina’s economic clout grows, might itwant Taiwanese banks excluded?

Another risk is that using SWIFT in thisway could lead to the creation of a rival.Russia’s central bank is pre-emptivelyworking to develop an alternative net-work; China has also shown interest inshifting the world’s financial centre ofgravity eastward. Earlier this year it co-founded a BRICS development bank withRussia, India, China and South Africa, andits UnionPay service, set up in 2002, hasloosened the stranglehold of MasterCardand Visa on card payments. If China andother countries that feared being subjectedto future Western sanctions joined the Rus-sian venture, it might become an alterna-tive to SWIFT—and one less concernedwith preventing money laundering andthe financing of terrorism.

Since the terrorist attacks of September11th 2001, America has used subpoenas togain access to data on SWIFT transactionsas part of the Treasury’s Terrorist FinanceTracking Programme. (SWIFT has to hand

mandating a cut-off. (Based near Brussels,SWIFT is governed by Belgian law.) Euro-pean governments are divided, with Brit-ain and Poland among the keenest.

The earlier SWIFT ban is widely seen ashaving helped persuade Iran’s govern-ment to negotiate over its nuclear pro-gramme. The ban was one of the first sanc-tions Tehran asked to be lifted, points outMark Dubowitz of the Foundation for De-fence of Democracies, a Washington-based think-tank. Though some of thebanks blocked from SWIFT managed tokeep moving money by leasing telephoneand fax lines from peers in Dubai, Turkeyand China, or (accordingto a Turkish prose-cutor’s report) by using non-expelled Irani-an banks as conduits, such workaroundsare a slow and expensive pain. And thesanctions prompted Western banks to stopconducting other business with the target-ed banks.

The impact of a reprise on Russia’s al-ready fragile economy would be huge. Itsbanks are more connected to internationaltrade and capital markets than Iran’s were.They are heavy users not only of SWIFT it-self but also of other payment systems towhich it connects them, such as America’sFedwire and the European Central Bank’sTarget2. Kommersant, a Russian newspa-per, has reported that more than 90% oftransactions involvingRussian banks crossborders.

Foreign firms that do business in Russia

Financial sanctions

The pros and cons of a SWIFT response

Blocking rogue states’ access to the world’s financial-messaging networkis a potentmeasure, but it carries long-term risks

International

Also in this section

54 FIFA and corruption

55 Cutting obesity: what works

55 The risks of getting paid

54 International The Economist November 22nd 2014

1

2 over only data linked to specific suspectedthreats, and the arrangement is indepen-dently monitored.) Since 2010 America hasshared this information with its Europeanallies. It has proved useful. Though terro-rists know that SWIFT is monitored byspooks, they still use it, just as they contin-ue to use mobile phones: they know bothbring risks, but sometimes they have noobvious alternatives.

According to a recent European Com-mission document, between October 2012and February of this year informationfrom SWIFT, including account numbers,names, addresses, transaction amountsand branch locations, produced 5,421sepa-rate counter-terrorism leads for EU statesand Europol. Such data are rarely enoughalone to give a clear picture ofa terror cell’sactivities, but they sometimes providemissing links in investigative chains.

Dragging SWIFT further into sanctionscould upset this fruitful arrangement.Some worry that this might hamper at-tempts to track the finances of IslamicState. Though most of the terrorist group’sfunding comes from local oil revenues,ransoms and shakedowns ofbusinesses interritories that IS controls, it ishard to imag-ine the group operating without having tomake or receive at least occasional interna-tional banktransfers.

“Governments have to be very carefulhow they use SWIFT as a tool of financialpressure,” says Juan Zarate, who helpedpioneer the use of banking sanctionswhile at America’s Treasury a decade ago.To avoid collateral damage and thus maxi-mise legitimacy, better to target only thosebanks linked to specific illicit activities, heargues. The Iranian banks hit by sanctionshad been accused of involvement in fund-ing terrorists or the Revolutionary Guards,abranch ofIran’smilitary, ornuclearprolif-eration. The Russian equivalent might bebanks linked to organised crime rings orkleptocratic energy deals. An alternativewould be for America to label some Rus-sian banks as “primary money-launderingconcerns” under the Patriot Act, whichwould in effect cut them off from transac-tions with Western banks.

Call the plumberAmerica’s current crop of senior Treasuryofficials are similarly cautious, despite be-ing vocal proponents of sanctions in gen-eral. SWIFT is a “global utility”, says one,and using it for sanctions should be “an ex-traordinary step, to be used in only themost extraordinary situations”. Blockingaccess to SWIFT, he frets, could mean thattrafficshifts to networks thatare less secureand easier to disrupt—and thus make lifeeasier for criminals and cyberterrorists, in-cluding those in rogue governments.Against those who threaten global securi-ty, a SWIFT ban is a powerful and provenweapon. But it is also a risky one. 7

AUTOCRATICRussia and swelteringQa-tar won the rights to host the 2018 and

2022 World Cups fair and square, after agenerally clean and honest bidding pro-cess. There might have been dodgy deal-ing, perhaps even criminal behaviour, onthe part ofa few ofthose involved—but notenough to justify rerunning the bids.

That, at least, is according to FIFA, worldfootball’s governing body. On November13th it described the results of an internalinvestigation into the bidding process ashaving mostly cleared itself and the hostcountries ofwrongdoing. Nevertheless, onNovember 18th it said that it was handingthe report from thatprobe over to Swiss au-thorities because it may have uncoveredcriminal activity (as yet unspecified).

The investigation into the bidding pro-cess had been led by Michael Garcia, anAmerican lawyer, who submitted over400 pages of findings to FIFA’s ethics com-mittee in September. His report was thenreviewed by Hans-Joachim Eckert, a Ger-man judge who heads the committee’s ad-judicatory chamber (pictured right, withMr Garcia). It was not published, despitepleas from some FIFA officials and Mr Gar-cia himself. Instead Mr Eckert released hisown summary, which Mr Garcia has de-scribed as “incomplete and erroneous”.Two whistle-blowers have since said thatMr Eckert tarnished and misrepresentedthem. Mr Garcia has appealed against MrEckert’s interpretation of his report—to an-other FIFA committee.

Ever since Russia and Qatar won thehosting rights in 2010, there have been alle-gations of funny business. Several FIFA of-ficials involved have since stepped down

under a cloud. In June the Sunday Times, aBritish newspaper, published e-mails de-tailing lavish campaigning by Mohamedbin Hammam, a disgraced formerFIFA big-wig from Qatar, ahead of the vote for hiscountry. Lord Triesman, who led England’sbid for the 2018 tournament, has said FIFA

officials asked him for bribes.So it may seem odd that England was

the country most harshly criticised by MrEckert. Its bid committee had accommo-dated unethical requests from corrupt FIFA

officials, he said. Qatar, too, had commit-ted some violations, but according to MrEckert its actions “were, all in all, not suitedto compromise the integrity” of the pro-cess. Russia was let off the hook, eventhough investigators had limited access toits documents because the computers itsofficials used had been destroyed.

Dismayed by the findings and the lackof transparency, some football officials aredaring to peek above the parapet. Mr Eck-ert’s summary was “a joke”, says GregDyke, the chairman of England’s FootballAssociation. His predecessor, David Bern-stein, has called for UEFA, European foot-ball’s governing body, to boycott the WorldCup in protest. Reinhard Rauball, the headof Germany’s soccer federation, has sug-gested that UEFA might leave FIFA if MrGarcia’s full findings are not published.

But a European rebellion seems unlike-ly. Michel Platini, the head of UEFA, whohas himself had to deny allegations of cor-ruption, voted for Qatar. Europe’s footballassociations benefit from hosting WorldCup qualifiers and the sponsorship dealsthat come with playing on the tourna-ment’s big stage. Poorer nations are even

FIFA and corruption

Hear no evil

Football’s governing bodyis struggling to silence its critics

The Economist November 22nd 2014 International 55

2 less likely to challenge FIFA, as they benefitfrom its handouts. The money sloshingaround feeds a perception that at leastsome of it is used to buy favours or votes.

Despite not having read Mr Garcia’s re-port, Sepp Blatter, the 78-year-old head ofFIFA, insistshisorganisation is clean: “Ifwehad anything to hide, we would hardly betaking this matter to the [Swiss authori-ties].” But the Swiss benefit from FIFA’spresence in Zurich. A greater threat maycome from the Americans. The FBI is inves-tigating allegations of corruption againstFIFA, and Mr Garcia can still recommendcases against individual officials.

After Mr Eckert’s summary, FIFA saidthat “a degree of closure has beenreached”. That depends on the sponsors. Ifthey start to abandon FIFA and its WorldCup, it will prove wishful thinking. 7

Paydays and mortality

Cash to crash

GETTING paid is generally good forthe health. Those who are earning

can buy better food and live in greatercomfort; joblessness is associated with ahost of ills, from heart disease to depres-sion. But a new paper* finds that theconsequences ofactually receiving yoursalary can be fatal.

The authors looked at Sweden’spublic-sector employees, who make up afifth of the country’s workforce, over asix-year period. Regional variations inpaydays allowed them to strip out theeffects on mortality rates of the seasons,days of the weekand the timing ofpub-lic holidays. They found a 23% increase inthe chance ofdying on paydays, withouta matching fall on the days following.

That suggests that the deaths were“extra”, and not merely the slightly accel-erated demise of frail individuals whowould have died anyway in the comingdays. If the same pattern holds for thewhole workforce, the very fact ofbeingpaid kills nearly100 Swedes a year.

Previous research had suggested thatdrinking and recreational drug-takingtend to rise on paydays: workers sudden-ly flush with cash get sloshed or high.Some then perish. But the new researchfound no such effect. Nor did mortalityrise from accidents or road collisions.The extra payday deaths were almost allfrom heart problems (a 70% rise in mor-tality) and strokes (a 120% rise). Theywere among workers who earned lessthan average, and mostly among theyoung: 16- to 35-year-olds saw a 125% risein mortality; over-50s, just a 29% rise.

These patterns, the authors say, sug-gest that increased spending on food andleisure—take-out meals, trips to footballmatches and the like—caused a suddenspike in activity, which led to the extradeaths. Poorer and younger workers,having cut backon fun as their bankbalances dwindled during the month,went on a consumption spree once theywere topped up. A few died as a result.

That receiving cash can kill is dispir-iting. But there is a policy lesson. Duringthe industrial revolution many casualworkers were paid by the day, says JaneHumphries ofOxford University. In thisrespect, at least, a return to 19th-centuryways might save lives.

Whygetting paid can kill you

............................................................*Income receipt and mortality—evidence fromSwedish public-sector employees, by ElviraAndersson, Petter Lundborg and Johan Vikström.Institute for Evaluation of Labour Market andEducation Policy, 2014:21

IT HAS become a cliché to call obesity abig problem for a reason: more than 2.1

billion people, or nearly 30% of the globalpopulation, are overweight or obese. Ex-cess weight leads to about 5% of world-wide deaths. On current trends, almosthalf of the world’s adults will be fat by2030. Over the past three decades, accord-ing to a study in the Lancet, a medical jour-nal, no nation has slimmed down.

It’s enough to drive a person to comforteating. But a new study from the McKinseyGlobal Institute (MGI), the consultancy’sresearch arm, offers some hope. It looks at74 anti-obesity measures around theworld, and judges the cost and impact ofthe 44 for which there were sufficient data.None alone could do much, it concludes,but all 44 together could mean about a fifthof overweight people achieving a reason-able waistline within five to ten years.

The interventions range from nudges

(making healthy eating choices easier) toshoves (taking poor eating choices away).The most effective would force food pro-ducers and restaurants to make servingssmaller and limit fatty ingredients (seechart). Others are less paternalistic, such ashaving grocery stores promote healthyproducts instead of sugary ones. But leav-ing it to individuals to slim down throughdieting and exercise without any suchhelp, MGI concludes, consistently fails.

How much governments should do topromote healthier lifestyles sparks vigor-ous debate, especially among Americans,who prize freedom as much as freedomfries. When Michael Bloomberg, then themayorofNewYork, tried to limit the size ofsugary drinks in 2012 he faced a backlash,and was stopped by the courts. In Europe anumber of countries have all but rid foodsof trans fats, which have particularly po-tent artery-clogging effects. America isheading in that direction, too.

John Stuart Mill, the liberty-loving 19th-century philosopher, saw state action asjustifiable to prevent deeds harmful to oth-ers. Some regard anti-obesity measures asfalling into that category. Rich countries de-vote 2-7% of their health spending to theproblem, and up to 20% if you includetreatment of associated diseases, such asdiabetes. The economic burden of obesity,MGI estimates, is 2.8% of global GDP,roughly equal to that ofsmoking or war.

Almostall the measuresanalysed in thereport are cost-effective, offering health-care savings and productivity gains thatwould outweigh their cost over the life-time of the target population. If they wereall deployed in Britain, which it uses as aworked example, the economic benefitwould be around $25 billion a year. Yet Brit-ain currently spends less than $1 billion ayear on weight-management pro-grammes, public-health campaigns andthe like.

The MGI report is but a partial picture. Itcannot vouch for all of the third-party re-search it cites. And it focuses on behaviour,rather than clinical questions such as therole of specific nutrients or genetics in obe-sity. It thus glosses over disagreementabout what makes people fat. More studyis promised. Consider this an appetiser. 7

The war on obesity

Heavy weapons

A new studyoffers hope in the battleagainst bulging waistlines

Tipping the scales

Source: McKinsey *Years of life lost to ill health, disability and early death, over lifetime of 2014 population

Most effective obesity interventions, estimated Disability-Adjusted Life Years* saved in Britain, m

0 0.5 1.0 1.5 2.0 2.5

Portion control

Changing food-product formulas

Restricting high-calorie food & drink

Weight-management programmes

Educating parents

Pupils’ education & exercise

Healthier meals at school & work

Surgery

Better food & drink labelling

Restricting price promotions

Average costper DALY*saved, $

400

2,600

200

1,300

2,000

600

14,000

10,000

2,000

200

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1

ON NOVEMBER 14th Brazilian policeraided the offices of Petrobras, a vast

state-controlled oil firm at the centre of acorruption scandal. Back in 2010 Petrobraswas a symbol of Brazil’s economic rise. Itconducted the largest global equity raisingon record, to pay for the development offields off Brazil’s coast. Now, bribes are theleast of it. Despite an investment binge itsproduction growth has been anaemic. Itsreturns on capital and its shares haveslumped. Its balance-sheet is shot, formerexecutives have been arrested and its ac-counts may be restated. Petrobras is todayan exemplar of something else: the lousyperformance ofstate-owned firms.

Ronald Reagan said the nine most terri-fying words in the English language were“I’m from the government and I’m here tohelp.” For investors the scariest words maybe, “I’m from a state-owned firm and Iwant your capital.” Across the world, big,listed state-owned enterprises (SOEs) thatwere floated, or raised mountains of equ-ity, between 2000 and 2010 have had a dis-mal time. Their share ofglobal market cap-italisation hasshrunkfrom a peakof 22% in2007 to 13% today. Measured byprofits theirdecline is less stark, mainly because bigChinese banks continue to report inflatedprofits that do not accurately reflect theirrotten books. Exclude them and SOEs’share of earnings has slumped, too (seechart). It will probably fall further.

In Russia, Gazprom, which the Kremlin

lagged those ofitsprivate-sectorpeers, BHP

Billiton and Rio Tinto, by over 40% in thepast three years.

Overall, the SOEs among the world’stop 500 firms have lost between 33% and37% of their value in dollars since 2007, de-pending on how one treats firms that wereunlisted at the start of the period. Globalshares as a whole have risen by 5%.

It was not meant to be like this. As theWest slipped into a crisis in 2007-08, statecapitalism supposedly took the businessworld by storm, particularly in the emerg-ing world. It had two elements. Sovereignwealth funds (SWFs) gathered the excesssavings that oil-rich and Asian countriesaccumulated, investing them overseas.And a new, hybrid kind of SOE was invogue. When Europe and Latin Americaprivatised firms in the 1980s and 1990s,they often went the whole hog, with thestate selling out completely—think of Brit-ish Gas or telecoms in Brazil. But in the2000s private investors were invited toplay only a subordinate role, with the statekeeping a controlling stake and making en-lightened decisions in the interests of all.Investors lapped it up: they forked outmore than $500 billion in SOE equity rais-ings between 2000 and 2012.

What went wrong? As trade surplusesand commodity prices have fallen, SWFshave accumulated cash at a slower rateand spent less on buying stakes in firms. In2013 their investments were $50 billion,under half the level of 2008, reckons Ber-nardo Bortolotti of Bocconi University inMilan. SOEs, meanwhile, have beenthrough hell. Tumbling commodity priceshave hurt energy and mining firms. Sanc-tions have clobbered Russian firms. Cor-ruption scandals have erupted, and notjust in Brazil. Jiang Jiemin, PetroChina’s ex-boss, was arrested in 2013, for example.

But at the root of the underperfor-

once predicted would be the first firm to beworth $1 trillion, has crumpled: it is worth$73 billion today. India’s mismanagedstate-owned banks command miserly val-uations compared with their private peers.Since 2009 the Shenzhen stockmarket’s in-dex, which is dominated by private firms,has rocketed past that of its rival in Shang-hai, which is mainly made up ofstate com-panies, notes Sanford C. Bernstein, ananalysis firm. Once, investors swooned atthe rise ofChina Mobile, a state-owned op-erator. Now they admire Xiaomi, a wilyprivate handset-maker. Shares in Vale, aBrazilian miner in which public-sectorpension funds have a big stake, have

Government-controlled firms

State capitalism in the dock

NEW YORK

The performance ofstate-owned enterprises has been shockingly bad

BusinessAlso in this section

58 Vietnam’s unappealing state firms

59 Uber’s reputational problem

59 Guess why bosses hire pay advisers

60 Consolidation in oilfield services

60 The endangered SIM card

62 Poland’s companies venture forth

63 Making resources firms behave better

64 Schumpeter: Short-termism has itsgood points

Not in a great state

Sources: Bloomberg;The Economist

*Companies in which the governmentholds at least 20% of voting rights

State-owned enterprises*As a share of top 500 global firms’, %

0

10

20

30

5

15

25

35

2002 04 06 08 10 12 13

Market capitalisation

Profits

Profits (excluding bigfour Chinese banks)

Capital spending

http://Economist.com/business-finance

58 Business The Economist November 22nd 2014

2 flated earnings, flatter this picture. Exclud-ing them, SOEs’ return on equity falls to10%. Cash returns to investors are poor:SOEs’ dividendsand buy-backsare typical-ly only 10-15% of the global total. Flabbyand stingy, SOEs are now priced by inves-tors at about their liquidation value.

Forgovernmentsand managersofSOEsthe immediate task is firefighting. WhileSOES’ aggregate balance-sheet is passable,some companies are too indebted. Viet-nam hashad one bigSOE default, bya ship-yard. Petrobras has net debt equivalent tofour times its gross operating profit. Ros-neft, a Russian oil firm, must refinance $21billion of bonds before April. Its bondyields have risen sharply and it wants stateaid. Many SOE banks in the emergingworld need to be recapitalised.

Next, investment levels and costs needto be cut, so as to lift returns on capital.There is little sign that this is happeningyet. Natural-resources SOEs will probablybe slower to react to lower commodityprices than their private-sector peers. Allstate firms find it hard to lay offpeople—theSOEs among the world’s 500 most valu-able firms employ 8m, and their workforcehas risen by a fifth since 2007. Those in in-dustries facing disruption from the web,particularly banking and telecoms, willprobably need redundancy schemes.

Privatisation 3.0In the longer term, managers need to re-think how firms are run. Interviewed byThe Economist in April, Xi Guohua, thechairman of China Mobile, talked of intro-ducing incentive-based pay, awarding staffshares and establishing stand-alone unitswith freedom to innovate. “The old organi-sation will restrict our development andstand in our way, and we are fully aware ofthe urgency ofsuch changes,” he said.

China Mobile’s efforts are part of a wid-er drive in China to make SOEs more effi-cient by deregulating prices and interestrates, introducing more private investorsand increasing competition. NarendraModi, India’s newish prime minister, has asimilar plan to open up Coal India, a noto-riously inept monopolist, to competitionand to resuscitate India’s state-run banks.

Yet at the heart of all these efforts, a ten-sion remains: who are SOEs run for? Thepublic good, as interpreted by politicians?Or shareholders? Only some countrieshave resolved this, either by the state sell-ing out completely, or by establishing ro-bust mechanisms to keep firms at arms’length from the government, such as at Te-masek, Singapore’s state holdingcompany.Until this question is resolved the value-destroying impulses of SOEs will remain,and investors will be wary of both estab-lished firms and newcomers. That is why,as the box alongside describes, not a singleforeign investor took part in Vietnam’s lat-est flotation ofa state firm.7

mance is what looks like a huge misalloca-tion of capital by SOEs. Given licence bypoliticians, and with little need to pacifystroppy investors, their capital investmentsurged, accounting for over 30% of the glo-bal total by big listed firms.

More than $2.5 trillion has been invest-ed in telecoms networks, hydrocarbonsfields and other projects by SOEs since2007. Gazprom built an alpine ski resort forthe winter Olympics. Etisalat, a telecomsfirm in the United Arab Emirates, blew

$800m on an operation in India whose li-cence was cancelled after an anti-graft in-quiry. To counteract the global slowdownafter 2007-08, state banks went on a lend-ing binge in China, India, Russia, Brazil andVietnam. The resulting bad debts are onlynow being recognised.

As the balance-sheets of SOEs havegrown faster than profits, return on equityhas slumped from 16% in 2007 to 12% today,less than the 13% achieved by private firms.China’s four biggest banks, with their in-

Vietnam’s state firms

Excess baggage

WHEN the government launched aninitial public offering ofshares in

Vietnam Airlines on November14th, itwas hoping that the flotation ofone offew companies widely known outsidethe country would help it speed up aplan to “equitise” hundreds ofstate firms.However, the IPO, in which a stake of just3.5% of the airline was on offer, attractednot one foreign investor. Local bankswere the main buyers.

State-owned enterprises (SOEs) ac-count for about a third ofVietnam’s GDP,in industries ranging from finance tofabrics, seafood-processing to shipbuild-ing. Not all are duds: Vinamilk, a dairyfirm, attracted a number offoreign in-vestors to its successful IPO in 2003, andthis September foreign investors boughtabout halfof the shares sold in a $57mIPO ofVinatex, a big textiles firm (thoughthe firm did not sell as many shares as ithad wanted).

Nevertheless, the opaque bureaucra-cies at most SOEs make them breeding-grounds for graft and mismanagement. Inthe most prominent example, in 2010Vinashin, a shipbuilder, defaulted on aforeign loan, triggering a downgrade ofVietnam’s sovereign debt. Many SOEs arestuffed with “workers” who do little.

The state firms’ poor performancemeans that Vietnam’s GDP growth, nowaround 5.5% a year, is weaker than itshould be, given its young and educatedpopulation, and its wealth ofnaturalresources. Unusually for a communistcountry, the prime minister, Nguyen TanDung, had to endure a confidence vote inthe National Assembly last year over hiseconomic record—and he did poorly.

This year, besides restoring his popu-larity by standing up to China in a territo-rial dispute, Mr Dung has breathed newlife into a long-standing plan to sell mi-nority stakes in SOEs to private investors,in the hope ofmaking them more busi-nesslike. Ones with IPOs planned for

next year include Vietnam NationalShipping Lines—two ofwhose formerexecutives were sentenced to death lastyear in a drive against corruption. Giventhe condition many are in, Mr Dung’sgoal ofequitising more than 400 firms bylate 2015 is optimistic.

Edmund Malesky, a Vietnam-watcherat Duke University in the United States,reckons the government in Hanoi may bepushing forward the equitisations withan eye on the Trans-Pacific Partnership(TPP), a big trade deal now being negotiat-ed, which would oblige member coun-tries to cut subsidies. Iffloating SOEsmade them more efficient, they wouldneed fewer handouts. It would then beeasier for Vietnam to sign up to an even-tual TPP deal, enabling it to enjoy widermarket access for its exports.

The strategy makes sense, but it maybe hard to pull off. Vietnam’s stockmarketremains one ofAsia’s smallest, and for-eign investors are reluctant to buy sharesin firms the state will continue to control,especially those in such areas as energyand transport that it regards as strategic,meaning prone to meddling.

HANOI

The 400 firms the government wants to part-privatise are mostly unappealing

Not such a smooth take-off

The Economist November 22nd 2014 Business 59

DESPITE its tenderage ofonly five years,Uber, an American firm that links taxi

passengers to drivers through a smart-phone app, already has several records toits name. It has raised $1.5 billion in venturecapital and reached a valuation of morethan $17 billion. It has expanded to 229 cit-ies in 46 countries. It is rumoured to bebringing in gross revenues of almost $1 bil-lion a month. But it now seems, in recordtime, to have gone from hero to villain inthe eyes of much of the technology press.Praised in its earlydays fordisrupting unre-liable, high-cost local taxi monopolies,Uber now stands accused of using unfairtactics against both rivals and critics.

On November 17th it emerged that anUber executive, Emil Michael, had said at aprivate dinner that the firm should consid-er spending $1m to dig up dirt on its criticsin the media, in particular Sarah Lacy, theeditor of Pando, a tech-news site. Mr Mi-chael has since apologised. Travis Kalan-ick, Uber’s boss, said on Twitter that his re-marks showed “a lack of humanity and adeparture from our values and ideals”, butbrushed offcalls for Mr Michael to resign.

Although it is hardly an excuse, the re-marks were a reaction to a series of highlycritical articles on Uber, in particular by MsLacy and her publication. She has arguedthat Mr Kalanick, known for his libertarianviews and combativeness, is an exampleof Silicon Valley’s “asshole problem”,meaning that venture capitalists increas-ingly invest in entrepreneurs who knowneither scruples nor social graces. Most re-cently, she accused the firm of“sexism andmisogyny” because its branch in Lyon,France, had offered to pair passengers with“hot chick” drivers. She says she has de-leted the Uber app from her smartphone.

Uber has never feared controversy. Inits drive to disrupt taxi markets it has oftenignored local regulations, leading to court-ordered banson its services. Ithasemergedthat the firm has sent “brand ambassa-dors” to hire cabs through Lyft, a rival app,who would then either cancel them, orpress their drivers to defect to Uber. Mr Ka-lanick has also admitted to having inter-vened in its rival’s fund-raisingattempts bytelling potential investors that his firm wasalso about to raise large amountsofcapital.

The network effects in the taxi-appbusiness are strong: as a firm recruits moredrivers, this reduces pickup times, whichattracts more passengers; this in turn at-tracts more drivers, since they get more

fareson each shift. Thatwinnersand losersemerge so quickly explains the need for adegree ofruthlessness. Uber’shardball tac-tics have helped it pull well ahead of its ri-vals: by some estimates its revenues arenow12 times those ofLyft, and are growingat ten times the rate.

Technologyfirms like to say that in theirbusiness one must “move fast and breakthings”. Whether it is Uber’s attempt to getone over its rivals, Facebook’s tinkeringwith users’ privacy settings or Amazon’stough negotiating tactics in its now-re-solved price dispute with Hachette, a pub-lisher, ambitious tech firms often seemquite purposefully to be testing the con-ventionsofacceptability. Theyall risk turn-ing customers, and regulators, againstthem. But perhaps they have taken note ofhow the most thick-skinned of low-costairlines—such as Spirit Airlines and Ryan-air—are constantly cursed by customersand media commentators, and yet arehighly successful. People may say they areoutraged but if the service on offer is cheapand convenient, it will be hard to resist. 7

The taxi-app market

Uber-competitive

SAN FRANCISCO

Uberrisks a consumerbacklash over itstough tactics

WARREN BUFFETT once noted that ifyou want independent advice, don’t

ask a barber whether you need a haircut.But if, asa chiefexecutive, youwant to earnmore, then it makes sense to hire a com-pensation consultant. Or so concludes anew study from the Judge Business Schoolat Cambridge University.

Though its findings hardly seem ashock, previous studies that tried to linkbosses’ pay and the use of consultants hadfound no significant effect. However, thisnew research was made possible by a rulebrought in by America’s Securities and Ex-change Commission (SEC) in 2009. It saysthat when a company hires a consultantfor advice on both compensation and oth-er matters, it must disclose the fees paid ineach case. When consultants are hiredsolely to give advice on compensation, thefee need not be disclosed.

The reason for this asymmetric rulewas that the SEC feared some bosses werein effect bribingconsultants to recommendthem for pay rises by bunging them lots ofother, more lucrative work. Making the feestructure more transparent would discour-age the practice, the regulator hoped.

The academics used three tests. First,they compared companies that kept their“multi-service” advisers after 2009 with

those that switched to using specialistcompensation consultants to advise themon executive pay. Those that switchedwere found to be paying their CEOs almost10% more than similar firms that had hungon to their multi-service consultants. Oneobvious explanation is that the switcherswere those firms that had been offering ex-tra business to their consultants mainly toinfluence their advice on executive pay—for as long as they could do so without re-vealing it—and that this had worked.

The second test was to look at whochose any specialist pay advisers hiredafter the rule change. In firms in which theconsultants were only chosen by theboard, the CEO was paid about 13% lessthan at similar firms whose CEO also hireda second set ofpay advisers.

The third test was consultant turnover.The academics reasoned that “If an in-crease in pay is associated with a subse-quent lower probability of being replacedby a competitor, then consultants indeedhave an incentive, on average, to recom-mend higher pay.” The trend was againclear. When CEOs get big pay rises theircompanies are less likely to replace theirconsultants in the following year.

All told, the academics found that firmsthat hire compensation consultants paidtheir CEOs 7.5% more than those that didnot. They concluded that “our study findsstrong empirical evidence for the hiring ofcompensation consultants as a justifica-tion device for higher executive pay.”

These findings make it a little harder toargue that higher CEO pay is linked toshareholder returns or to greater talent; ifthat were the case, one would not expectsuch a clear correlation between pay andthe use of consultants. The trend smacksmore ofthe lickspittle courtierofLouis XIV,who, when asked the time, replied, “It iswhatever time your majesty pleases.” Themodern equivalent is, it seems, “Whateverpay your majesty pleases.” 7

Executive compensation

If you hire them,pay will come

Surprise: bosses earn more when theyhire compensation consultants


1

OIL companies rarely soil their handswith the business ofextracting the hy-

drocarbons that are their lifeblood. The jobof drilling, and constructing and maintain-ing wells is largely delegated to oilfield-ser-vices firms. In a deal agreed on November17th Halliburton, the second-largest ofthese in the world, by market capitalisa-tion, is set to buy Baker Hughes, the third-largest, for $38 billion in cash and shares.The deal is set to prompt a round of con-solidation in the industry: three days later,Technip, a French oilfield-services firm,said it had bid for a local rival, CGG.

Drilling for oil may be grubby but mas-tering the technology is lucrative. Schlum-berger of France, the biggest of the bunch,made profits of $7 billion on revenues of$45 billion in 2013. The combined revenuesof the American firms will be greater, andtogether they may match its performance.Marginsare similar in America, where Hal-liburton and Schlumberger are equal com-petitors. In the rest of the world the Frenchfirm is bigger, and more profitable.

Amarriage with BakerHughes will giveHalliburton economies of scale and theability to spread its costs more widely. Itputs annual savings at $2 billion. The newfirm will also match Schlumberger in thebreadth of services it offers. Halliburtoncan plug gaps with two technologies atwhich Baker Hughes excels: “artificial lift”,which boosts the pressure and recoveryrate from wells; and speciality chemicalsthat help oil flow more cheaply and safely.

Joining forces will help the two firmscope with an expected downturn in the in-dustry’s fortunes. The oil price has fallenby 30% since June. As a result most bigWestern oil companies intend to cut capi-tal spending—which means a drop in rev-enues for the oilfield-services firms. Be-coming a one-stop shop on the scale ofSchlumberger will make it easier to wincontracts from state-owned national oilcompanies (NOCs), which are an increas-ingly important source ofbusiness.

While the oil majors suffer, the NOCsare expanding. NOCs control most of theworld’s known reserves, and their oil andgas is generally cheap to extract, and thusless sensitive to price swings. Firms underthe control of politicians often have othermotivations for maintaining investment,such as preserving jobs. Saudi Arabia ispouring cash into drilling for gas to run itspower stations.

Oil companies and antitrust authorities

are bound to worry about a deal that willcut the numberofbigcompetitors in the in-dustry. To appease them, Halliburton ispromising to sell businesses with annualrevenuesofup to $7.5 billion if the takeovergoes through. Brad Handler of Jefferies, aninvestment bank, thinks oil firms may notkick up too much fuss, since they will beless in need of the services companies forthe foreseeable future.

As the weak oil price drags down theshares of oilfield-services firms, othersmay be bought. General Electric has al-ready invested heavily in the business ofmaking drilling equipment, and may thusbe keen on buying into the services side.National Oilwell Varco, the biggest rig-hirefirm, also plans to diversify. Though theirbusiness does not look great at the mo-ment, the long-term outlook for the ser-vices firms looks good: as production fromsome of the world’s biggest fields matures,there will be ever more need for the firms’expertise in squeezing out the last drop. 7

Oilfield-service firms

Knowing the drill

Two firms that do the oil companies’dirtyworkare set fora tie-up

In-console-able

Source: VGChartz *Estimate

Global cumulative sales of gaming consoles, m

N D

2013J F M A M J J A S O N*

2014

0

2

4

6

8

10

12

14PlayStation 4

Xbox One

The releases last November of Sony’sPlayStation 4 and Microsoft’s Xbox Onewere seen as the last hurrah of high-endhome games consoles. The previousversions of each device had been roundlybeaten by the lower-tech Nintendo Wii.And simpler games played on smart-phones and tablets were rapidly gainingpopularity. Sony’s strategy was to makeits new console a more sophisticated,specialist device aimed at hard-coregamers. Microsoft went the other way,making the new Xbox a versatile multi-media device, aimed at a broader market.Sony’s strategy quickly began to provemore successful: in its first six weeks itsold 4.2m of the new consoles to Micro-soft’s 3m.Microsoft replaced the head of its Xboxdivision and cut its prices. But a year onfrom the launches, Sony is still far ahead,and IHS, a market researcher, predicts itwill stay that way. Still, the Xbox One nowoutsells the latest version of the Wii, andhas done better than previous Xboxes.

APPLE revolutionised online music withthe iPod and iTunes. It may be about to

transform the payments business, giventhe successful launch last month of ApplePay. And the next set of businesses to havetheir applecarts overturned may be themobile-telecoms operators. Some of Ap-ple’s latest iPads have a new type of SIM

card that lets users switch easily betweenoperators without replacing the card. Thiscould seriously weaken the operators’ gripon their market, especially ifApple were tofollow up by putting the new SIMs iniPhones or replacing them with software.

The job of the SIM (subscriber identitymodule) is to store some unique numbersand an encryption key, which are used toidentify the subscriber when the device iscommunicating with the network. For aslong as wireless networks carried mostlyvoice calls, SIMs worked well. Their chipsare hard to hack: prying them open to get atthe stored information can make themself-destruct. Since only mobile operatorswere allowed to issue SIMs, and were giv-en much leeway over the terms on whichthey did so, they were able to createmonthly payment schemes which subsi-dised the upfront cost of a handset. Thishelped mobile telephony to get going, andthereafter provided a mechanism for per-suading consumers to keep on tradingtheir old phones for ever more sophisticat-ed new ones.

However, now that most mobile de-vices can connect through Wi-Fi, their SIM

cards no longer seem quite so indispens-able. Most tablets, even those with SIM

card slots, are notbought from a mobile op-erator; and the cost and hassle of signingup for a SIM card, so as to use the devicewhen there is no Wi-Fi available, is toomuch for many buyers. So, Apple’s newSIMs are meant to make it easier to sign upfor a mobile operator—and to encouragepeople to choose the pricier iPad modelsthat contain them.

Re-programmable SIMs may also helpbring about the “internet of things”, inwhich all sorts of devices, from fridges tocars, will be connected up. Carmakers, forexample, would be able to glue the cardsinto place so they do not shake loose, andalso be able to switch to a different opera-tor for their connected-car services with-out drivers having to install new cards.

Since re-programmable SIMs make iteasier not just to sign up with a mobile op-erator but to switch away from one, the op-

Mobile telecoms

The endangeredSIM card

Moves to reinvent, oreven abolish, theSIM card could have big consequences

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1

2 erators are wary of the innovation. Theyhave some legitimate security concernsabout the new cards. Most would need tomake big changes to their billing systemsand other back-office functions to adapt toa world in which customers bought theirconnectivity one gigabyte at a time from avariety of operators, rather than signing along-term contract. But their biggest fear isthat, as they lose control of the customerrelationship, margins would surely suffer.

It was only late last year that the GSMA,an association of mobile operators, agreedon a common specification for re-program-mable SIMs. Now that Apple is trying out agadget containing such a card, the opera-tors are watching nervously, to see howconsumers react. Of the four biggest wire-less carriers in America, only T-Mobile US

fullysupportsApple’s experiment. Verizondecided not to take part. Users of the newiPad can use its re-programmable SIM tosign up for AT&T but will have to install anew card if they want to switch operatorlater. And those who select Sprint willhave to go through a further registrationprocess to activate the service. In Europeonly one operator, EE, has agreed to partici-pate so far.

Whatever the outcome, re-programma-ble cards are bound to spread, predictsPhilippe Vallée of Gemalto, the world’sbiggest maker of SIMs. All sorts of newconnected devices are coming along, andoperators will have fewer objections tothese having the new type of SIM in them.For instance, Gemalto is supplying re-pro-grammable SIMs fora “smart watch” beingmade by Limmex, a Swiss firm.

The new type of card will gain furthermomentum if more countries follow theexample of the Netherlands, which hasjust begun to let organisations other thanoperators issue SIMs, such as utilities andcar companies. Germany may be next. Ifits giant carmakers issued their own SIMs,and rented spare capacity on the opera-tors’ wireless infrastructure, they could to-gether save €2 billion ($2.5 billion) a yearthrough lower prices and more flexiblecontracts, estimates Rudolf van der Berg ofthe OECD, a think-tankbased in Paris.

Going softThe biggest question is whether re-pro-grammable SIMs will find their way intosmartphones—and in what form. Applefans predict that the firm will soon releasean iPhone with a pre-installed card thatlets them switch providers. Some hope itwill eventually take the next logical step,and replace the card with a softSIM, a pieceofsoftware code that does the same job.

Operators would put up stiff resistanceto putting re-programmable SIMs, let alonesoftSIMs, into phones, saysDean Bubley ofDisruptive Analysis, a consulting firm. In2010 Apple was believed to be developingan iPhone that came with such a SIM, but it

was reportedly scared off by operatorsthreatening to stop promoting its handsets.Managing SIMs for phones that handlevoice calls is much more complex than it isfor data-only devices. In many countries,for instance, people have to show an iden-tity card when signing up. The operators’security worries about softSIMs would beeven greater than those for re-programma-ble cards, says Mr Bubley.

Those hoping for the death of the SIM

card in its current, inflexible form shouldbe careful what they wish for, and not justfor security reasons. Operators would losecontrol of the market, but Apple and otherdevice-makers might gain it. They would,if regulators let them, be able to choosewhich operators appeared on the menuwhen buyers of their phones and tabletswere setting them up. The risk would thenbe that the SIM card’s demise leads to lesschoice, and higher prices for users. 7

NOWY STYL, a Polish company that isEurope’s fourth-largest maker ofoffice

furniture, recently bought two small Ger-man rivals. The firm’s boss, Adam Krza-nowski, was asked by a German friend ifhe was pleased with his purchase. “I toldhim that I was not happy with the qualityof the workers. His jaw dropped,” says MrKrzanowski, with a grin. He had to send ateam from his factory in Poland to bring hisnew German workers up to speed on thelatest manufacturing methods.

Polish firmshave grown in size and con-fidence along with the economy, whichafter years ofexpansion is twice the size, inreal terms, that it was when democracywas restored in 1989. Now, at last, some ofits firms are looking beyond the domesticmarket and going global. InPost is rollingout its automated parcel lockers in ninecountries, including Britain (see picture), tograb a share of the rapidly growing busi-ness of making deliveries for e-commercefirms. Comarch, a Polish IT firm, has set uptwo data-processing centres in Germany.

Polish businesses are making more ef-forts to conquer export markets. Pesa, atrainmaker, won a $1.5 billion contract in2012 to supply Germany’s Deutsche Bahnwith up to 470 new diesel locomotives.“Nobody believed we could sell the Ger-mans such a high-tech product,” says To-masz Zaboklicki, the firm’s chiefexecutive.

A decade ago the most notable foreignventures by Polish businesses were the re-sult of a strong prod from the government,usually applied to state-controlled firmswith political objectives in mind. The re-sults were dire. In 2004 PKO Bank Polskiwas encouraged to invest in Ukraine, Po-land’s poorer neighbour to the south-east,during its Orange revolution. In Ukraine’ssubsequent economic slump, the smallbank PKO had bought, Kredobank, suf-fered a drastic rise in bad loans, eventuallyforcing PKO to bail it out.

In 2006 PKN Orlen, a state oil refiner, in-vested $3.7 billion in a Lithuanian plant,with the aim of helping the Baltic statesloosen their dependence on Russia. After

Companies in Poland

Growing the Polish Apple

WARSAW

Afteryears ofsteadygrowth at home, firms are venturing abroad

The Economist November 22nd 2014 Business 63

2 years of losses, Orlen has written off mostof its investment.

Now, the Polish firms venturingabroad,even the state-backed ones, are driven byprofits rather than politics. In SeptemberKGHM, a copper miner in which the statehas a 32% stake, began shipments from aChilean mine jointly owned with Sumi-tomo of Japan. This follows KGHM’s pur-chase, in 2012, of Quadra FMX, a Canadiancopper and silver miner. In October GrupaAzoty, a fertiliser-maker, announced a planto make up to ten foreign acquisitions, inAfrica and South America aswell as in cen-tral Europe, to maintain its position in anindustry that is consolidating rapidly.

Although a few Polish firms are gaininga profile outside their home country, theyare still the exceptions. Of those localmanufacturers that export, many are pro-

ducing materials or parts that end up deepin German cars or consumer products.One problem is that even the largest Polishfirms are small by global standards. Anoth-er is that most have been reluctant to investin the research and development neededto take on sophisticated foreign rivals.

“I ask myself, ‘Why is there no Polishproduct which is internationally famous?Why is there no Polish Apple or Google?’,”says Andrzej Kozminski, founder of Koz-minski University, the country’s leadingbusiness school. He hopes it is simply amatter of time. In another decade, givenPoland’s rapid economic growth com-pared with western Europe’s, its business-es may become large enough that foreignventures like those of Nowy Styl will be-come common. If so, more German work-ers will have to get used to Polish bosses. 7

FEW governments have aligned their in-terests so closely to those of their coun-

try’s energy and mining firms as Canada’sConservative administration. The primeminister, Stephen Harper, has boasted ofCanada as an “emerging energy super-power”. Under the banner of “responsibleresource development”, his governmenthas done its best to ease the way for miner-als firms, at home and abroad, includingdirecting some foreign aid to countrieswhere Canadian firms wanted to drill.Ministers point with pride to the C$174 bil-lion ($169 billion) in export revenues fromsales of minerals, oil and gas in 2013 and tothe fact that Canada is home to more thanhalf of the world’s publicly listed explora-tion and mining companies.

But the downside of seeming so cosywith extractive firms is that whenever oneof them gets in trouble—an inevitable oc-currence with 1,500 firms active in morethan 100 countries—the country’s image istarnished too. So the government has re-cently begun to reduce that vulnerabilityby taking a stricter line on corporate socialresponsibility (CSR) and bribery by Cana-dian firms operating abroad. Protecting thenational brand is “a huge part of it,” saysAndrew Bauer of the Natural Resource Go-vernance Institute, a group that monitorsthe industry and lobbies for openness.

Ed Fast, the international trade minister,admitted asmuch on November14th, asheintroduced new rules that require Canadi-an resources firms involved in disputeswith local communities to take part in a

resolution process. If any firms refuse, thegovernment will withdraw its economicdiplomacy on their behalf.

In Mr Fast’s eyes, Canada’s brandshines like a freshly minted ingot, and sim-ply needs to be preserved rather than re-stored. Campaigners beg to differ. Theynote a slew of protests against Canadianfirms’ projects, from Romania (pictured),where environmentalists are objecting toplans for an opencast gold mine, to Guate-mala, where guards at a nickel mine havebeen accused ofgang rape.

The government is also promising to

strengthen the mandate of its official “CSR

counsellor”, whose job is to advise re-sources firms and mediate in their dis-putes. The post has been vacant for a year,and the previous incumbent made littleprogress because the companies were notobliged to co-operate. The move did not gofar enough for some campaigners, whohad wanted the counsellor to be made in-dependent ofgovernment.

Still, they had better luck with a newlaw introduced last month, to curb briberyby mining and energy firms by demandingmore transparency from them. The law,which still must be fleshed out in detailedregulations, requires them to disclose allpayments made to domestic and foreigngovernments. It brings Canada broadlyinto line with British legislation and withrules beingcontemplated by the US Securi-ties and Exchange Commission. It helpedthat the law was backed by an unusual co-alition of non-government organisationsand mining companies themselves. Thelegislation “is pretty faithful to our recom-mendations”, says Pierre Gratton, head ofthe Mining Association ofCanada.

It seems that the miners’ experience indealing with local communities is makingthem more sensitive to their concernsabout corruption and other ills. In contrast,the oil and gas firms are lobbying for thetransparency law to be weakened. Theywant to be given exemptions in countrieswhose local laws conveniently prohibitthe disclosure ofsuch payments. They alsowant to avoid having to give a project-by-project breakdown of their payments,without which the information would beof little use. There is still room for backslid-ing by a government that is unashamedlybusiness-friendly. But a public plea for it tostand firm, from a former Shell executive,may yet stiffen ministers’ spines. A wa-tered-down transparency law would cer-tainly take the shine offCanada’s brand. 7

Canada’s natural-resources companies

Reputation management

OTTAWA

The government promises to keep promoting miners’ and energyfirms’ interestsabroad if theybehave themselves

...but not in Canadian miners


THE sheep in “Animal Farm” repeat the slogan, “Four legsgood,two legsbad”. In the managementworld these days, the chant

is “Long-termism good, short-termism bad”. The Harvard Busi-

ness Review constantly thunders against the evils of short-ter-mism. Bosses of listed companies give off-the-record briefings tojournalists bemoaning shareholders’ inability to see beyond theends oftheirnoses. In the continental European model of capital-ism, long-termism means that businesses will prosper by pursu-ing the enduring interests ofall their “stakeholders”, workers andsuppliers included. More recently, supporters of Anglo-Saxoncapitalism have produced a variant of this argument: firms willenjoy sustained growth if they favour the interests of long-termshareholders over traders who hold stockfor briefer periods.

This isnotmerely rhetoric. Policymakersare drawing up plansto give long-term investors more shares, more voting power ortax incentives. France already has a rule that gives extra votingrights to long-term shareholders; and the European Commissionis mulling something similar. The Delaware Supreme Court—which sets the tone of much American corporate law because somany companies are registered in that state—has endorsed theview that a firm’s owners are those who have held its shares for along time (though it has not said how long), rather than thosewho happen to own them at any given moment.

It is easy to see why long-termism has become so fashionable.Repeated financial-market crises, including the one in 2007-08,have reinforced a view that short-term traders are nothing buttrouble. Germany’s relatively strong performance over the pastdecade seems to be an affirmation of its stolid corporate virtues.But there is a danger in going too far.

Long-termism is no guarantee of success. In the 1980s fans ofJapan’s economic model argued that it would pull ahead ofAmerica because its firms preferred slow consensus-buildingand could rely on their core shareholders, the banks, to stand bythem for the long term. But between 1990 and 2013 the Americaneconomy grew by 75% in real terms, whereas Japan’s only man-aged 24%.

In 1994 Jim Collins and Jerry Porras, two management pun-dits, published a hymn to long-termism in “Built to Last”. Thebook describes18 companies whose shares had consistently out-

performed stockmarket indices over decades, in large partbecause they invested heavily in such things as research andtraining, and set goals that were also measured in decades, notquarters. But a follow-up study five years later discovered thatonly eight of them had kept on outperforming the market. Todaymany of their exemplars are struggling. IBM is treading water,Motorola is a shadow of its former selfand Procter & Gamble hasbeen forced to bring backa retired boss, A.G. Lafley, to sort it out.

Long-termism can be an excuse for failing to grasp the nettle.Nokia, a Finnish mobile-phone giant, left a floundering boss,Olli-Pekka Kallasvuo, in place for fouryearsdespite growing prot-ests from investors. By the time it got around to replacing him in2010 the company was damaged almost beyond repair. Short-term demands such as quarterly reporting schedules can forceproblems out in the open, the quicker to get them fixed. We mightstill be in the dark about Tesco’s accounting fiasco if the Britishgrocer did not have to update investors on its performance everyfew months. More important, short-termism can allow “creativedestruction” to work its magic. The United States has been betterthan other countries at producing world-beating startups be-cause it is better at shifting capital quickly to new opportunities.

Perhaps the strongest argument for rewarding long-term in-vestors is that they think more about sustained growth, whereasshort-term ones will sacrifice this for a quick buck. This is true ifcompanies do not trade in their own shares, says Jesse Fried ofHarvard Law School. However, he argues that this argumentbreaks down when firms become enthusiastic repurchasers oftheir own shares, as American companies have: last year those inthe S&P 500 index bought back$500 billion of their own stock.

His explanation is as follows: companies repurchase theirshares when they think they are cheap, as a way of benefitingtheir long-term holders at the expense of those who sell. As ithappens, their timing is often poor. However, what is more im-portant is that the cash they spend on repurchases could oftenhave been used on expanding into new markets, or on researchand development, to generate long-term growth. One studyfound that a doubling of repurchases leads to an 8% fall in spend-ing on R&D.

Terms and conditionsAll this is not to say that we should start chanting: “Short-termgood, long-term bad”. Rather, it is an argument for nuance. Long-termism and short-termism both have their virtues and vices—and these depend on context. Long-termism works well in stableindustries that reward incremental innovation. But it is a recipefor failure in such businesses as social media, where firms areconstantly forced to abandon their plans and “pivot” to a newstrategy, in markets that can change in the blinkofan eye.

Nor are long-termism and short-termism mutually exclusive.General Electric, often praised for its long-term perspective, is try-ing to run itself more like a startup, to combat bureaucratic bloat.In recent years activist investors have repeatedly bought stakes inbig firms, from Yahoo to Fortune Brands, and agitated for ashake-up. Long-term institutional investors, seeing the merits oftheir arguments, have often backed them.

Making sweeping statements about the virtues of long-ter-mism and the vices of short-termism is a satisfying pastime: itconfers a sense ofmoral seriousness and intellectual depth. But itis a poor way of analysing the dynamics of wealth creation—andit is an even worse way ofdesigning corporate policies. 7

The tyranny of the long term

Let’s not get carried awayin bashing short-termism

Schumpeter


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Economist.com/economics

1

IN BEIJING, a city of grandiose govern-ment offices, the central bank stands out

for its modesty. Its headquarters are smalland dated; plans for a big, gleaming exten-sion have so far come to nothing. Crampedas they are, however, these digs are an aptsymbol of the central bank’s restraint.

For nearly four years the People’s Bankof China (PBOC) has classified monetarypolicy as “prudent”, which is supposedly aneutral stance—not too tight, not too loose.In reality it has been tightening, to cool anoverheated property market and slow thealarming accretion of debt. At the sametime, the central bank has chipped away atvestiges of central planning with changesto its currency and interest-rate regimes.The PBOC is far from independent, but un-der Zhou Xiaochuan (pictured), its gover-nor since 2002, it has acquired real clout asit has doggedly pursued its dual objectivesof restraint and reform.

These two aims were complementaryin 2011, when the central bank first em-braced prudence. Nominal growth wasstill running at 18%, a heady pace even byChinese standards; slowing breakneck in-vestment was essential. Yet times havechanged. The economy is now on track forits weakest year since 1990, sliding belowthe government’s goal of 7.5% growth; in-flation is at a five-year low, nearly two per-centage points below the official 3.5% tar-get. The central bank faces mounting callsto lower rates. But advisers say it fears

ty”, injectinga furtherwhackofcash—769.5billion yuan, it turns out—into the econ-omy via loans to commercial banks. Ru-mours spread for weeks before the centralbank confirmed them on November 6th.As for the initial trillion-yuan loan, it even-tually acknowledged the operation,though declined to say how much it hadlent, at what rate or even to which bank.

The combined amount ofthe infusions,if as big as reported, would be huge—equalto more than three months of America’snow-completed QE scheme when it was atits height, or to five months of Japan’s cur-rent programme. The impact of China’seasing, however, has been underwhelm-ing. It has not reached the real economy.Short-term interest rates have fallen: aclosely watched interbank rate is down byalmost two percentage points this year, to3.2% (see chart). But the rate at which bankslend to businesses, which matters more forgrowth, has remained stuckat about 7%.

The central bank’s lack of transparencyhas sown confusion. “The more policytools you have, the harder it is to predictchanges in any one of them,” says Song Yuof Goldman Sachs. A recent Barclays sur-vey ranked the PBOC third-worst of 14 bigcentral banks in terms of communication,behind only Turkey’s and Russia’s.

Even when providing partial confirma-tion of its covert easing, the PBOC’s mes-sage was muddled. The purpose was “toguide banks to lower lending rates”, it said,an apparent indication of an intention torelax policy. But in the next breath it addedthat the easing was to compensate for a de-cline in capital inflows, in order to “main-tain a neutral, appropriate level of liquid-ity”—that is, to keep policy unchanged.

The central bank is right to be con-cerned about debt. Economy-wide debtshave soared to 250% ofGDP, up by100 per-centage points since 2008. Increases ofthat

sending the wrong message: by easing, itmight signal an end to restraint and, by ex-tension, to reform.

The central bank’s answer to this dilem-ma has been to loosen monetary policy,but in a covert fashion. It lent the state-owned China Development Bank one tril-lion yuan ($163 billion), according to ru-mours that dribbled into local media inJune. Some likened it to Chinese-stylequantitative easing (QE): the central bankhad in effect printed cash to rev up growth.But whereas central banks in developedeconomies have explained every step oftheir QE schemes to markets, the PBOC didnot even bother to announce its activity.

Then, in September and October, itlaunched a “medium-term lending facili-

The People’s Bank of China

Covert operations

BEIJING

China’s central bankis waryofeasing monetarypolicy, but that is what theeconomyneeds

Finance and economicsAlso in this section

66 Buttonwood: Central bankers’ foibles

67 Corporate venture capital booms

67 The ABC of BDCs

68 Greece’s economy stirs

68 Proof that bankers are untrustworthy

71 A rush into mobile transfers

72 Free exchange: Demography’s role insecular stagnation

Business as usual

Sources: Thomson Reuters; PBOC *Latest available

China’s money and lending rates, %

2013 20140

2

4

6

8

10

12Short-term interbank loans

Corporate loans*

http://Economist.com/economics

66 Finance and economics The Economist November 22nd 2014

2 magnitude have presaged financial crisesin other countries, so tighter policy wouldseem in order. Yet real interest rates haveclimbed to more than 8% for industrialcompanies, since the prices at which theysell theirwaresare actuallydeclining. That,in turn, makes debts much harder to ser-vice than anticipated. Cutting interest rateswhile enforcing capital rules to preventbanks from issuing a gusher of new loanswould be a better way to rein in debt.

The PBOC has talked instead of “finetuning” monetary policy and making itmore “targeted”. The loan to China Devel-opment Bank appears to have been ear-

marked for public housing, which localgovernments have struggled to fund. Toborrow from the “medium-term facility”banks were said to be obliged to reducemortgage rates. In other words, having letair out of the property market, the PBOC

nowseems to be pumping itup again. “Theproblem is that there’s no clear frameworkfor monetary policy. They are feeling theirway through,” says Zhang Bin of the Chi-nese Academy of Social Sciences. “If youchange targets, you should explain why.”

In the background are questions aboutthe future of the long-serving Mr Zhou. Hewas due to step down in 2013, having

reached the official retirement age of 65.When his term was extended, it was seenasan endorsementofhis reformistagenda.But a few months ago, word spread in Beij-ing that he might soon be replaced. Someeven suggested that he had pushed toohard to deregulate interest rates.

People familiar with the PBOC say thattalk of Mr Zhou’s imminent retirement hassince died down. Yet he will eventually de-part. His legacy will be extremely positiveoverall: he has presided over an era of rap-id growth, stable inflation and progress infinancial reforms. But his final years in of-fice are turning into a bit ofa muddle. 7

THE world expects a lot of its centralbankers. Politicians demand that they

control inflation, keep the economy grow-ing and the financial sector stable. Attimes, central banks seem to do all thework: it was Mario Draghi of the Euro-pean Central Bank, not the leaders of Ger-many and France, who stopped the sell-off in euro-zone bond markets in 2012, forexample. Sometimes politicians seem tobe sabotaging the central bankers, tight-ening fiscal policy when the banks areeasing to help the economy.

But can we rely on central bankers toget things right? They are subject to thesame behavioural biases as the rest of us.That is the theme of a recent, thoughtfulspeech* from Andrew Haldane, the BankofEngland’s chiefeconomist.

There are various mechanisms to en-sure the bankacts in a considered and rig-orous manner. It is accountable for its ac-tions. Its goals are set by Parliament and ifit misses its inflation target, the governorhas to write a letter to the chancellor ofthe exchequer, Britain’s finance minister,explaining why. Decisions on interestrates are made by a committee, which in-cludes academics and economists fromoutside the institution—a way ofavoidinggroupthink. At least one member of thecommittee has dissented at around halfofall meetings.

But there have still been failings, as MrHaldane freely admits. It is obvious in ret-rospect that problems were building inthe banking sector in 2005-06. Leveragehad risen and the regulations of the timeserved to obscure the nature of the risksthe banks were taking. Mr Haldane hasemphasised how important banks werein fuelling the crisis in an earlier speech.**Yet in the decade preceding the financialcrisis of 2007-08, the minutes of the mon-etary-policy committee’s meetings sug-

gest that it spent just 2% of its time discuss-ing banks.

The central bank moved centre-stage inthe aftermath of the crisis, providing li-quidity to struggling banks, pushing inter-est rates to their lowest level in its 300-yearhistory and buying £375 billion ($590 bil-lion) of British government bonds. Giventhe scale ofits interventions, itwas impera-tive for the bank to get its economic fore-casts right. But as Mr Haldane admits, it didnot. “Since the crisis, the bank’s forecast er-rors for output and inflation, like those ofexternal forecasters, have tended to beone-sided and serially correlated.”

Mr Haldane describes this as a hubrisbias. Before 2007, during the periodknown as the Great Moderation, thebank’s forecasts were highly accurate. Thismay have led to overconfidence in its pre-dictive powers. Its inflation report showsfan charts showing the likely outcomes foreconomic variables; since the crisis, halfofall outcomes have occurred in the outer20% of its forecasts.

Most notably, inflation exceeded the 2%target for four consecutive years, eventhough the bank consistently forecast that

it would return to target in 18-24 months.The central bank took no action to bringinflation back down during that time, onthe understandable grounds that tighten-ing policy would cause considerable eco-nomic damage. Still, it is hard to describesomething as a “target” in such circum-stances. Were a husband to tell his wifethat he had a target of being faithful, hadfailed to meet it over the previous fouryears, but hoped to do so over the follow-ing two, the marriage would be prettyshort-lived.

To his credit, Mr Haldane is trying toaddress the problem, attempting a “cul-tural revolution”. Instead of using re-search to support the bank’s view, it willin future “put into the public domain re-search and analysis which as often chal-lenges as supports the prevailing policyorthodoxy”. This new approach “will actas another bulwark against hubris, over-confidence and groupthink”.

But this is a tricky path to tread. On theone hand, the bank’s every statement ispored over by the markets for signs of fu-ture policy changes, so the publication ofout-of-the-box thinking might only leadto confusion in investors’ minds. On theother hand, the central bank may wellneed fresh thinking to get its forecastsright. The big new hope for monetarypolicy is “forward guidance”—a steerfrom the bank on the outlook for interestrates two years, rather than just onemonth, ahead. Forward guidance is use-less if the bank has no better vision of thefuture than a funfair psychic.

Thinking outside the BankButtonwood

Powerful central banks are subject to theirown biases and failings

..............................................................* “Central bank psychology”, speech at the RoyalSociety of Medicine, London, November 17th 2014. ** “Containing discretion in bank regulation”, speechat the Federal Reserve Bank of Atlanta conference,April 9th 2013.

Economist.com/blogs/buttonwood

http://Economist.com/blogs/buttonwood

The Economist November 22nd 2014 Finance and economics 67

1

WHAT do a Braille printer made out ofLego and a drone that helps farmers

monitor crops (pictured) have to do withchipmaking? Intel Capital, the venture-capital VC unit of the American technol-ogy giant, is not quite sure yet but it wantsto find out. It recently announced it wastaking stakes in 16 startups, including thefirms making these products. Intel hasbeen in the venture-capital business forover 20 years, and has invested in morethan 1,300 companies in 56 countries. Overthat time corporate enthusiasm forventurecapital has waxed and waned—but has sel-dom been greater than it is now.

Companies as diverse as conveniencestores (7-Eleven), chemists (Boots), finan-cial firms (Visa and Citigroup) and carmak-ers (BMW) are all getting into the game.They are looking for quicker, cheaper andbetter sources of innovation than R&D,which often disappoints. In return, thestartups they invest in benefit from theircapital, expertise and connections. Overthe past five years the number of cor-porate-venture units worldwide has dou-bled to 1,100; 25 of the 30 firms that com-prise the Dow Jones Industrial Averagehave one. The $6.4 billion such units haveinvested so far this year is over 60% morethan they did in 2012. America’s corporateinvestors have been involved in 18% of thecountry’s venture-capital deals this year.

Sceptics see a bubble. Three previousbooms, which coincided with ones in con-ventional venture capital, ended intears—in the late 1960s, the early1980s and,most spectacularly, during the dotcombubble, when a staggering $21 billion was

invested in 2000 alone. After each bust,venture units were mothballed or shut.

Believers say the likes of Intel Capitaland Google Ventures have learned to usetheir expertise rather than just their deeppockets. This boom is also driven by neces-sity, says Dörte Höppner of the EuropeanVenture Capital Association. Disruptive in-novation has become the single biggestworry for many firms. Setting up VC armsis a way to identify life-threateningchanges to their business early, so that theycan adapt or, better yet, get in on the act,says Ben Veghte of America’s NationalVenture Capital Association, whose mem-bership has mushroomed in recent years.

Perhaps as a result, the new generationof venture units looks better integratedwith their parents: instead of chasing thenext Facebook (or drone), they tend to in-vest in industries related to the firm’s mainbusiness. IBM, for instance, has set up a$100m fund to back startups that use thetechnology behind Watson, a computerthat can communicate in colloquial lan-guage. It has already invested in Welltok, ahealth-care startup which has invented anapp which uses the technology to analyseusers’ habits and give medical advice.

There are some indications that cor-porate VC is working better than in thepast. Startups backed by firms are morelikely to list their shares than those cham-pioned by conventional venture groups. Abank in Silicon Valley estimated last yearthat corporate VC yields three times thenumberofpatents perdollar invested thanin-house R&D. The longevity of corporateVC arms is also increasing: the average ageis now five and 120 have lasted a decade ormore. That makes them hardier than manychiefexecutives. 7

Corporate venture capital

If you can’t beatthem, buy them

Fearofbeing displaced bystartups isturning firms into venture capitalists

IT IS a common gripe among business-men that although central banks in the

rich world have done their damnedest tobring down interest rates, many firms stillstruggle to borrow, as battered banks curblending in an effort to shore up their capi-tal. In America, one beneficiary of this un-fortunate squeeze on credit isa form ofmu-tual fund that lends to businesses, knownas a business-development company(BDC). BDCs have been around since the1980s but have recently multiplied. Morethan 50 ofthem are nowlisted, with a com-bined market capitalisation in excess of$35billion (see chart).

BDCs are allowed to borrow as muchmoney as they raise from shareholders,usually through fixed-rate bonds, so the to-tal amount at their disposal is approxi-mately $70 billion. That is not much. Theindustry’s total valuation is only a quarterof Citigroup’s, and were they to lend outthis entire sum, it would equal just 4% ofAmerica’s commercial and industrialloans. In reality, some of their money is in-vested in shares and some goes into prop-erty, so their impact is even smaller.

Still, BDCs are big enough to be receiv-ing attention from businesses hungry forcapital and willing to pay interest of 10% ormore to get it, as well as from investorshungry for dividends, which can also ex-ceed 10%. That is more than four times thedividend on the average stock and morethan double the yield ofeven a junkbond.

The high payout comes with a caveat,however. Because BDCs are classified as afund, they pay no corporate tax, unlike abank. To preserve this status, theymust dis-tribute 90% or more of their income eachyear. As a result, building up their capitalbase is a slog. So too is finding good cus-tomers for loans, since they do not offer theprosaic products like current and payrollaccounts through which banks typicallyacquire their customers. Many BDCs spe-cialise in financing the acquisitions ofpriv-ate-equity firms. That helps to keep downcosts, as they make big loans to just a fewcustomers. But it can also suppress returns,as there is lots of competition to back priv-ate-equity deals.

Although BDC’s limited borrowingmakes them safer than banks, they alsosuffer from higher defaults. As a result,when the financial markets become vola-tile, and in particular when the market forhigh-yield debt wobbles, their sharesslump and they struggle to raise capital.

Another quirk is that all but a handfulofBDCs do not have internal managers; in-stead, they farm out their management tonotionally independent firms. The manag-ers’ compensation under such deals is of-ten opaque but lavish. Indeed, chargesakin to the “2 and 20” that hedge-fundmanagers once typically extracted (a man-

Business-development companies

Shadowydevelopments

New York

In the gap left byembattled banks, analternative emerges

Developing fast

Source: MLV & Co *As of November 19th

US business-development companiesMarket capitalisation, $bn

0

10

20

30

40

1997 2000 02 04 06 08 10 12 14*


1

2 agement fee of 2% of assets and a perfor-mance fee of 20% of profits beyond a cer-tain threshold) remain common.

Triangle Capital, based in Raleigh,North Carolina, is an exception. Last year itreturned 18% on equity by backing privatecompanies in the region, with both debtand equity. It is managed in-house, andprovides transparent accounts, completewith details on managers’ pay. Triangle’smarket capitalisation is far greater than thevalue of its assets; BDCs with externalmanagers typically trade at a discount.

For the industry to continue growing,reckons Christopher Nolan of MLV & Co,an investment bank that focuses on it,BDCs must make two changes. First, they

should align the interests of owners andmanagers better. Second, they should allywith banks, which have lots of loan-hun-gry clients but less appetite for risk.

A bit of financial engineering mightspur such partnerships: loans could besliced up to create a high-yielding but riski-er portion for BDCs while leaving the saferand less lucrative bit with banks. Regula-torsare keen on the idea oftransferring riskfrom outfits with flighty, government-in-sured funding, such as deposits at banks, toones with more stable, loss-absorbingbackers, such as the shareholders of BDCs.Building arrangements of that sort on anyscale will take time, but a foundation isstarting to emerge. 7

The Greek economy

Grecovery

THE euro area stayed in the doldrumsin the third quarter, according to data

released on November14th. Output roseby 0.2% compared to the second quarter,equivalent to just 0.6% on an annualisedbasis. That was only slightly faster thanthe meagre 0.1% growth in the secondquarter (0.3% annualised). Against thisdismal backdrop there was one nicesurprise: of the 14 countries in the 18-strong currency union that reported data,Greece fared best, growing by 0.7%.

It turns out that the Greekrecoverystarted in the first quarter of this year,when it grew even faster, by 0.8%, accord-ing to the new figures (for technical rea-sons quarterly figures had been suspend-ed since 2011); it then slowed to 0.3% inthe second quarter. The upturn hasmeant that the economy is now growingon a yearly basis (see chart). Apart from ablip in early 2010 just before the first oftwo bail-outs, this is Greece’s first spell ofannual growth since the start of2008.Between the pre-crisis peak, in the sec-ond quarter of2007, and the trough at the

end of last year, GDP contracted by 27%, adecline rivalling America’s in the early1930s.

Even though the euro zone as a wholeis doing badly, the Greekrecovery looksset to continue, at least in the short-term.An economic-sentiment index compiledby the European Commission stood at102 in October, well above its level a yearbefore, when it was 92, let alone duringthe worst of the euro crisis, when it sankbelow 80. Since the indicator tends totrackGDP growth this suggests a decentstart to the current quarter.

According to the commission’s fore-cast in early November, the recoveryshould strengthen next year, when itexpects the economy to grow by 2.9%.Growth would come from higher house-hold consumption and investment, asausterity eases, together with a boostfrom net exports.

That upbeat outlookmay be un-dermined by political uncertainty, how-ever. The coalition government led byAntonis Samaras, which steered thecountry away from the abyss after twofraught elections in 2012, could fall nextyear, possibly as early as February.

Opinion polls suggest that the nextone may be led by Syriza, a left-wingparty whose policies would put it on acollision course with the euro zone’screditor countries, especially Germany.Already, ten-year government-bondyields, which had fallen below 6% duringthe summer, have risen above 8% asinvestors worry about the country’spolitical prospects.

The foundations of this year’s growthwere laid when the threat ofa Grexit wasremoved. Should the jitters return, theGrecovery will surely wobble too.

Political uncertaintycould trip up the euro zone’s newstarperformer

Out of the abyss

Sources: Eurostat; EuropeanCommission; Haver Analytics *Forecast

Greek:

2007 08 09 10 11 12 13 1412

9

6

3

0

3

6

0

30

60

90

120

150

180

+

–

GDP, % changeon a year earlier

general governmentgross debt, % of GDP

*

“IF YOU can only be good at one thing,be good at lying…because if you’re

good at lying, you’re good at everything.”Thus a wag imagined one investmentbanker advising another in a lift. He maynot have been far wrong.

In an experiment published by Nature

this week, 128 bankers with an average of12 years’ experience in the industry weresplit into two groups. The “control” groupwas asked a series of anodyne questions—for instance, how many hours of televisionthey watched each week. The “treatment”group was quizzed on their work at theirbank.

Each banker was then asked to toss acoin in private ten times and report the re-sults. For each toss they could win $20, de-pending on whether the coin landed on“heads” or “tails”. (If it landed on thewrong side, they got nothing). The bankersreported the results of their ten flips on acomputer, and received payment automat-ically. With enough lucky flips—or shame-less lying—a banker could easily make$200 in a matter ofseconds.

In both groups, workers from the red-blooded bit of banking—traders and thelike—were more dishonest than those inancillary jobs. Overall, however, the con-trol group was quite honest: they reportedthat 52% of their tosses had been winners,only slightly above the probable outcomeof 50%. The treatment group, in contrast,said that they had got lucky 58% of thetime. Nearly a tenth of the treatment groupclaimed the full $200, despite there being aone-in-a-thousand chance of this happen-ing to an honest flipper.

Behavioural economics

Lying, cheatingbankers

Talking about theirworkmakesbankers more dishonest

2400+Employees around the world

250+Portfolio managers

13Global offi ces

1Time-tested approach

©2014, PIMCO.

wearepimco.com

Singular in our mission to protect and enhance our clients’ assets.

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PIMCOWe work every day with the single goal of

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The Economist November 22nd 2014 Finance and economics 71

2

Correction: Our chart on page 4 of last week’s specialreport on the Pacific contained two errors. It mixed upthe direction of eastbound and westbound trade; and itsdefinition of Europe (derived from IMF figures)understated the level of trade between that region andthe Americas. In the accompanying text, we should havesaid, “since the 1980s trade across the Pacific has faroutrun the Atlantic sort.” A corrected version of thechart is online. Also, in the diagram on page 8 of thereport, TTP should have read TPP. Apologies.

It was not merely talk of stocks andshares that made people more deceitful:when the authors tried that trick on non-bankers, there was no effect. And people inother professions—say, those in computingand pharmaceuticals—did not becomemore dastardly when the researchersasked them about their work.

The authors posit that the discussion ofwork may have put the treatment groupinto a more materialistic frame of mind:more of them than in the control groupagreed with the notion that social statuswas primarily determined by financialsuccess, for example. Another possibility,about which the authors are sceptical, is

that the people in the treatment groupwere more prepared to lie because theirprofessional identity had taken centre-stage; the feelings of the person inside thesuit became less important.

Banks say they are trying to stamp outdishonesty among their staff. Some nowmake employees attend ethics classes. Theresearchers want bankers to take the finan-cial equivalent of the Hippocratic Oath,doctors’ promise to “do no harm”. TheNetherlands introduced one at the begin-ning of 2013, in which moneymen solemn-ly affirm their “responsibility towards soci-ety”. But it may not be the bankers who arethe problem so much as the setting. 7

HANDLING small transfers between in-dividuals is not an especially big or lu-

crative part of the financial system, but it isa faddish one. On November 17th Snap-chat, a popular app that lets users sendeach other photos that disappear after afew seconds, introduced a new servicecalled Snapcash that allows them to trans-fer money (with luck, no vanishing is in-volved). The news comes hot on the heelsof the announcement from Groupe BPCE,a French bank, that its customers will soonbe able to send each other money via Twit-ter, a microblogging service. Facebook, asocial network, has similar plans; Apple,which recently launched a payment ser-vice, may also join the fray.

Person-to-person (P2P, in techno-speak) payments are growing fast. Lastyear Forrester, a market-research firm, pre-

dicted that mobile P2P payments in Ameri-ca would amount to only $4 billion a yearby 2017. Now it expects the market to reach$5 billion this year and to grow by 26% ayear, to reach $17 billion by the end of 2019.(Two-thirds will be domestic transfers, therest international remittances.) Venmo, aP2P startup now owned by PayPal, an on-line-payments firm, says that it transferred$700m in the third quarter of the year, 50%more than in the second.

Using mobile phones to send cash isnothing new. The granddaddy of such ser-vices is Kenya’s M-PESA. Launched in 2007,it is now used by more than 17m Kenyans,equivalent to more than two-thirds of theadult population. PayPal has had a mobile-payments app for some time and is themarket leader in America. Big banks havealso entered the P2P business, with ser-

vices such as Popmoney in America andPaym in Britain.

What is changing is that such servicesare getting ever easier and faster to use,with some now offering instantaneouspayments. In the case ofSquare Cash usersopen an account with their debit card andcan send money to any e-mail address ormobile phone number (recipients need toopen an account, too). Snapcash allows us-ers to flick money to their friends by drag-ging images of notes around the screen oftheir smartphone.

Venmo is an example of another trend:it makes mobile payments “social”, in thatit allows groups to split bills easily at res-taurants, say, and share information abouttransactions. The app lets users send mes-sages alongwith payments (“To Misha andNina, for such a fun evening”) and makethem—although not the sum involved—visible to friends. Although all this maymake older users yawn or cringe, youngerones, the majority of Venmo’s customers,seem to like it.

The ease of use and the social elementraise concerns about security. Snapchatdoes not have the best record in this re-spect: in October tens of thousands of sup-posedly vanished photos sent via the appappeared online. But providers point outthat their services run on regulated pay-ment platforms, where all the sensitivedata are kept. Snapchat, for instance, usesSquare, a payments firm, which also oper-ates Square Cash. All services impose alimit on transfers: in the case ofSnapcash itis $250 a week (although that can be raisedto $2,500).

Another burning question is how allthese services will make money. Somecharge fees. Popmoney, for instance, setsyou back $0.95 per transaction. Othersmay introduce premium services, try tomonetise the data they gather on pay-mentsorsell advertising. Butconsumers, atleast for domestic transfers, will come toexpect real-time, free P2P services, predictsDenée Carrington of Forrester. “Nearly allofferings are loss leaders,” she says.

All this is a threat to banks, reckons MsCarrington: they want to remain the mainconduit for consumer spending and mon-ey transfers, which is why most now havetheir own P2P payment offerings. But whatif consumers, in particular the youngerones, prefer the services of newcomers? Insome circles in America “Venmo” is al-ready used as a verb, as in “Can youVenmo me some money?” 7

Mobile payments

The cheque is in the tweet

SAN FRANCISCO

Sending and receiving moneyon yoursmartphone is getting easier


IN THE late 1930s economists trying to explain how a depressioncould drag on for nearly a decade wondered if the problem was

a shortage of people. “A change-over from an increasing to a de-clining population may be very disastrous,” said John MaynardKeynes in 1937.* The following year another prominent econo-mist, Alvin Hansen, fretted that America was running out of peo-ple, territory and new ideas. The result, he said, was “secular stag-nation—sick recoveries which die in their infancy anddepressions which feed on themselves and leave a hard andseemingly immovable core ofunemployment.”

A year ago Larry Summers of Harvard University revived theterm “secular stagnation” to describe the rich world’s prolongedmalaise. Weakdemand and excess savingswere making it impos-sible to stimulate growth with the usual tool of lowshort-term in-terest rates, he argued. Demographics may play a central role inthe ailment Mr Summers described—indeed, a more central onethan in the 1930s.

An ageing population could hold down growth and interestrates through several channels. The most direct is through thesupply of labour. An economy’s potential output depends on thenumber of workers and their productivity. In both Germany andJapan, the working-age population has been shrinking for morethan a decade, and the rate of decline will accelerate in comingyears (see chart). Britain’s potential workforce will stop growingin coming decades; America’s will grow at barely a third of the0.9% rate that prevailed from 2000 to 2013.

All else being equal, a half percentage-point drop in thegrowth of the labour force will trim economic growth by a simi-lar amount. Such an effect should be felt gradually. But the reces-sion may have accelerated the process by encouraging manyworkers to take early retirement. In America the first baby boom-ers qualified for Social Security, the public pension, in 2008, onturning62. Accordingto several studies, this can probably explainabout half the drop since then in the share of the working-agepopulation either working or looking for work, from 66% to be-low 63%. (This echoes the experience of Japan, which slid intostagnation and deflation in the 1990s around the same time as itsworking-age population began to shrink.)

The size and age of the population also influences how manycustomers and workers businesses can tap, and so how muchthey will invest. Keynes and Hansen worried that a falling popu-

lation would need fewer of the products American factoriesmade. Contemporary models of economic growth assume thatfirms need a given stockofcapital per worker—equipment, build-ings, land and intellectual property—to produce a unit of output.If there are fewer workers to hire, firms will also need less capital.

In a research note, Eugénio Pinto and Stacey Tevlin of the Fed-eral Reserve note that net investment (gross investment minusdepreciation) is close to its lowest as a share of the total capitalstock since the second world war. This is partly cyclical, since therecession led businesses to curtail expansion plans. But it is alsosecular. Growth of the capital stock slowed from 3.1% a year in1994-2003 to 1.6% in the subsequent decade. The economists attri-bute about a third of the deceleration to slower growth in theworkforce, and the rest to less innovation. In other words, busi-nesses are buying less machinery because they have fewer work-ers to operate it and fewertechnological breakthroughs to exploit.

A borrower’s worldThe third means by which demography can influence growthand interest rates is through saving. Individuals typically borrowheavily in early adulthood to pay for education, a house and ba-bies, save heavily from middle age onwards, and spend thosesavings in retirement. Coen Teulings of Cambridge Universityhas calculated what various countries’ collective savings shouldbe given their demographics. Higher population growth andshorter retirements require less saving; older populations more.

For America, the required stock of savings equalled -228% ofGDP in 1970: households should have been borrowers ratherthan savers since their relative youth and lower life expectancymeant they had ample future income to repay their debts and fi-nance retirement. But as the population aged, its growth slowedand time in retirement lengthened thanks to increased lifespans,the required level ofsavings rose to 52% ofGDP in 2010. For Japan,required savings went from -176% to 119% of GDP in the same per-iod, Germany’s from 189% to 325%, and China’s from -40% to 86%.

The simultaneous effort by so many countries to save for re-tirement, combined with weak investment, slowing potentialgrowth, fiscal retrenchment, corporate cash hoarding and in-equality (which leaves more of the national income in the handsof the high-saving rich) is depressing the “equilibrium” interestrate that brings investment and saving into balance. There is,however, at least one obvious policy fix. “A higher retirement agereduces saving,” Mr Teulings and Richard Baldwin of the Gradu-ate Institute in Geneva write in a recent e-book. “There simply is alimit to the extent to which we can save today in exchange for lei-sure and high consumption tomorrow. Somebody has to do thework tomorrow; we cannot all be retired by that time.”

Moreover, at some point, an ageingpopulation starts to use upthe savings it has accumulated. Charles Goodhart and Philipp Er-furth ofMorgan Stanleynote that the ratio ofworkers to retirees isnow plunging in most developed countries and soon will inmany emerging markets. Japan is already liquidating the foreignassets its people acquired during their high-saving years; Chinaand South Korea are starting to do so and Germany will soon.This, they predict, will drag real interest rates, which are now neg-ative, back to the historical equilibrium of2.5-3% by 2025.7

No country for young people

The vanishing worker

Source: World Bank *Excluding Britain

Working-age population, % change on a year earlier

Online: For an explanation of secular stagnation in graphics, visit Economist.com/stag14

2

1

0

1

2

3

+

Ð

1970 75 80 85 90 95 2000 05 10 15 20 25 30 35 40 45 50

Britain

United States

China

Japan

European Union*

F O R E C A S T

Demographymayexplain secularstagnation

Free exchange

Economist.com/blogs/freeexchange

................................................................................................* Studies cited in this article can be found at www.economist.com/stagnation14

http://www.economist.com/stagnation14

http://Economist.com/stag14

http://Economist.com/blogs/freeexchange

73


Property

http://www.47parkstreet.com

mailto:[email protected]


http://www.palazzotornabuoni.com



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1

“YOU can take photos. But stay on theroad. Don’t step onto the grass.” It is

28 years since the world’s worst nuclearac-cident, at the Chernobyl nuclear powerplant in northern Ukraine, but visitors arestill told to be careful. Though much of theplant (at which, even now, 3,000 peoplework) has been decontaminated, and theroads cleaned up, the surrounding foresthas hotspots where fragments of debrisand nuclear fuel, ejected by the explosionthat destroyed reactor number four onApril 26th 1986, emit dangerous radiation.

At the moment, the reactor’s remainsare sealed in by a concrete and steel struc-ture known officially as the Shelter Objectand colloquially as the sarcophagus. Thishas done its job for nearly three decades,but there are doubts it can manage afourth. Wind, rain, rust and time have tak-en their toll, and the radiation level withinit makes maintenance near-impossible.Many fear it may collapse.

That is why visitors to Chernobyl thesedays will see a huge and growing buildinglooming in front of reactor four’s remains.This is the New Safe Confinement (NSC; ithas yet to attract a nickname). It is in es-sence, as the picture shows, a giant double-skinned stainless-steel Nissen hut, whichwill have flat walls at each end. It weighs30,000 tonnes; is taller, at 110 metres, thanthe Statue ofLiberty; and is165 metres longand 260 metres broad. It is being built byNovarka, a French consortium, and its cost,

height. To overcome that, the NSC is com-posed of two sections—each, in turn, madeof linked panels, so that they can remainflat, under the shield’s protection, untilraised by special jacks.

To complicate matter further, reactorfour shares a building with reactor three,which did not blow up and is not coveredby the sarcophagus. The NSC will coveronly the reactor-four part of this building.The wall at that end of it thus has a holethrough which the building fits, and whichwill have to be sealed to the building by amembrane when everything is in place.

Even when that has happened, how-ever, only half of the contract will havebeen fulfilled. The other half—keeping thething standing for the century specified inits blueprints—will be a challenge. Manylarge steel structures, such as the ForthBridge, in Britain, have survived for morethan a century. But, as Nicolas Caille, theproject’s director at Novarka, points out,these rely on regular repainting to protectthem from the elements.

The ruined reactor’s radioactivitymeans it will be impossible to do that forthe NSC. Instead, the plan (besides usingstainless rather than normal steel for partof its construction) is to pump warm, dryair between its inner and outer skins. Aslong as this ventilation system can keepthe air’s relative humidity below 40%, thenon-stainless bolts and beams that holdthe structure together should not rust. Forthe plan to work, though, the dehumidi-fiers will have to be kept supplied withpower for the whole period.

Then there is the question ofwhat to dowith the radioactive junk inside. The ulti-mate goal is to disassemble the sarcopha-gus and then cut up and dispose of the re-mains of the reactor. The NSC is thereforebeing built with several internal, remotelyoperable cranes, and the plan is, one day, to

€1.5 billion, is met by donations from doz-ens ofcountries, administered by the Euro-pean Bank for Reconstruction and Devel-opment. It was scheduled for completionin 2005, but political foot-dragging andwrangling over who would pay have de-layed its construction by more than a de-cade. When it is finished, though—proba-bly in 2017—it will protect the sarcophagusfrom the ravagesofthe weatherand ensurethat, even if that older container does falldown, no radiation will escape. With luck,it will be able to do this for a century.

Baba Yaga’s hutEven now, so long after the explosion, toomuch radioactivity streams through thesarcophagus from the reactor’s ruined coreto allow the NSC to be built in situ. Instead,it is being constructed a few hundred me-tres away and will be slid into place onrails—making it, Novarka reckons, the big-gest movable structure ever built.

That distance, however, is still notenough for complete safety. The construc-tion site isa compromise, for it ison a slope.The railwaymustbe flat, so everymetre it isextended means removing and disposingof more tonnes of radioactive soil. Ratherthan do that, Novarka has built a specialconcrete radiation shield in front of the sar-cophagus, to provide additional protectionfor its workers. This, though, is a compro-mise too, for the shield is necessarily farshorter than the NSC’s arch will be at full

Nuclear safety

The ultimate security blanket

Chernobyl

Almost three decades after the catastrophe that wrecked it, a proper tomb forreactornumberfourat the Chernobyl nuclearpowerplant is nearing completion

Science and technologyAlso in this section

75 How Tibet was won

75 Antibodies v bacteria

76 The fate of Philae

http://Economist.com/science

The Economist November 22nd 2014 Science and technology 75

1

2 use these and robots to do the job. But that will not be easy. The inside of

reactor four is a mess of twisted metal, na-ked nuclear fuel and lumps of “corium”, alava-like substance formed when reactorfuel melted and mixed with the concretefloor of the reactor building. This buildingis so radioactive that anyone walkingaround in it would accumulate a lethaldose in minutes. Even robots workingthere will need to be hardened against theradiation, and also dexterous enough tonavigate through what is, essentially, abomb site. Those involved concede thatthe technology needed to do this does notyet exist. But once the NSC is in place, therewill be plenty of time to invent it.

There may, though, be little incentive todo so. Once the NSC is finished, and thereis no longera riskofradiation escaping, theproblem of deconstructing the sagging sar-cophagus and clearing out the reactorbuildingwill become less urgent. There aremany other calls on the Ukrainian govern-ment’s money, and foreign donors may de-cide they have higher priorities. Doingnothing might even be sensible—the 100years the NSC is designed to last will givetime for radiation levels inside the reactorbuilding to fall, making any eventualclean-up simpler. When asked about this,Igor Gromotkin, the director of the Cher-nobyl nuclear power plant, simply smiledand replied: “It’s a good point.”7

How Tibet was won

The barley mow

THAT agriculture permitted the hu-man population to expand its size is

obvious. That it permitted the populationto expand its range as well is a moresubtle point. But a paper just published inScience, by Chen Fahu and Dong Guang-hui ofLanzhou University, in China, andtheir colleagues, shows a fascinatingexample of just that. A new crop not onlyallowed people to colonise the highestreaches ofTibet, but let them do so at atime when the weather was actuallygetting colder.

Archaeology suggests that humanshave been visiting the Tibetan plateau forat least 20,000 years. For most of thistime, though, these visits were seasonal—probably in search ofgame such as goats,sheep, asses and yak. The lower slopes ofthe plateau started to be settled by farm-ers about 5,500 years ago. But these farm-ers, Dr Chen and Dr Dong discoveredafter reviewing artefacts, plant remains,animal bones and teeth from 53 sites inthe north-east of the plateau, failed toestablish themselves above 3,000 metres

until about 3,600 years ago. Only thendid farming spread to cover places withan altitude ofup to 4,700 metres.

This is odd, because 4,000 years agothe climate in the area became distinctlycolder. Ifanything, the maximum alti-tude of farms would have been expectedto fall, not rise. So what accounts for thespread?

The clue is in the crops. Sites belowthe crucial contour line are dominated bymillet. Those above it are dominated bybarley. Though barley has a longer grow-ing season than millet, it is more tolerantof the cold. Barley was part ofa farmingrevolution that happened in the MiddleEast as millet and rice were spreading inChina. It arrived in Tibet at just the righttime. Tibet’s farmers were able to expandconfidently upwards instead ofbeingforced downhill, and the roofof theworld, a habitat about as different fromthe African savannah in which Homosapiens evolved as it is possible to imag-ine, was nevertheless absorbed success-fully into the human empire.

Beijing

The settlement ofTibet depended on an exoticcrop from the West

“Our job”, says Jan Kemper, “is tomake cells happy.” Ms Kemper

works at MedImmune, a subsidiary ofAstraZeneca based in Gaithersburg, Mary-land. Her laboratory contains 40 bioreac-tors—fluid-filled tanks of about three litres’capacity. Paddles within them whirlaround a mixture of nutrient broth andspecially engineered hamster cells that arebusy making human antibodies.

It is, indeed, cell heaven in one of thesereactors. It is also part of a new front in theancient war between man and microbe,for the antibodies Ms Kemper’s cells pro-duce are designed to attack bacteria, andthus back up conventional antibiotics,some of which are failing in the face of ris-ing bacterial resistance.

In America alone, at least 2m illnesses ayear—and 23,000 deaths—are caused byantibiotic-resistant bacteria. Besides thehuman suffering this inflicts, it adds $20billion to the annual cost of health care.The toll is such that, in September, BarackObama directed federal agencies to takeaction against antibiotic-resistant bacteria.A task-force, ordered to report in February,has been appointed. And the Departmentof Health and Human Services is puttingup a $20m prize for a rapid, diagnostic testfor such bacteria. But a diagnosis is of littlevalue without a treatment. Which is whereantibodies come in.

Horse senseAntibodies are proteins that have specialsites on them which can vary in shape inmyriad ways. Each variation is tailored tostick to one or a handful of specific othermolecules, known as antigens, and neu-tralise them. Ifan antigen is part of a bacte-rium or virus, that gets neutralised too.

Using antibodies to treat infections isnot a new idea. The first Nobel prize inmedicine, awarded in 1901, went to Emilvon Behring for discovering how to em-ploy antitoxins, as he called them, to treatdiphtheria. Von Behring found he couldtransfer them from infected horses to sickpeople by injecting those people withhorse-blood serum. In the wake of this dis-covery, serum therapybecame, until the in-vention of antibiotics, the main way oftreating not only diphtheria but also teta-nus, scarlet fever and meningitis. It fadedinto the background after the invention ofantibiotics, but is still employed for neu-tralising snake venom and—albeit experi-mentally—for treating Ebola fever. How-

Antibodies v bacteria

Making resistancefutile

Gaithersburg

A newwayto fight bacterial infections

76 Science and technology The Economist November 22nd 2014

2 ever, now that biotechnology allowsparticular antibodies to be created in lab-oratories like Ms Kemper’s, the techniqueis poised to return to wider use, albeit in aslightly different guise.

Merck, a large American drugcompany,is testing a combination of two antibodiesagainst toxins made by Clostridium diffi-cile, a bacterium that plagues hospitals andwhich can be hard to treat with conven-tional antibiotics. The past few years haveseen a particularly virulent strain of thisbug emerge, and death rates have in-creased. Early trials of Merck’s treatmentsuggest that, when used alongside conven-tional antibiotics, antibody therapy re-duces the recurrence of infection.

MedImmune’s antibodies, known forthe moment as MEDI3902 and MEDI4893,are aimed respectively at Pseudomonas ae-ruginosa and Staphylococcus aureus andbind, in the former case, to bugs them-selves and in the latter to human cells,shielding them from bacterial toxins. Pseu-domonas and Staphylococcus are bacteriathat particularly plague intensive-care un-its, sometimes causing stays in hospital tobe five to eight times longer than they needbe. For that reason, and the lack of alterna-tive therapies, America’s Food and DrugAdministration has recently agreed to ex-pedite the review process for these two po-tential treatments.

Unlike most antibodies, MEDI3902 isbi-specific—meaning it has been engi-neered to bind to two different targets. Oneof these is on Pseudomonas’s tip, the sitethat injects toxins into an infected individ-ual’s body cells. When the tip is plasteredwith antibodies, this cannot happen. Theother target is on the bacterium’s surface.Here, the antibodydoes two things. It stopsbacteria it is attached to interacting with,and thus harming, body cells. It also bringsthe bugs in question to the notice of thebody’s defences, such as white blood cellscalled macrophages, which then eat them.

MEDI4893 also has more than one func-tion. It stops the toxin produced by Staphy-lococcus binding to body cells. It also pre-vents the bug rupturing those cells’membranes and killing them. And Merckand MedImmune are not the only compa-nies involved in this area. Sanofi, a Frenchfirm, is also working on an antibody thatkills Staphylococcus by attracting it to theattention ofmacrophages.

All these new treatments will, if theywork, be useful in hospitals—particularlyto treat infections that are resistant to anti-biotics and thus hard to get rid of. But theymightalso be used prophylactically, as con-ventional antibiotics already sometimesare, before someone undergoes surgery.They may, indeed, prove to be a way ofsparing the routine use of antibiotics, thusreducing the selective pressure on bacteriato evolve resistance to those drugs—for thereason resistance is such a problem in hos-

pitals is that there are an awful lot ofantibi-otics sloshing around in them.

Evolution being what it is, bacteria willno doubt find ways around antibodies, asthey have with antibiotics. But the widerthe range ofweapons available for deploy-ment in the conflict, the harder life will befor them. As Steve Projan, who overseesMedImmune’santibodyproject, eloquent-ly puts it, “I’ve been working on staph for34 years. I’m ready to beat the bastard.” 7

AS MIXED successes go, it was a spectac-ular one. On November 12th the Euro-

pean Space Agency (ESA) announced, witha mixture ofreliefand triumph, that Philae,a robotic probe, had landed on its target, a4km-wide comet called 67P/Churyumov-Gerasimenko. But, as the minutes andhours passed, it became clear that thingshad notgone entirely to plan. Philae wasin-deed down, but it was down in the wrongplace, and suffering from a serious short-age ofsunshine to boot.

Landing on a comet is tricky, even bythe standards of rocket science. Becausecomet 67P is so small, its gravity is feeble.Anything lifting off from its surface at aspeed greater than about one metre a sec-ond will zoom awayinto space. Itwas vital,then, that Philae make a gentle landing,and have some means of staying put onceit was down. That did not happen, thanksto what could only be called hard luck.

First, a small rocket intended to fire ontouchdown to push the craft downwardsin order to stop it rebounding, failed beforePhilae separated from its mother ship, Ro-

setta. ESA’s mission controllers decided togo ahead anyway, relying on a pair of har-poons designed to fire into the comet’s sur-face and anchor Philae in place. In theevent, those did not workeither.

Moreover, the comet appears to bemade of stiffer stuff than expected. WhenPhilae hit the surface, its flexible legs ab-sorbed some ofthe impact energy—but notenough to prevent a bounce. Even a smalljolt was enough to send it rebounding hun-dreds of metres back into space. As it wasbouncing, the comet rotated beneath it.When it did come to rest, two hours later(and after a second, smaller bounce), it wasfar from its planned landing site.

Worse, it ended up lying at an awkwardangle, in the shadow of a cliff (see photo-graph). Its solar panels were illuminatedfor just an hour and a half out of every 12-hour cometary day. With insufficient sun-light to recharge the craft’s batteries, mis-sion controllers had to husband carefullywhat juice they had.

For two days, eight of its ten instru-ments collected data. On November 14th,with the batteries running low, ESA decid-ed to try deploying Philae’s soil penetrator,but it seems not to have accomplishedmuch. Then, with the collected data safelytransmitted to Earth and the batteries deepin the red, the controllers moved the craftslightly to try to improve the amount ofsunlight it received. On November 15th,contact was lost.

But not, perhaps, for ever. Rosetta con-tinues to orbit the comet, gathering data ofits own. And Philae seems undamaged byits ordeal. ESA hopes that, as 67P falls to-wards the sun and Philae’s solar panels areconsequently able to harvest more andmore photons, the probe might one daybring itselfback to life.7

The fate of Philae

Where the

shadows lie

Europe’s comet-landerworked, but notas well as had been hoped

The black cliffs of 67P/Churyumov-Gerasimenko

Correction: Last week we said that, before Philae’slanding on comet 67P/Churyumov-Gerasimenko, nocraft had made a soft landing on an astronomical bodyother than a planet or a moon. That is wrong. Two craft,NEAR Shoemaker, an American mission, and Hayabusa, aJapanese one, have landed on asteroids.

For daily analysis and debate on books, arts andculture, visit

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1

“PUTIN, thief! Putin, thief!” chantedthe protesters who marched through

Moscow as Vladimir Putin sought his thirdterm as president. Since then the rallieshave ended. Russia’s swift annexation ofCrimea and its subsequent proxy-war inthe south-east of Ukraine have turned MrPutin into a national hero in the eyes ofmany Russians, including some formerprotesters. But they have also led to West-ern sanctions against Mr Putin’s cronies,and focused attention once more on the is-sue of theft and corruption, which is thesubject ofa new bookby Karen Dawisha, a political scientist at Miami University inOxford, Ohio.

“Putin’s Kleptocracy” is a who’s who ofthe people on the sanctions lists drawn upby America and the EU. It is also a guide tothe crony capitalism that grew out of thenexus of Mr Putin’s plutocratic interests,his shady past and authoritarian rule.

When Mr Putin became president hewas seen as a pro-Western, economic liber-al. He pledged to clamp down on the oli-garchs who wielded power in the 1990s,and to restore the role of the state as chiefarbiter. Instead, Ms Dawisha writes, hetransformed “an oligarchy independent ofand more powerful than the state into acorporatist structure in which oligarchsserved at the pleasure of state officials,who themselves gained and exercised eco-nomic control…both for the state and forthemselves.” The result is that 110 individ-uals control 35% ofRussia’s wealth, accord-ing to Ms Dawisha.

Putin was a junior officer. By 1990 he wasformally in charge of external trade rela-tionships in the office of the mayor of StPetersburg. In practice, this meant he waspart ofall trade deals with foreigners.

When Mr Putin moved to Moscow,serving in the Kremlin’s administrationand then as the head of the FSB, the KGB’ssuccessor, before becomingprime ministerand then president, his friends followed.Mr Putin relied on former associates tohelp run the country. Some have becomebillionaires controlling the distribution ofthe oil rents. Mr Putin also exploited thetraditional links between the KGB and organised crime.

Ms Dawisha points her finger at many.Cambridge University Press was so fright-ened ofher accusations that it decided ear-lier this year not to publish the book forfear of being sued. (It was subsequentlybought by Simon and Schuster, but is beingbrought out only in America.) British libellaws have no doubt contributed to a senseof intimidation. Russian oligarchs havebeen able to take advantage of them, butmay find that harder now that many ap-pear on a sanctions list and are unable totravel to Europe and America. In 2009 The

Economist settled a libel action, which MsDawisha refers to in her book. It wasbrought by Gennady Timchenko, a formerowner of Gunvor, a commodities-tradingfirm. He is on the American sanctions list.

Ms Dawisha’s work is largely based onopen sources, chiefly investigations byRussian and foreign journalists and pub-lished in Russian newspapers, journalsand books. The problem with this ap-proach is that without being able to verifythese sources, Ms Dawisha makes herselfvulnerable to the same ills that have besetthe Russian media: supposition, conspira-cy and statements based on assumptionsand circumstantial evidence rather thandocumentation. It is impossible to judgehow much of this can be proved.

The buccaneering oligarchs who em-erged in the 1990s were bright, self-mademen who ruthlessly exploited every op-portunity offered by the transition econ-omy. Mr Putin’s cohort is different. Most ofthem are secretive, unremarkable, greymen, with backgrounds in the security ser-vices. They prospered, not by buildingnew businesses, but by suffocating exist-ing ones and picking up the pieces or suck-ing money out of the state.

In the mid-1990s Yegor Gaidar, the ar-chitect of Russian market reforms, fearedthat the repressive Soviet bureaucracycould morph into a mafia system. “Aunionbetween mafia and [bureaucratic] corrup-tion can create a monster which has noequivalent in Russian history—an all-pow-erful mafia state, a real octopus,” he wrotein 1994. Adecade laterGaidar’s concern be-gan to turn into reality. Ms Dawisha’s bookdescribes the fusion between the secretpolice, the mafia and the oligarchs withtentacles that stretch into almost every aspect of life in Russia and beyond.

Ms Dawisha traces their influence tothe last days of the Soviet empire, whenthe KGB was put in charge of the Commu-nist party’s foreign bank accounts and setup joint ventures with Western firms.When the party collapsed the KGB knewwhere the money was. In the late 1980s Mr

Russia

Band of brothers

An academic investigation into the networks that control Russia

Books and artsAlso in this section

78 Quantum biology comes of age

78 Germany’s unfathomable history

79 Tove Jansson, one of a kind

80 The story of English family life

80 First editions, second thoughts

Putin’s Kleptocracy: Who Owns Russia?By Karen Dawisha. Simon and Schuster;445 pages; $30


http://Economist.com/culture

78 Books and arts The Economist November 22nd 2014

1

2 The overall thesis of Ms Dawisha’sbook is that Mr Putin’s advance to powerwas not accidental but part of a pre-meditated plan. Furthermore, the systemthat has emerged in Russia was created bya group of men who followed Mr Putin.“The group did not get lost on the path todemocracy,” she writes. “They never tookthat path.” But hindsight can be mislead-ing. Ms Dawisha imposes her view oftoday’s Russia on to the time when Mr Putin came to power. In fact, Russia’sdescent into the corporatist, nationaliststate that it has now become was by nomeans predetermined.

In a pluralistic state, the scandalous,ugly stories about Mr Putin and his asso-ciates would bring down the government.In Russia they have had little effect. Part ofthe reason lies in the Kremlin’s control oftelevision, the main source of informationfor most Russians. The vast increase in in-comes, particularly in large cities, has alsomade people more tolerant of corruption.It was not just Mr Putin’s cronies who ben-efited from the rising oil prices. So didthose who voted for him. Russia’s aggres-sion in Ukraine and the propaganda thataccompanied it strucka chord with peoplekeen for an imperial resurgence. But as theeconomy slows down and real incomesstart to fall, the focus may shift back to theissue that sparked the protest in 2011. If so,the stories that Ms Dawisha tells may startto resonate more loudly.7

LIFE science still hides a few mysteries.How do migratory birds sense direc-

tion? How are molecules in the air per-ceived as a smell? How, precisely, do tad-poles lose their tails? For years, scatteredviews from the fringes have attempted toexplain such phenomena using quantummechanics, a weird bit of physics that predicts oddities such as particles being inmultiple places at once, eerily connectedacross vast distances or tunnelling throughseemingly insuperable barriers.

Yet a growing body of experimental evidence suggests that quantum odditiesmay really be responsible formany of life’sengineering successes. Quantum biology,the name given to the nascent field thatdraws these diverse data together, is moving in from the fringes and becomingestablished. “Life on the Edge” is the first

popular science bookto outline it.Quantum mechanics is one ofscience’s

most successful theories, superseding SirIsaac Newton’s “classical” physics, theworkaday version taught at school. Thetheory’s weirder predictions—spooky con-nections, tunnelling and the like—are notpartofpeople’severydayexperience. Theyhappen at a microscopic level and, it wasthought, only under precisely controlledconditions. Experiments were done by thesteadiest hands in the darkest labs at thelowest achievable temperatures.

But life is nothing like that. Plants andanimals are warmed and lit by the sun,mostly, and tend to be squidgy, movingand watery. It had long been assumed thata living being is a poor laboratory in whichto carry out quantum experiments. But in2007 scientists who were trying to under-stand how plants gather the sun’s energyso efficiently stumbled across somethingstrange: that energy was sloshing aroundin what are called quantum coherences. Ineffect, the energy is in multiple places at thesame time and “finds” the most efficientroute from where it is collected to where itis put to use.

This first credible example inspired other scientists to follow similarly bold avenues of enquiry. To grasp these newthreads in quantum biology is to grasp aquantity of quantum theory; the coher-ence is just one of the complex phenome-na that Jim Al-Khalili and Johnjoe McFad-den set out to teach the reader. Theysucceed by using delightfully revealinganalogies and similes, some borrowedfrom their prior work, that make slipperyconcepts sit still for study.

The notion of “quantum entangle-ment” makes more sense when depictedas a pair of loaded dice. Molecules withleft- and right-handed forms that vibrate inidentical ways become left-handed JimiHendrix and right-handed Eric Claptonplaying the same tune.

Once the quantum genie is out of the

bottle, it is tempting to use it to explain allmanner ofphenomena. The booksuggeststhat a molecule in birds’ eyes might be thesite of a quantum effect that permits themto “see” a magnetic field and thereby tonavigate. Subatomic particles tunnellingacross gaps in the nose when aroma mole-cules are around may be the first step inhow animals sense scent. This same tun-nelling is presumed to be at work in the ac-tion ofenzymes, those proteins that shufflechemical reactions along in living things(among them, the breakdown of tadpoles’tails as they become frogs).

Some of the ideas presented are quitespeculative. Quantum weirdness, after all,has long been used to excuse all sorts ofquestionable science. In 1989 Roger Pen-rose, an Oxford mathematician, proposeda quantum mechanism for consciousnessthat was met with deep scepticism. YetMessrs Al-Khalili and McFadden go on torevise Mr Penrose’s theory in light of morerecent experiments. Where doubt remains,work continues. The authors themselvesare leadingthe search fora quantum mech-anism in genetic mutations, which mightbe giving evolution itselfa helping hand.

That quantum effects are an incontro-vertible part of some of life’s machinery isreason enough to go looking for more examples. The ideas in “Life on the Edge”may be dead ends, or they may be just thebeginning. Either way, the quantum telescope is set on far horizons.7

Quantum biology

Nature, thephysicist

Life on the Edge: The Coming of Age ofQuantum Biology. By Jim Al-Khalili andJohnjoe McFadden. Bantam Press; 355pages; £20

Making sense of scents

JUDGING by the books published aboutGermany in recent decades, you mightconclude that the only subject worth

writing about was the 12 years from 1933 to1945: from when Hitler took power to theend of the second world war. And giventhe enormity of what happened duringthat period, it is easy to see why writers return to it over and over again to try to understand the incomprehensible.

Stephen Green, a self-confessed life-long Germanophile (as well as a formerchairman ofHSBC, a one-time trade minis-ter in the British government and an or-dained priest in the Church of England), offers some ofhis own explanations in thisvery personal take on the country. Hestarts a lot earlier than most, in 9AD, whena German tribal leadercalled Hermann de-feated three Roman legions in the battle of

German history

Reformedcharacter

Reluctant Meister: How Germany’s Past isShaping its European Future. By StephenGreen. Haus Publishing; 338 pages; $29.95and £25

The Economist November 22nd 2014 Books and arts 79

2

TOVE JANSSON, who was born in 1914,wrote some wonderful adult fiction,

but she is best known internationally forher Moominland stories and her illustra-tions for children. Jansson was often askedwhom she wrote for. For herself, shewould reply. But once she added: “If mystories are addressed to any particularkind of reader, then it’s probably a Miffle.”The Miffles were the lonely, timid ones,and their fear was important, she said.“Anxious and self-confident children alikeare unconsciously drawn to it, and to de-struction.” At first glance, this sits oddlywith the easy-going charm of Moomin-land where, in spite of disasters and theGroke and the sinisterHattifatteners, civili-ty and good humour always prevail.

Tuula Karjalainen’s “Tove Jansson:Work and Love”, translated from the Fin-nish, radically shifts that perspective, atleast forEnglish-speakerswho are unfamil-iar with the origins of Jansson’s stories.Jansson grew up in the shadow of the Rus-sian revolution, which spilled over into bit-ter civil war in Finland in 1918. Her fatherfought on the anti-communist side, andone of her best adult stories describes herchild-selfwatching him carousing with hisold war comrades and, at a certain mo-ment, ritualistically bayoneting a wickerchair. Many thousands died in that war,and although the anticommunists won,the country remained divided—increasing-ly so with the rise of Nazi Germany in the1930s. Jansson remembered feeling so en-raged by her father’s views that “she had togo to the bathroom and vomit”. Threemore wars followed, between 1939 and

1945: first the Finns fought against a Russianinvasion; then they joined with Nazi Ger-many to fight the Russians; and finally theyfought Nazi Germany itself.

During the 1930s Jansson studied at theAcademy of Fine Arts in Helsinki and be-came a passionate anti-Nazi pacifist. It wasin 1934, while staying with an aunt in Ger-many, that she painted one of her first ver-sions of a Moomin, a strangely menacingscene featuring a long-snouted creature,black and red-eyed. At the time she wasalso designing covers for a satirical maga-zine, Garm, in which she mercilessly cari-catured both Hitlerand Stalin. Again, smallMoomin-like figures make an appearance,sometimes black, and sometimes as theyappeared later, pale and plump.

The war itself conjured the stories. “Itwas the winter of war, in 1939,” she wrote.“It felt completely pointless to try to createpictures…I suddenly felt an urge to writedown something that was to begin with‘Once upon a time’.” Much later, left-wingFinnish critics would accuse Jansson ofbourgeois escapism. But, in a sense, thevery act of imagining was political, a ges-ture of defiance. The Moomins stood forsomething in a brutal world, though shewould never quite have said so.

Jansson always saw herself first as a se-rious painter. She exhibited frequently inFinland, and won awards and commis-sions for large public murals. Her reputa-tion there as a writer lagged far behind therest of the world. Ms Karjalainen is a histo-rian of Finnish art, and although she cov-ers Jansson’s writing, it is the paintings thatreally interest her. This is a pity. Janssonwas a more interesting writer than a paint-er, and her life sheds much light on her par-ticular quality as a storyteller. Her use ofMoomins to defy the war is characteristic.Everywhere in her fiction there is the samesense of deflection and indirection. Shehated ideologies, messages, answers. Andit somehow fits that she fell in love withboth men and women. Ambivalence wasa kind ofcomfort to her. As one ofher char-acters says, “Everything is very uncertain,and that is what makes me calm.”7

Children’s literature

Moomins’ magicmaker

Tove Jansson: Work and Love. By TuulaKarjalainen. Translated by David McDuff.Penguin Global; 291 pages; $34. ParticularBooks; £20

Political animals

the Teutoburg Forest, and ends in the pre-sent, with a Germany that, thrust into aleading role in the EU, is reluctant to em-brace it. The idea is to show that the rootsof that dismal period go a long way backand its effects still resonate 70 years on.

Amongthose roots, he argues, is a senseofvictimhood that eventually sees the vic-tim turn aggressor. In Germany this madean early appearance with Hermann, onwhom the Romans got their revenge a fewyears afterhis famous victory. More recent-ly the country saw itselfas the main victimofthe appallingThirtyYearsWarof1618-48;ofFrench aggression, from LouisXIVto Na-poleon; and, most devastatingly, of theTreaty of Versailles, in which the victors ofthe first world war imposed a crushing set-tlement on the vanquished.

Lord Green also traces the prolongedand difficult search for a German identitythrough the country’s religious, philosoph-ical and artistic heritage. A key concept inGerman moral thought is duty, extolled bythinkers from Martin Luther to ImmanuelKant. Butapplied to the wrongcause, devo-tion to duty can lead to disaster.

Such explanations may throw somelight on the origins of the Holocaust, butthey leave huge lacunae. How could ithave happened with so little resistance?There was some opposition, which gener-ally proved fatal—the July 20th plot to as-sassinate Hitler, the White Rose dissidentgroup, the Lutheran pastor Dietrich Bon-hoeffer and his supporters—but they weredrops in an ocean of acquiescence. Itseemed as though a nation’s collectiveconscience had been switched off.

Come the end of the war, it becameplain that the whole thing had been a chi-mera. The Germans found themselves pre-siding over a devastated country and amountain of guilt. For them, it was truly aStunde Null (zero hour).

The miracle, as Lord Green rightlypointsout, is that from this state of total col-lapse, Germany (with the help ofgenerousMarshall aid from America and a sensiblecurrency reform) rose again to become acountry with model democratic institu-tions and a highly successful economy. It isnow living at peace with its neighbours forthe first time in many centuries. Any re-maining shadows of the Third Reich wereswept away when the Berlin Wall camedown 25 years ago and East and West Ger-many were united. Integrating them washard but ultimately successful.

There were fears at the time that a un-ited Germany might be tempted to throwits weight around again, yet the oppositehas happened: critics now accuse it of be-ing too reluctant to play the leading role inthe EU for which its size and economicweight clearly mark it out. But they cannothave it both ways. Instead, they shouldmarvel at this reformed character in theirmidst, be thankful—and learn from it. 7

80 Books and arts The Economist November 22nd 2014

ONE of the inspirations for AlisonLight’s book, “Mrs Woolf and the Ser-

vants”, which came out in 2007, was hergrandmother and her work as a domesticservant in the early years of the 20th century. Here, in “Common People”, arethe rest of her family—a miscellaneous col-lection, stretching as far back as the 18thcentury, and including needle-makers,washerwomen, bricklayers, shirt-sewers,railwaymen, sailors, postmen, domesticservants and, in every generation, pau-pers. The workhouse casts a long shadow.

“Common People” is an extraordinarypiece of research. “Every life deserves tel-ling,” says Ms Light, an English literatureprofessor at Newcastle University. “Noneis without drama and change.” But few ofher family left any trace beyond census re-turns and registrations of baptism, mar-riage and death. Hunting through the re-cords, she longs for something more: “Iwanted some distinguishing features,” sheconfesses, “some sign of an inner life.” Butthe point ofher booklies not so much in itsindividual characters as in the patternsthey make. They were not the solidmasses, all clogs and snap tins. They wereconstantly on the move, tramping theroads, in and out of employment, slidingaround the social scale. A telephone clerkbecomes a railway porter; a bricklayer be-comes a navy cook’s mate; a schoolmas-ter’s daughter sews shirts; a master-bakerbecomes a grocer and dies in the work-house. These people are blown about byprivate and political circumstance—figures“in the carpet woven by events, by chanceand accident, and by the play offorces larg-er than us.”

Ms Light’s research into the historicalcontext of her family is wide and various.Their streets and houses, their occupa-tions, the impacts on them of laissez-faireeconomics, of population growth, of puni-tive Poor Laws, and so on—all these arerichly chronicled. So why, readers mightask, bother with family? Why not write asocial history of the working classes? Oneanswer, perhaps, is that it is precisely there,at the level of the family, that a generic concept, such as “the playofforces”, is at itsleast generic.

Ms Light often reflects on questions ofdistance and perspective. The family histo-rian, she says, “estranges her antecedentsby locating them ‘in history’”. Yet she also“humanises those who might otherwise

be mere faces in a crowd.” By the same to-ken, she familiarises history itself, brings ithome—where, crucially, it touches a nerve.

“I am filled with sadness when I tracethe contours of these lives,” Ms Lightwrites. And anger too: “Anger is more brac-ing.” Ancestors “lived in accommodationwe could hardly stomach, on streetswhose stench would make us gag…” Onegreat-grandmother was born in a work-house, entered domestic service as a child,married, had children and died in a mentalasylum. But Ms Light is wary of miserytales. “What seems like fate”, she writes, “isoften only what survives as documents.”What about the spaces between? There areslumdwellers who “look back with affec-tion on their childhoods”, hopscotchingand leapfrogging “in some of the worstplaces imaginable”. But that, of course,does not make slums alright. Family his-tory, thanks to the internet, has become ahugely popular pastime. “Common Peo-ple”, with its fine sense of nuance, raisesthe game for everyone.7

English family life

Busy people

Common People: The History of an EnglishFamily. By Alison Light. Fig Tree; 322 pages;£20

INK is indelible; once printed, books can-not be rewritten. Or can they? Eighteen

months ago Rick Gekoski, a London-basedantiquarian bookdealer, persuaded 50 au-thors to scribble second thoughts in firsteditions of their most famous works. J.K.Rowling wrote in “Harry Potter and thePhilosopher’s Stone”, Kazuo Ishiguro in“The Remains of the Day”, his obsessivetale of an English butler in thrall to duty.

Lionel Shriver annotated a copy of her2003 bestseller, “We Need to Talk aboutKevin”, and the book was snapped up bythe Dobkin Family Collection ofFeminismas a totem of its kind. The average price atthe auction was $10,000, though for the“Harry Potter” the hammer went down at$235,000. The sale raised $690,000 forPEN, an association that promotes free-dom ofexpression around the world.

Now Mr Gekoski’s wife, BelindaKitchin, has revisited the idea in aid of PEN

America. Seventy-five artists and authorshave offered additions to their books,which will be auctioned at Christie’s inNew Yorkon December 2nd.

For artists such as Kiki Smith, RichardSerra and Ed Ruscha, who have long beeninfluenced by books and paper, the auc-tion has been an opportunity to roll uptheir creative sleeves. Ink, charcoal, graph-ite, glitter, red paint—nothing is out ofbounds. Every page carries signs of theirphysical efforts.

Marina Abramovic, a performance art-ist, has done something rather different.“Dream House” was a farmhouse in Japanthat she converted into a retreat for peopleto sleep in and record dreams. The “DreamBook”, which came out in 2012, gathers to-gether 100 of these dreams. For the PEN

auction Ms Abramovic has annotated acopy of the book (pictured), then tied it upwith hair-like black thread, to which a bro-ken brass key is attached. Like so manydreams, the book is unopenable, destinedfor ever to be a mystery.

If the artists have looked forward, thewriters, for the most part, have used theauction to look back at their youngerselves, not knowing how like themselvesthey had already become. Malcolm Glad-well is the Imelda Marcos of trainers; hebuys two dozen pairs a year. Lydia Davis, awriter of sly short stories, is herself sly: “Inever realised until the latest collectionhow often fish reappeared in my stories.”Garrison Keilor is the stolid Midwesternerhe always was: “I had stopped smoking2/14/1982 which briefly made me feel mywriting was kaput. ‘Lake Wobegon Days’kept me going.” Gillian Flynn seems morethan a little crazy: “Thanks for reading this!Sorry that I have the crabbed handwritingofa serial killer!”

Mid-career, Michael Chabon looksback“in acute embarrassment and mortifi-cation”. Much older and retired from writ-ing, Philip Roth is mightily pleased withwhat he has achieved. “Portnoy’s Com-plaint” was described to Richard Nixon byan aide as “the most obscene, pornograph-ic book of all time”. When Mr Roth waspresented with the Presidential Medal ofFreedom 40 years later, Barack Obamaasked only: “How many young peoplehave learned to think by reading of Port-noy and his complaints?” “Millions,”grinned Mr Roth. Indelible ink, indeed.7

Collecting modernism

Reconsidering

Acleverauction in aid ofPEN America

81


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Economic data% change on year ago Budget Interest Industrial Current-account balance balance rates, % Gross domestic product production Consumer prices Unemployment latest 12 % of GDP % of GDP 10-year gov't Currency units, per $ latest qtr* 2014† latest latest 2014† rate, % months, $bn 2014† 2014† bonds, latest Nov 19th year ago

United States +2.3 Q3 +3.6 +2.2 +4.0 Oct +1.7 Sep +1.8 5.8 Oct -389.2 Q2 -2.3 -2.8 2.35 - -

China +7.3 Q3 +7.8 +7.3 +7.7 Oct +1.6 Oct +2.1 4.1 Q2§ +206.0 Q3 +2.2 -3.0 3.45§§ 6.12 6.09

Japan -1.2 Q3 -1.6 +0.9 +0.8 Sep +3.3 Sep +2.8 3.6 Sep -2.5 Sep +0.2 -8.0 0.48 118 100

Britain +3.0 Q3 +2.8 +3.0 +1.4 Sep +1.3 Oct +1.6 6.0 Aug†† -147.5 Q2 -4.4 -4.5 2.25 0.64 0.62

Canada +2.6 Q2 +3.6 +2.3 +3.2 Aug +2.0 Sep +1.9 6.5 Oct -50.4 Q2 -2.6 -2.4 2.03 1.13 1.04

Euro area +0.8 Q3 +0.6 +0.8 +0.7 Sep +0.4 Oct +0.5 11.5 Sep +327.3 Sep +2.4 -2.6 0.85 0.80 0.74

Austria +0.6 Q2 -0.6 +1.0 -3.7 Aug +1.6 Oct +1.6 5.1 Sep +3.7 Q2 +2.5 -3.0 1.03 0.80 0.74

Belgium +0.8 Q3 +0.8 +1.0 +0.5 Aug +0.1 Oct +0.7 8.5 Sep +7.4 Jun -0.9 -3.0 1.19 0.80 0.74

France +0.4 Q3 +1.1 +0.4 -0.3 Sep +0.5 Oct +0.6 10.5 Sep -40.0 Sep‡ -1.4 -4.4 1.20 0.80 0.74

Germany +1.2 Q3 +0.3 +1.4 -0.2 Sep +0.8 Oct +1.0 6.7 Oct +281.6 Sep +7.0 +0.4 0.85 0.80 0.74

Greece +1.7 Q3 +2.6 +0.4 -5.1 Sep -1.7 Oct -1.5 25.9 Aug +2.3 Aug +0.5 -3.5 8.32 0.80 0.74

Italy -0.4 Q3 -0.4 -0.3 -2.9 Sep +0.1 Oct +0.3 12.6 Sep +34.7 Sep +1.3 -3.0 2.32 0.80 0.74

Netherlands +1.1 Q3 +0.7 +0.6 -1.1 Sep +1.1 Oct +0.8 8.0 Sep +86.3 Q1 +9.7 -2.7 0.94 0.80 0.74

Spain +1.6 Q3 +2.3 +1.2 +3.7 Sep -0.1 Oct nil 24.0 Sep +2.4 Aug +0.3 -5.7 2.13 0.80 0.74

Czech Republic +2.5 Q2 +1.2 +2.6 +8.3 Sep +0.7 Oct +0.5 7.1 Oct§ -0.5 Q2 +0.3 -1.6 0.83 22.1 20.2

Denmark +0.3 Q2 +0.8 +0.9 -0.6 Sep +0.5 Oct +0.7 5.0 Sep +23.6 Sep +6.6 -1.3 1.08 5.94 5.51

Hungary +3.2 Q3 +2.0 +3.0 +5.2 Sep -0.4 Oct nil 7.4 Sep§†† +5.9 Q2 +1.7 -2.9 3.65 243 220

Norway -0.3 Q2 +3.7 +2.3 +7.5 Sep +2.0 Oct +2.0 3.7 Aug‡‡ +57.9 Q2 +11.2 +12.2 2.07 6.79 6.09

Poland +3.3 Q3 na +2.6 +4.2 Sep -0.6 Oct +0.2 11.3 Oct§ -6.9 Sep -1.1 -3.5 2.67 3.36 3.09

Russia +0.7 Q3 na +0.4 +3.0 Oct +8.3 Oct +7.5 4.9 Sep§ +60.3 Q3 +2.6 +0.4 10.22 46.8 32.7

Sweden +2.6 Q2 +2.9 +2.1 -4.3 Sep -0.1 Oct nil 7.5 Oct§ +36.6 Q2 +5.9 -2.2 1.11 7.39 6.62

Switzerland +1.4 Q2 +0.8 +1.5 +3.1 Q2 nil Oct +0.1 3.2 Oct +78.4 Q2 +12.0 +0.3 0.47 0.96 0.91

Turkey +2.1 Q2 na +3.0 +4.1 Sep +9.0 Oct +8.9 10.1 Aug§ -46.7 Sep -6.0 -2.6 8.47 2.24 2.01

Australia +3.1 Q2 +2.0 +3.0 +4.6 Q2 +2.3 Q3 +2.6 6.2 Oct -42.8 Q2 -2.8 -1.9 3.28 1.16 1.06

Hong Kong +2.7 Q3 +6.8 +2.4 +2.2 Q2 +6.6 Sep +4.0 3.3 Oct‡‡ +4.6 Q2 +0.9 +0.8 1.89 7.76 7.75

India +5.7 Q2 +3.1 +6.0 +2.5 Sep +5.5 Oct +8.0 8.8 2013 -18.4 Q2 -2.0 -4.5 8.16 62.0 62.3

Indonesia +5.0 Q3 na +5.0 +10.9 Sep +4.8 Oct +6.3 5.9 Q3§ -24.0 Q3 -3.1 -2.3 na 12,148 11,598

Malaysia +5.6 Q3 na +6.0 +5.4 Sep +2.6 Sep +3.1 2.7 Aug§ +18.0 Q3 +5.7 -3.5 3.91 3.36 3.18

Pakistan +5.4 2014** na +5.4 +5.3 Aug +5.8 Oct +8.0 6.2 2013 -3.1 Q3 -2.0 -5.5 11.75††† 102 108

Singapore +2.4 Q3 +1.2 +3.4 -1.2 Sep +0.6 Sep +1.2 1.9 Q3 +56.5 Q2 +19.9 +0.5 2.31 1.31 1.24

South Korea +3.2 Q3 +3.5 +3.5 +1.9 Sep +1.2 Oct +1.5 3.2 Oct§ +86.7 Sep +5.5 +0.5 2.74 1,106 1,056

Taiwan +3.8 Q3 +2.0 +3.7 +10.2 Sep +1.1 Oct +1.5 3.9 Sep +64.0 Q2 +11.9 -1.3 1.64 30.8 29.5

Thailand +0.6 Q3 +4.4 +1.4 -3.9 Sep +1.5 Oct +2.1 0.8 Sep§ +10.2 Q3 +2.6 -2.1 2.71 32.8 31.6

Argentina nil Q2 +3.6 -1.4 -1.7 Sep — *** — 7.5 Q3§ -6.2 Q2 -0.9 -2.7 na 8.52 6.04

Brazil -0.9 Q2 -2.4 +0.4 -2.1 Sep +6.6 Oct +6.3 4.7 Oct§ -83.6 Sep -3.6 -3.9 12.78 2.58 2.26

Chile +0.8 Q3 +1.5 +2.0 +0.2 Sep +5.7 Oct +4.3 6.6 Sep§‡‡ -5.0 Q3 -1.5 -2.2 4.47 601 520

Colombia +4.3 Q2 -0.6 +5.0 +1.7 Sep +3.3 Oct +2.8 8.4 Sep§ -14.9 Q2 -4.1 -1.5 6.52 2,165 1,918

Mexico +1.6 Q2 +4.2 +2.3 +3.0 Sep +4.3 Oct +3.9 4.8 Sep -24.5 Q2 -1.7 -3.6 5.87 13.6 12.9

Venezuela +1.0 Q4 +3.6 -2.5 +0.8 Sep +63.4 Aug +62.2 7.0 Sep§ +6.9 Q3 +1.0 -12.2 15.49 12.0 6.29

Egypt +3.7 Q2 na +2.2 +30.4 Sep +11.9 Oct +10.7 13.1 Q3§ -2.4 Q2 -2.4 -12.0 na 7.15 6.89

Israel +2.5 Q3 -0.4 +2.0 +5.7 Aug -0.3 Oct +0.5 6.5 Sep +8.5 Q2 +3.4 -3.3 2.16 3.83 3.52

Saudi Arabia +4.0 2013 na +4.1 na +2.6 Oct +2.9 5.6 2013 +139.2 Q2 +14.2 +2.4 na 3.75 3.75

South Africa +1.0 Q2 +0.6 +1.6 +8.2 Sep +5.9 Oct +6.2 25.4 Q3§ -18.8 Q2 -5.2 -4.4 7.56 11.1 10.2

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, Sep 39.79%; year ago 18.81% †††Dollar-denominated bonds.

84 The Economist November 22nd 2014Economic and financial indicators

The Economist November 22nd 2014 Economic and financial indicators 85

Indicators for more countries and additional

Other markets % change on

Dec 31st 2013

Index one in local in $ Nov 19th week currency terms

United States (S&P 500) 2,048.7 +0.5 +10.8 +10.8

United States (NAScomp) 4,675.7 nil +12.0 +12.0

China (SSEB, $ terms) 263.6 +0.4 +5.1 +3.9

Japan (Topix) 1,396.5 +1.4 +7.2 -4.2

Europe (FTSEurofirst 300) 1,359.9 +1.2 +3.3 -6.0

World, dev'd (MSCI) 1,724.7 +0.6 +3.8 +3.8

Emerging markets (MSCI) 989.9 -0.6 -1.3 -1.3

World, all (MSCI) 421.9 +0.4 +3.3 +3.3

World bonds (Citigroup) 903.5 -0.3 -0.3 -0.3

EMBI+ (JPMorgan) 703.0 -0.1 +7.9 +7.9

Hedge funds (HFRX) 1,221.5§ nil -0.3 -0.3

Volatility, US (VIX) 14.0 +13.0 +13.7 (levels)

CDSs, Eur (iTRAXX)† 64.5 +1.4 -9.4 -17.5

CDSs, N Am (CDX)† 66.7 +3.6 +3.1 +3.1

Carbon trading (EU ETS) € 7.0 +2.8 +39.8 +27.2

Sources: Markit; Thomson Reuters. *Total return index. †Credit-default-swap spreads, basis points. §Nov 18th.

The Economist commodity-price index2005=100 % change on one one Nov 11th Nov 18th* month year

Dollar Index

All Items 158.1 156.4 +1.1 -3.4

Food 176.1 173.9 +1.8 -3.1

Industrials

All 139.5 138.2 +0.2 -3.9

Nfa† 127.8 125.9 -2.5 -19.9

Metals 144.5 143.4 +1.2 +3.9

Sterling Index

All items 181.2 181.8 +4.2 -0.6

Euro Index

All items 158.2 155.2 +2.7 +4.2

Gold

$ per oz 1,156.0 1,196.1 -4.5 -6.2

West Texas Intermediate

$ per barrel 77.8 74.4 -10.7 -20.3

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.

Markets % change on

Dec 31st 2013

Index one in local in $ Nov 19th week currency terms

United States (DJIA) 17,685.7 +0.4 +6.7 +6.7

China (SSEA) 2,566.4 -1.8 +15.9 +14.6

Japan (Nikkei 225) 17,288.8 +0.5 +6.1 -5.2

Britain (FTSE 100) 6,696.6 +1.3 -0.8 -6.2

Canada (S&P TSX) 14,980.2 +0.8 +10.0 +3.0

Euro area (FTSE Euro 100) 1,025.5 +2.3 +0.5 -8.5

Euro area (EURO STOXX 50) 3,123.1 +2.5 +0.5 -8.6

Austria (ATX) 2,232.8 +1.6 -12.3 -20.2

Belgium (Bel 20) 3,211.0 +2.3 +9.8 -0.1

France (CAC 40) 4,266.2 +2.1 -0.7 -9.6

Germany (DAX)* 9,472.8 +2.8 -0.8 -9.7

Greece (Athex Comp) 954.7 +9.4 -17.9 -25.3

Italy (FTSE/MIB) 19,379.9 +3.6 +2.2 -7.0

Netherlands (AEX) 417.8 +1.4 +4.0 -5.4

Spain (Madrid SE) 1,050.6 +2.1 +3.8 -5.5

Czech Republic (PX) 981.5 +1.7 -0.8 -10.8

Denmark (OMXCB) 676.8 +0.9 +19.6 +9.1

Hungary (BUX) 17,585.8 +0.8 -5.3 -16.1

Norway (OSEAX) 655.2 +1.4 +8.7 -2.9

Poland (WIG) 53,299.4 +0.5 +3.9 -6.7

Russia (RTS, $ terms) 1,021.2 -2.3 +0.9 -29.2

Sweden (OMXS30) 1,428.0 +1.4 +7.1 -6.9

Switzerland (SMI) 8,983.5 +1.3 +9.5 +1.6

Turkey (BIST) 81,461.6 +1.3 +20.1 +15.3

Australia (All Ord.) 5,352.5 -1.7 nil -3.4

Hong Kong (Hang Seng) 23,373.3 -2.4 +0.3 +0.3

India (BSE) 28,032.9 +0.1 +32.4 +32.2

Indonesia (JSX) 5,127.9 +1.6 +20.0 +20.2

Malaysia (KLSE) 1,824.4 +0.4 -2.3 -4.7

Pakistan (KSE) 31,756.3 +0.4 +25.7 +30.1

Singapore (STI) 3,334.6 +1.5 +5.3 +1.8

South Korea (KOSPI) 1,966.9 nil -2.2 -6.7

Taiwan (TWI) 8,963.2 +0.5 +4.1 +0.7

Thailand (SET) 1,577.6 +1.0 +21.5 +21.6

Argentina (MERV) 9,584.3 -4.8 +77.8 +36.1

Brazil (BVSP) 53,402.8 +0.8 +3.7 -5.3

Chile (IGPA) 19,340.4 +1.1 +6.1 -7.2

Colombia (IGBC) 12,829.5 -2.4 -1.8 -12.4

Mexico (IPC) 44,118.1 +0.9 +3.3 -0.7

Venezuela (IBC) 2,844.5 -0.5 +3.9 na

Egypt (Case 30) 9,220.2 -1.3 +35.9 +32.1

Israel (TA-100) 1,296.0 +0.7 +7.3 -2.8

Saudi Arabia (Tadawul) 9,383.8 -3.1 +9.9 +9.9

South Africa (JSE AS) 50,150.5 -0.4 +8.4 +2.6 series, go to: Economist.com/indicators

Global business barometer

Source: The Economist/FT survey

Balance of respondents expecting global businessconditions to improve in the next six monthsPercentage points

0 10 20 30 40 50

Asia-Pacific

Middle East& Africa

Eastern Europe

Global

Western Europe

Latin America

North America

Q1 2014 Q4 2014

Interactive: Track global business confidence with our barometer at Economist.com/bizbaro

Executives around the world remainupbeat about the prospects for businessbut this optimism is on the wane, accord-ing to the latest Economist/FT survey ofaround 1,500 senior managers, conduct-ed by the Economist Intelligence Unit.The balance of respondents who thinkthat global business conditions will soonimprove has fallen by 29 percentagepoints from the beginning of the year to13. The executives foresee a divergence inmonetary policy. Almost half of respon-dents expect the Federal Reserve to bethe first central bank to raise interestrates while more than two-thirds expectthe European Central Bank to beginquantitative easing in 2015.

http://Economist.com/bizbaro

http://Economist.com/indicators

http://www.pharmasummit.economist.com


ALTHOUGH the man in the street maynot know it, modern life is full of the

inventions of Donald Stookey. His ingenu-ity lies behind the screens of tablets andmobile phones; behind glasses that fade toblack as the sun comes out; behind thenose-cones of guided missiles, and cook-ware so sturdy that you can broil it in theoven, plunge it in the fridge and drop it on astone floor, with damage to nothing butthe soufflé that was in it.

Interesting, then, that Dr Stookey sawhimself less as a scientist than an alche-mist. This was because his field was glass, amaterial so unique and strange—not solid,liquid or gas, but a liquid frozen in an un-stable state—that in 3,500 years ofhistory ithad kept its secrets intact. His liveliest men-tal companion, as he worked away for al-most five decades among the smokestacksofthe CorningGlass Works in upstate NewYork, was Johann Kunckel, first finder inthe 17th century of a formula for gold rubyglass, who believed that cups made of thiscould transmit to drinkers the virtues ofthe philosopher’s stone.

He also saw himself as an explorer, thesort he had loved to read about in child-hood, opening doors into unseen worlds;or, being an avid hunter and fisherman, asa tracker of elusive prey. Hence his originalventure into glass, as he left MIT in 1940

with a doctorate but with job offers onlyfrom Corning and Nabisco, a bakery com-pany. He did not want to bake, so chose todo research into milky white opal glass. Heknew nothing of either the substance orthe chemistry, but found it mysterious andbeautiful and hoped it might be useful.

The job was still almost artisan, withhis glass samples heated in one-poundbatches in clay crucibles by a gruff oldglass-blower. But he succeeded after someyears in making opal glass photosensitive,so that three-dimensional designscould beetched into it by the action of light. Takingclues from nature, he made this “Foto-form” glass resemble frost-lace, spiders’webs and a honeycomb, in which honey-bees actually produced honey. He also per-fected a glass which, in daylight, lookedlike marble, and now covers the north faceof the UN headquarters in New York.

A nucleus of goldThe joy of glass, he soon discovered, laynot only in its resilience and transparencybut in its very instability, and its yearningto reach a lower-energy crystalline state.Every one ofhis inventions depended on aprocess called “nucleation”, in which thesmallest stable trace ofany element, addedto molten glass, became a nucleus roundwhich crystals would grow until, by cool-

ing, he chose to stop them. Tiny light-scat-tering particles of sodium fluoride madeopal glass; mites of copper or gold madethe ruby glass he so admired. These too herendered photosensitive, so that after ex-posure to ultraviolet light photographscould appear within them. One of his firstattempts was a paperweight containing aphotograph of his wife Ruth in her wed-ding gown; and in wartime the TreasuryDepartment almost took up his idea ofmakingpennies not ofscarce copperbut ofcopper ruby glass, with Lincoln’s portraitmagically suspended in them.

That notion proved too costly, however.(So did the pleasing idea ofmakingmirrorsand spectacles for spies which, when ex-posed to light, would reveal secret mes-sages.) Indeed some folk at Corningthought Dr Stookey was just playingaround, making things that were decora-tive rather than commercial. His naturalshyness, reinforced by partial blindness,did not help; but with every prod some-thing extraordinary appeared. He madeglass with thousands of holes per squareinch, to guide electron beams for colourtelevision sets, by dissolving a crystallisedphotograph of a vast array of dots from Fo-toform glass with hydrofluoric acid. Hemade glass that was rubbery and easier tosaw. He imagined a future in which glass,with its raw material so abundant every-where, could replace not only petrochemi-cal plastics but also metal and wood.

One invention, too, earned money instyle. This was glass-ceramic, patented in1960 as Fotoceram and marketed as inde-structible Corningware dishes, so popularin America that by the 1980s six pieces of it(originally white, with blue cornflowers)could have graced every household. DrStookey invented this by accident when,having left a piece of Fotoform glass in toohot a furnace, he found it had turned milkyand bounced off the floor when, cursing,he tried to yank it out. This glass had so in-tensely crystallised on reheating that itdropped with a clang like steel.

He made some money from that:enough to indulge his passion for motorcruisers and to have a fair number of extra-laboratory adventures, including a sea-plane wreck in a freezing Canadian lake.Much of his spare time was spent on or bywater, itself glass-like, and in search of thesecretive elements—this time panfish, troutand marlin—lurking within. His whole ca-reer, though, thanks to the support of Cor-ning, had been conducted at a similarly lei-surely pace: a journey by patient micro-steps to the “Centre of the Crystal Ball”, ashe called his autobiography, punctuatedby moments of delight and surprise atwhat glass could become, given half achance. And so it must have been, he re-flected, for those other alchemists, bentover their alembics long ago. 7

The joy of glass

Donald Stookey, glass chemist, died on November4th, aged 99

Obituary Donald Stookey

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