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Friday October 1st 2010 Site feedback

Print edition October 2nd 2010

The world this week

Politics this week Business this week KAL's cartoon

Leaders

India's economy India's surprising economic miracle

Brazil's presidential election The handover

Cyberwar The meaning of Stuxnet

Britain's fiscal squeeze On the tight side

Financial regulators Finance's other bosses

Education in America Is it a bird? Is it a plane?

Letters

On Boeing, India and Nepal, Canada's armed forces, Latinos, Mustique, higher education, South African politics, maps, foreign banks

Briefing

Brazil's presidential election Lula's legacy

United States

The budget and the election The red ink war

Ohio Back and forth

Governors' races The rest of the Midwest

Louisiana's 2nd House district How now, Mr Cao?

Guns and state borders Trekking north

Households Cramped quarters

Energy in Texas The search for power

Lexington The loneliness of Barack Obama

The Americas

Venezuela's legislative election The revolution checked

Security in Colombia The beginning of the end

Measuring Mexico's economy Getting bigger

Asia

China The debate over universal values

Kyrgyzstan's election A vote into the unknown

North Korea We three Kims of Orient are

Education in Vietnam Low grades for the party

Cambodia and Islamism Courting the Cham

How India's growth will outpace China's The country's state may be weak, but its private companies are strong: leader

Business

The return of advertising The box rocks

Prisa and Spanish media The cost of Liberty

Retailing The beast goes on safari

Tablet computers Chasing King Apple

The global lorry market Crash repairs

Innovation in Asia Trading places

Airbus v Boeing Plane poker

Schumpeter Money and power

Correction: Melbourne Business School

Briefing

Business in India A bumpier but freer road

Finance and Economics

The euro zone's trouble spots The bottomless bail-out

Spain's banks Two cheers, three tiers

AIA lists again Déjà blue

Buttonwood The last great hope

The battle for Stuyvesant Town The housing rubble

Venture capital Angels or demons?

Precious metals Silver lining

Accounting's new era Beancounter there, done that

Economics focus Cutting edge

Science & Technology

Mimicking black holes Dr Hawking's bright idea

Extending lifespan Thanks, Mum!

Personal urban transport The bubble car is back

Books & Arts

The Crimean war A holy war of an unusual kind

Innovation and technology Well, what a good idea!

God, science and knowledge Knowing it all

The life of Roald Dahl Fantastic Mr Dahl

Practical architecture

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Banyan A half-pike up the nostril

Middle East & Africa

Reform in Saudi Arabia At a snail's pace

Israel and Palestine Stumbling at the first hurdle

How Syria controls its dissidents Banning travel

Yemen's bad habit You can't easily qat it out

Drugs in Africa A lot of pain

Europe

The sacked mayor of Moscow Medvedev 1, Luzhkov 0

Italy's political ruptures Silvio the survivor

Bosnia's election So this is democracy

Spain's economy Sideshow in the streets

Press freedom in Turkey Don't cross Erdogan

French education A chorus of disapproval

Charlemagne Economic sanctions? Yes, please

Britain

Labour's new leader Red, ready or neither?

The other Ed The unofficial winner

The nuclear deterrent Gunning for Trident

The Supreme Court Cheap at the price

Rural broadband Wiring Arcadia

Financing small business The mother of invention

Bagehot Get it, or it will get you

Correction: Hastings

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The Stuxnet outbreak A worm in the centrifuge

Rare earths and China Dirty business

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Politics this week Sep 30th 2010

North Korea convened a conference of the Korean Workers’ Party and promoted the 20-something Kim Jong Un, youngest son of the country’s Dear Leader, Kim Jong Il, to the rank of four-star general. He was also given the vice-chairmanship of the party’s military commission. The appointments confirm expectations that young Un is being groomed to succeed his ailing father as a communist dynast. See article

Japan released the captain of a Chinese fishing boat whom it had detained since his vessel hit two Japanese patrol boats near a cluster of disputed islands. China released three of four Japanese arrested for filming in a military area.

Sri Lanka’s president Mahinda Rajapaksa confirmed a 30-month jail sentence for violating military procurement procedures against Sarath Fonseka, the former army chief whom he defeated for the presidency in January.

On the first day of its term Australia’s new government became the first in decades to lose a vote outright in the House of Representatives. The vote, on a procedural point, does not bode well for the passage of thornier legislation.

Fire-lighting

Barack Obama used a speech at the University of Wisconsin, Madison, to rally students to vote in the mid-term elections and relight the fire of his 2008 presidential bid. Young voters are not expected to turn out in great enough numbers to make much of a difference to the results. See article

A survey from the Pew Research Centre that tested Americans’ knowledge of world religions found that atheists and agnostics were better informed about religious teachings and religious leaders than were Protestants and Catholics. Evangelicals scored better on questions solely related to Christianity and the Bible.

Peace talks under pressure

A ten-month moratorium on Israeli settlement building in the West Bank expired and was not renewed by the government of Binyamin Netanyahu. Palestinian leaders have said they will decide at a meeting on October 4th whether to continue peace talks. See article

An Iranian court sentenced an Iranian-Canadian blogger, Hossein Derakhshan, credited with sparking a boom in online reporting across Iran, to more than 19 years in prison for what it called illegal co-operation with foreign powers. Mr Derakhshan boasted of a trip to Israel and was critical of the Iranian regime.

The Israeli military seized a ten-metre boat used by Jewish activists to take aid to Gaza before it could reach its destination. Israel denied claims by those on board that soldiers used excessive force to take control of the vessel.

Gunmen in the Nigerian state of Abia boarded a school bus and kidnapped 15 schoolchildren

before demanding a ransom of 20m naira (around $130,000). Hostage-taking is endemic in the nearby Niger Delta but has so far focused largely on foreign oil workers and Nigerian civilians working with them.

At least 13 African refugees fleeing to Yemen drowned in the Gulf of Aden when their boat sank during a rescue operation by an American warship.

Unlucky Luzhkov

After weeks of speculation, Yuri Luzhkov, the long-serving mayor of Moscow, was sacked by President Dmitry Medvedev. Mr Luzhkov, who had run the Russian capital for 18 years, had faced attacks from state-owned television channels following the publication of an article in which he criticised the president’s decision to suspend construction of a road between Moscow and St Petersburg. Mr Luzhkov accused Mr Medvedev of resorting to Soviet-style repression. See article

Silvio Berlusconi’s government won a vote of confidence in the Chamber of Deputies by 67 votes. Many had expected Italy’s prime minister to stand down if he failed to secure a sufficiently large majority. See article

Ed Miliband narrowly defeated his elder brother David to become leader of Britain’s Labour Party, the main opposition force. In his first speech as leader Mr Miliband (the younger) distanced himself from the Blair-Brown era, insisting a “new generation” was in charge. Mr Miliband (the elder) said he was stepping down, for now, from front-line politics. See article

Spain’s trade unions demonstrated on the streets of Madrid during the country’s first general strike in eight years. The strike, protesting against the government’s planned austerity measures, coincided with marches in several European countries. See article

After months of talks the Netherlands looks set for a minority government. The centre-right Liberal and Christian Democrat parties will rely on backbench support from the Freedom Party of Geert Wilders, a far-right populist who is on trial for inciting hatred against Muslims.

In a partial climbdown, the European Commission said it would not sue France for racial discrimination over its expulsion of Romanies. But France (and other countries) will face action over failing to transpose EU law into national legislation.

Jojoy-less

Colombia’s FARC guerrillas named Pastor Alape as their new military commander after his better-known predecessor, nicknamed Mono Jojoy, was killed in a government raid on his mountain bunker. Juan Manuel Santos, Colombia’s president, hailed Jojoy’s death as “the most resounding blow” against the FARC in its history. See article

Heavy rainfall triggered mudslides in Colombia, where 30 passengers were killed as they walked along a blocked road between buses. Mudslides also affected Mexico, where 11 people were missing in a remote village in the southern state of Oaxaca.

Parties opposed to Hugo Chávez, Venezuela’s leftist president, won a narrow majority of the vote in the country’s legislative election. A gerrymandered electoral system awarded Mr Chávez’s supporters 98 of the 165 seats in the National Assembly, but he will no longer have the two-

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thirds majority required for laws affecting constitutional rights and for judicial appointments. See article

Brazil’s government said it would spend $200m over the next two years to slow deforestation and environmental damage in the cerrado, the vast savannah which is home to many of the country’s agribusinesses and a wealth of rare plant and animal species.

The world this week

Business this week Sep 30th 2010

The European Commission, the European Union’s executive arm, proposed legislation that would grant it more powers over member states’ public finances. José Manuel Barroso, its president, said the rules would include new rights to fine members for fiscal profligacy. The proposals are meant to help avoid another Greek-style crisis. They would need to be approved by EU governments in the European Council. See article

Ireland’s government announced another capital injection in Anglo Irish Bank, a failed property lender, and said it would probably take majority control of Allied Irish Banks. The country’s finance ministry estimated that the eventual cost of bailing out the banks and building societies will rise to as much as €50 billion ($68 billion). This will cause the deficit to explode to around 32% of the country’s GDP. Irish ten-year bond yields have climbed above 6.5%. See article

Dubai returned to the markets for the first time since Dubai World, a government-owned holding company, announced it would have to restructure its debt of some $25 billion in November 2009. The emirate managed to raise $1.25 billion in a two-part bond sale, which was heavily oversubscribed.

Adam Posen, an external adviser to the Bank of England, said quantitative easing should resume to sustain the British economy’s recovery. Mr Posen argued that the monetary-policy committee should opt for printing more money and should not “settle for slow growth out of misplaced fear of inflation”.

Currency battles

The House of Representatives approved a bill to treat the yuan’s exchange rate as a subsidy. The legislation was backed by both Democrats and Republicans and is a response to what American lawmakers believe is systematic manipulation to keep the Chinese currency undervalued. China said the bill could harm ties between the two countries. It is unlikely that the bill will be passed by the Senate and signed into law by Barack Obama.

Consumer and business confidence rose in the euro area in September, with Germany leading the economic-sentiment indicator for the 16-member currency union close to a three-year high. Americans were not as optimistic, as job and wage woes drove the consumer-confidence index down.

HSBC went through internal turbulence to replace Stephen Green, who last month announced he will be stepping down as chairman at the end of 2010 to assume a position in Britain’s coalition government. Michael Geoghegan, the bank’s chief executive, resigned as he was passed over for the top job, which went to Douglas Flint, the group’s finance director. Stuart Gulliver, head of investment banking, will be Mr Geoghegan’s successor as chief executive.

Takefuji, one of Japan’s biggest providers of consumer finance, filed for bankruptcy. It owes creditors ¥433.6 billion ($5.2 billion) and blames its demise on tight credit markets and a court decision that forced it to refund consumers for interest payments that were deemed excessive.

Rewriting the PlayBook



Research In Motion, the BlackBerry maker, unveiled its first tablet device, the PlayBook. It has a seven-inch screen and weighs less than a pound. RIM is targeting professional consumers and the device has two cameras to enable video-calls, unlike its rival, Apple’s iPad, which has none. It will be available to retailers in early 2011. LG Electronics, Samsung, Dell and Hewlett-Packard are also launching tablet devices. See article

Nestlé announced a SFr500m ($510m) investment plan in nutrition and health products over the next ten years. The Swiss food giant will create two new units to lead its foray into the growing market for healthy food and non-prescription health products. It will be competing against other food companies and drugs firms for a piece of the healthy-living pie.

BP raised $3.5 billion in five- and ten-year bond auctions, which attracted strong investor demand. The British oil company will have to pay roughly $20 billion as compensation for the oil spill at its offshore drill in the Gulf of Mexico. BP also fired the head of its exploration division and said it is undergoing a big reorganisation of its safety operations ahead of the arrival of Robert Dudley, its new boss, on October 1st.

Not another garage sale

Artwork and memorabilia from the Lehman Brothers offices were auctioned by Sotheby’s and Christie’s. The Sotheby’s sale raised $12.3m, while Christie’s yielded $2.6m, including $111,700 for two metal signs from the failed bank’s London headquarters. Proceeds will go towards paying Lehman’s creditors.

The world this week



KAL's cartoon Sep 30th 2010

The world this week

India's economy

India's surprising economic miracle The country’s state may be weak, but its private companies are strong Sep 30th 2010

HORRIBLE toilets. Stagnant puddles buzzing with dengue-spreading mosquitoes. Collapsing masonry. Lax security. A terrorist attack. India’s preparations for the 72-nation Commonwealth games, which are scheduled to open in Delhi on October 3rd, have not won favourable reviews. “Commonfilth”, was one of the kinder British tabloid headlines. At best—assuming that the organisers make a last-minute dash to spruce things up—the Delhi games will be remembered as a shambles. The contrast with China’s practically flawless hosting of the Olympic games in 2008 could hardly be starker. Many people will draw the wrong lesson from this.

A big sporting event, some people believe, tells you something important about the nation that hosts it. Efficient countries build tip-top stadiums and make the shuttle buses run on time. That India cannot seem to do any of these things suggests that it will always be a second-rate power.

Or does it? Despite the headlines, India is doing rather well. Its economy is expected to expand by 8.5% this year. It has a long way to go before it is as rich as China—the Chinese economy is four times bigger—but its growth rate could overtake China’s by 2013, if not before (see article). Some economists think India will grow faster than any other large country over the next 25 years. Rapid growth in a country of 1.2 billion people is exciting, to put it mildly.

People power

There are two reasons why India will soon start to outpace China. One is demography. China’s workforce will shortly start ageing; in a few years’ time, it will start shrinking. That’s because of its one-child policy—an oppressive measure that no Indian government would get away with. Indira Gandhi tried something similar in the 1970s, when she called a state of emergency and introduced a forced-sterilisation programme. There was an uproar of protest. Democracy was restored and coercive population policies were abandoned. India is now blessed with a young and growing workforce. Its dependency ratio—the proportion of children and old people to working-age adults—is one of the best in the world and will remain so for a generation. India’s economy will benefit from this “demographic dividend”, which has powered many of Asia’s economic miracles.

The second reason for optimism is India’s much-derided democracy. The notion that democracy



retards development in poor countries has gained currency in recent years. Certainly, it has its disadvantages. Elected governments bow to the demands of selfish factions and interest groups. Even the most urgent decisions are endlessly debated and delayed.

China does not have this problem. When its technocrats decide to dam a river, build a road or move a village, the dam goes up, the road goes down and the village disappears. The displaced villagers may be compensated, but they are not allowed to stand in the way of progress. China’s leaders make rational decisions that balance the needs of all citizens over the long term. This has led to rapid, sustained growth that has lifted hundreds of millions of people out of poverty. Small wonder that authoritarians everywhere cite China as their best excuse not to allow democracy just yet.

No doubt a strong central government would have given India a less chaotic Commonwealth games, but there is more to life than badminton and rhythmic gymnastics. India’s state may be weak, but its private companies are strong. Indian capitalism is driven by millions of entrepreneurs all furiously doing their own thing. Since the early 1990s, when India dismantled the “licence raj” and opened up to foreign trade, Indian business has boomed. The country now boasts legions of thriving small businesses and a fair number of world-class ones whose English-speaking bosses network confidently with the global elite. They are less dependent on state patronage than Chinese firms, and often more innovative: they have pioneered the $2,000 car, the ultra-cheap heart operation and some novel ways to make management more responsive to customers. Ideas flow easily around India, since it lacks China’s culture of secrecy and censorship. That, plus China’s rampant piracy, is why knowledge-based industries such as software love India but shun the Middle Kingdom.

India’s individualistic brand of capitalism may also be more robust than China’s state-directed sort. Chinese firms prosper under wise government, but bad rulers can cause far more damage in China than in India, because their powers are so much greater. If, God forbid, another Mao were to seize the reins, there would be no mechanism for getting rid of him.

That is a problem for the future. For now, India’s problems are painfully visible. The roads are atrocious. Public transport is a disgrace. Many of the country’s dynamic entrepreneurs waste hours each day stuck in traffic. Their firms are hobbled by the costs of building their own infrastructure: backup generators, water-treatment plants and fleets of buses to ferry staff to work. And India’s demographic dividend will not count for much if those new workers are unemployable. India’s literacy rate is rising, thanks in part to a surge in cheap private schools for the poor, but it is still far behind China’s.

Advantage India

The Indian government recognises the need to tackle the infrastructure crisis, and is getting better at persuading private firms to stump up the capital. But the process is slow and infected with corruption. It is hard to measure these things, but many observers think China has done a better job than India of curbing corruption, with its usual brutal methods, such as shooting people.

Given the choice between doing business in China or India, most foreign investors would probably pick China. The market is bigger, the government easier to deal with, and if your supply chain for manufactured goods does not pass through China your shareholders will demand to know why. But as the global economy becomes more knowledge-intensive, India’s advantage will grow. That is something to ponder while stuck in the Delhi traffic.

Leaders

Brazil's presidential election

The handover Lula gave Brazil continuity and stability. Now he needs to give his successor independence Sep 30th 2010

THINK back eight years, when the prospect of Luiz Inácio Lula da Silva, leader of the left-wing Workers’ Party becoming president of Brazil, the world’s fourth most populous democracy, caused panic in financial markets. With Lula now preparing to step down after two terms, Brazilians seem poised to elect his chosen successor, Dilma Rousseff. She is at least as left-wing as he is. But the markets’ mood could hardly be more different. By way of a pre-election boost, Lula even travelled to São Paulo’s stock exchange to hail a $67 billion share issue by Petrobras, the national oil company, to raise funds to develop Brazil’s vast new deep-sea fields.

Brazil’s circumstances and its standing in the world have been transformed during Lula’s presidency and mostly for the better (see article). Poverty has fallen and economic growth has quickened. Brazil is enjoying a virtuous circle: soaring Asian demand for exports from its farms and mines is balanced by a booming domestic market, as—partly thanks to better social policies—some 20m new consumers have emerged from poverty. No wonder foreign businesses are piling in, while a swelling group of Brazilian multinationals is expanding abroad.

Thanks to his tactile charm and impoverished origins, Lula has been an extraordinary salesman for this transformation. He embodies the fairer, more inclusive democracy he has helped to create. His popularity rating stands close to 80%. Barack Obama called him “the most popular politician on earth”. Yet his biggest achievement is not to make his countrymen love him, but to give them continuity. The platform for Brazil’s take-off was laid by the liberalising reforms and inflation-busting policies of his predecessor, Fernando Henrique Cardoso. Lula kept these in place when many in his party wanted to scrap them, consolidating economic and political stability.

Hand in hand at the hustings

It is heartening, then, that the election campaign has confirmed a broad consensus on economic and social policy. But there are still big risks ahead, for Lula has left some troubling problems unsolved, and it is not clear whether Ms Rousseff has the strength or desire to tackle them.

As Lula’s chief of staff, Ms Rousseff showed herself to be a capable and forceful administrator. She is a tough and courageous woman: as a young leftist militant, she survived torture at the



hands of a military regime, and she came through a battle with lymphatic cancer last year. But she has never before held elected office. If she is victorious, it will be thanks not to her personality or achievements, but to Lula’s astounding popularity and tireless presence at her side during the campaign (often in violation of electoral law).

Against this, her rivals have struggled. José Serra, until recently the governor of São Paulo, is an experienced and competent politician from Mr Cardoso’s party. But his campaign has been woeful. Marina Silva, a former environment minister, espouses many good and thoughtful policies, but her Green Party is new and small. Until a fortnight or so ago, Ms Rousseff seemed assured of outright victory on October 3rd. Then allegations surfaced that her successor as Lula’s chief of staff was involved in influence-peddling. Though unproven, this scandal may do enough damage to push Ms Rousseff into a run-off election in a month’s time, though it is hard to imagine that she will not, in the end, win.

Let her go

That Ms Rousseff is so dependent on Lula’s patronage is a shame, for Brazil needs a strong and independent leader. Success has bred an atmosphere of hubris in Brasília. With the outlook for the world economy so uncertain, that is potentially dangerous. Despite the country’s achievements, there are three difficult sets of issues that—assuming she wins—Ms Rousseff will have to deal with.

The first is corruption. The opposition claims that Brazil’s new-found oil wealth will foster the elected authoritarianism that grew up in Mexico under the Institutional Revolutionary Party. That looks, for the moment, like an exaggeration; but it is true that the Workers’ Party has come to see public office as a perquisite and has a troubling tendency to bloat the federal bureaucracy with political appointees. Fortunately Brazil has a fiercely independent judiciary and media. But Ms Rousseff needs to make a clear commitment to clean government.

The second concerns the role of the state in the economy. This has expanded in Lula’s second term, and not only because of the world recession. The government has ill-advisedly given Petrobras a monopoly over developing the new oilfields, and used the share issue to raise its controlling stake in the company. It has lavished cheap loans on firms that it sees as national champions, partly to counteract the strength of the real. But these policies are driving up public debt even as the economy grows. They also crowd out much-needed spending on infrastructure, sanitation, education and innovation. And they do nothing to bring down high interest rates. The next government should aim speedily to eliminate the budget deficit. Better still would be an effort to reform the tax system and relax labour laws that still hold back the economy.

The third test for Ms Rousseff will be in foreign policy. Lula’s activism brought benefits to Brazil. But his penchant for autocrats—such as the Castros in Cuba, Venezuela’s Hugo Chávez and Iran’s Mahmoud Ahmadinejad—damaged the country’s reputation as a force for good. The next government will face a particular test in South America, where Brazil has at last become the main engine for regional growth. Mr Chávez’s star is waning (see article), but it is far from clear that he will relinquish power voluntarily if defeated in two years’ time. Brazil should use its clout to ensure that he does.

That most of these problems are perfectly manageable shows how far Brazil has come. Whether, and at what pace, the country solves them will depend on Ms Rousseff’s political skills. For her to acquire the authority to do the job properly, she needs to emerge from Lula’s shadow. As his final gift to his country, he should let her do that.

Leaders

Cyberwar

The meaning of Stuxnet A sophisticated “cyber-missile” highlights the potential—and limitations—of cyberwar Sep 30th 2010

IT HAS been described as “amazing”, “groundbreaking” and “impressive” by computer-security specialists. The Stuxnet worm, a piece of software that infects industrial-control systems, is remarkable in many ways. Its unusual complexity suggests that it is the work of a team of well-funded experts, probably with the backing of a national government, rather than rogue hackers or cyber-criminals (see article). It is designed to infect a particular configuration of a particular type of industrial-control system—in other words, to disrupt the operation of a specific process or plant. The Stuxnet outbreak has been concentrated in Iran, which suggests that a nuclear facility in that country was the intended target.

This is, in short, a new kind of cyber-attack. Unlike the efforts to disrupt internet access in Estonia or Georgia (blamed on Russia), or the attacks to break into American systems to steal secrets (blamed on China), this was a weapon aimed at a specific target—it has been called a “cyber-missile”. One or more governments (the prime suspects are Israel and America) were probably behind it. After years of speculation about the potential for this sort of attack, Stuxnet is a worked example of cyberwar’s potential—and its limitations.

Much of the discussion of cyberwar has focused on the potential for a “digital Pearl Harbour”, in which a country’s power grids and other critical infrastructure are disabled by attackers. Many such systems are isolated from the internet for security reasons. Stuxnet, which exploits flaws in Microsoft Windows to spread on to stand-alone systems via USB memory sticks, shows they are more vulnerable than most people thought. The outbreak emphasises the importance of securing industrial-control systems properly, with both software (open-source code can be more easily checked for security holes) and appropriate policies (banning the use of memory sticks). “Smart” electricity grids, which couple critical infrastructure to the internet, must be secured carefully.

Stuxnet is also illuminating in another way: it reveals the potential for cyber-weapons that target specific systems, rather than simply trying to cause as much mayhem as possible. It infected several plants in Germany, for example, but did no harm because they were not the target it was looking for. Such specificity, along with the deniability and difficulty of tracing a cyber-weapon, has obvious appeal to governments that would like to disable a particular target while avoiding a direct military attack—and firms interested in sabotaging their rivals.



Cyberwar is not declared

But the worm also highlights the limitations of cyber-attacks. Iran admits that some computers at its Bushehr nuclear plant were infected, but says no damage was done. The target may have been the centrifuges at its nuclear refinery at Natanz. Last year the number of working centrifuges at Natanz dropped, though it is unclear whether this was the result of Stuxnet. Even if it was, the attack will only have delayed Iran’s nuclear programme: it will not have shut it down altogether. Whoever is behind Stuxnet may feel that a delay is better than nothing. But a cyber-attack is no substitute for a physical attack. The former would take weeks to recover from; the latter, years.

Stuxnet may have failed to do the damage its designers intended, but it has succeeded in undermining the widespread assumption that the West would be the victim rather than the progenitor of a cyber-attack. It has also illustrated the murkiness of this sort of warfare. It is rarely clear who is attacking whom. It is hard to tell whether a strike has been successful, or indeed has happened at all. This, it seems, is what cyberwar looks like. Get used to it.

Leaders

Britain's fiscal squeeze

On the tight side The government’s deficit-reduction plan may prove too tight. Even so, the spending cuts should still go ahead Sep 30th 2010

WHEN George Osborne set out a tough deficit-cutting plan in his “emergency budget” in June, Britain’s chancellor of the exchequer circled a date in the calendar for his next big day, when he will announce precisely where the spending axe will fall. In the febrile season of political-party conferences ahead of that date, October 20th, there is an increasing clamour of dissent, most obviously in the Labour Party. Ed Miliband, its new leader, said this week that Mr Osborne’s plan was “extremely damaging” and “dangerous for our economy”.

Mr Miliband was no doubt playing to the unions who were responsible for electing him (see article). But there is concern in many other quarters that the government’s plans, which imply an average of 25% real cuts for most spending departments by 2014, may be too tough. At least one Cabinet minister is putting up a spirited fight (see article). Voters are worried, too. News that Ireland is hovering on the edge of a double-dip recession—its GDP shrank in the second quarter—has sharpened fears that the government’s fiscal policy may tip Britain into one too.

The debate is conflating two questions, which need to be separated. Has the government got its overall fiscal stance right? And, if not, should it reduce its planned spending cuts?

On the first question, the government received some encouragement this week. New figures confirmed that GDP grew briskly in the second quarter of this year, by 1.2% compared with the first, and the government’s plan was ringingly endorsed by the International Monetary Fund, which described it as “strong and credible” and “essential to ensure debt sustainability”. Pointing out that Britain’s deficit this year would be among the highest in the world, the IMF said that the government’s plan had greatly reduced the risk of a Greek-style loss of confidence in the public finances and would support a balanced recovery. Fiscal tightening would “dampen short-term growth but not stop it”, not least because of continued monetary stimulus.

A new plan B

This confidence may prove misplaced. Recent business surveys have pointed to a slowdown over the summer. The exchange-rate flexibility Britain has retained by staying outside the euro might, in other circumstances, have allowed it to export its way out of trouble; but, with most other rich countries also embarking on fiscal austerity, that’s unlikely to happen. A study of previous episodes of fiscal consolidation published by the IMF this week (see article) suggests that, on average, a 1% deficit cut leads to a 0.5% fall in GDP. When everybody is cutting, the result is more likely to be a 1% fall. The risk is not just of a double-dip recession, but also of a prolonged period of sluggish growth.

The answer to the first question, then, may well be: no. That does not, however, mean that Mr Osborne should bin his plans for tough spending cuts.

If the economy stutters, the government has monetary and fiscal levers to hand. The current plan B relies on monetary policy. The Bank of England is expected to resume the quantitative easing (QE)—injecting money into the economy by buying financial assets—which it stopped



earlier this year.

There are concerns about this plan. Pumping more money into the economy might jolt up inflation expectations, given that inflation has been above the government’s 2% target for most of the past four years. But the bigger worry is that, while banks remain so reluctant to lend, more QE will prove inadequate to counter fiscal austerity.

Fiscal policy is therefore likely to be more effective. But loosening it does not necessarily mean abandoning plans for spending cuts. The overall fiscal consolidation is tilted towards spending cuts, which will account for three-quarters of the deficit reduction by 2014. But next year, tax rises will make up nearly half of it. The main rate of VAT, a consumption tax, will rise in January from 17.5% to 20%, and national-insurance contributions will also go up in April.

Depending on what the data show in the coming months, a temporary reprieve on tax rises might be a good idea. Abandoning or postponing spending cuts would not. Britain cannot continue with public expenditure close to half of GDP on the Treasury’s figures. Spending cuts work better than tax rises when cutting deficits, if only because they tend to stick. The government has won credibility not just among voters but also in the markets for its tough plan. It cannot afford to lose that now.

Leaders

Financial regulators

Finance's other bosses Banks are reshuffling their leaders. Time for their supervisors to get their act together, too Sep 30th 2010

THE identity of the people who run the world’s banks is not just a matter for boards and shareholders. The credit crisis has shown that society has a stake in how well finance is run. So it is right that the comings and goings of bank bosses attract lots of attention. That process can look pretty messy—witness the botched succession process at HSBC and the bloodletting at UniCredit. Until, that is, you compare it with finance’s other big personnel issue: who runs the regulators.

In America the Federal Reserve, whose responsibility for financial stability has expanded thanks to the Dodd-Frank reform act, is currently short of its full complement of governors pending confirmation hearings in the Senate. The Office of the Comptroller of the Currency, a bank regulator, has been without a proper head since mid-August. Republican opposition to Elizabeth Warren, a law professor who has been a vocal critic of the banks, has stymied her chances of heading America’s new Consumer Financial Protection Bureau; to avoid a confirmation battle she has been named an adviser on the agency’s launch. There is no word on who will head the Office of Financial Research, a new body which will help monitor systemic risks. The hiring process for the head of the new Federal Insurance Office has only just kicked off.

It is a similar story in Europe, where policymakers have just agreed on the creation of three beefed-up supranational bodies to look after banks, markets and insurers respectively. Those institutions will begin operating at the start of next year, which will be here in no time, but no one has any idea who will lead them and few expect announcements in time for their launch. It is not clear whether their staff will be recruited directly or seconded from national regulators. And whenever international appointments are made, the risk of a geographical version of Buggins’s turn also looms. Just look at the politicised efforts to find a new head for the IASB, an international accounting standard-setter (see article). Or the absurd number of people—61 of them—who will sit on the new European Systemic Risk Board.

Hurry up, get a backbone

Does it really matter who is in charge of the regulators? The grunt work of supervision depends



on more junior staff, who will always struggle to keep tabs on smarter, better-paid types in the firms they regulate. There is a natural tendency for regulators to get captured by their charges. Some of the new institutions will be less important than others—Europe’s new banking watchdog will have less to do than the markets supervisor, for instance. Tighter regulation in one bit of finance may push excessive risk-taking into unregulated areas. And when crisis hits, decision-making shifts to a tiny handful of people at treasuries and central banks who can spend or create money.

Putting too much faith in the regulators would indeed be a mistake. But regulators with spine are still better than invertebrates. Imagine the difference it might have made to Ireland and Iceland, say, if supervisors there had resisted banks’ eye-watering credit growth. The likes of Adair Turner or Sheila Bair, heads of Britain’s Financial Services Authority and America’s Federal Deposit Insurance Corporation respectively, at least say what they think.

Damaging uncertainty about the scope of new agencies cannot begin to dissipate until people are appointed to run them. America’s Financial Stability Oversight Council, whose first meeting was due to be held this week, has some very basic questions to answer about what constitutes a systemically important firm, for example. Legitimacy matters, too. The shift towards a more pre-emptive form of regulation, in which a build-up of systemic risk is addressed before trouble hits, will probably mean telling borrowers that credit has been turned off for their own good. If that is to work (and there are big questions about whether it can), there has to be a proper sense of public accountability.

All of which argues for speed and transparency in openness. The Obama administration has been slow to nominate candidates: it should hurry up. And although America is not a great advertisement for the confirmation process, the principle of pre-appointment hearings is a good one. There is plenty of public debate about who should run banks. The choice of their guardians should receive just as much attention.

Leaders

Education in America

Is it a bird? Is it a plane? No, it’s an important attempt to get the American public behind education reform Sep 30th 2010

FOR America’s children the education system is often literally a lottery. That is the main message of a new documentary about America’s schools, “Waiting for ‘Superman’.” Made by the team that gave us “An Inconvenient Truth”, and supported with the sort of marketing budget that other documentary makers can only dream of, it is intended to create a surge in public support for education reform at least as great as the clamour to do something about climate change generated (for a while) by Al Gore’s eco-disaster flick.

The timing could hardly be better. The “jobless recovery” is finally bringing home to Americans the fact that too many of those who go through its schools are incapable of earning a decent living in an increasingly competitive global economy. The number of jobs advertised but not being filled is increasing even as the unemployment rate stays resolutely high. And despite its depressing enumeration of the failure of so many schools, particularly in poorer urban areas, its miserable ending, and the bleakness of its title, the movie also has a message of hope: there are good schools and teachers in America, whose methods could make its education system as good as any in the world if only they were allowed to.

That truth, recognised by anyone who has spent even a few hours in, say, a KIPP charter school, is an inconvenient one to the teachers’ unions, which the film rightly identifies as a big chunk of kryptonite standing in the way of a dramatic rescue for the children of America. For example, the film features efforts to reform the school system in Washington, DC, led by Adrian Fenty, the mayor, and Michelle Rhee, his combative schools chief, including a scene where Ms Rhee’s offer to double salaries for teachers in exchange for them giving up tenure and accepting “merit pay” (performance-related wages) is rejected by the unions. Right on cue for the launch of the film, Mr Fenty has just lost his local Democratic Party primary to a more union-friendly rival, so Ms Rhee may well be leaving. The $1m spent during the campaign by the American Federation of Teachers played a crucial role in Mr Fenty’s defeat.

The teachers’ unions have resolutely opposed efforts to pay good teachers more than mediocre ones, to fire the worst performers, and to shut down schools that consistently fail to deliver a decent education. This, coupled with underfunding in poor areas, has resulted in a shortage of good schools; so the few that are worth getting into are hugely oversubscribed, with places allocated by the public lotteries which provide the grim climax to the movie. Ms Rhee upset the



unions by refusing to accept all this, closing dozens of schools and firing 1,000 teachers, including the head of her own children’s school.

Hey, teachers! Leave them kids alone

Perhaps the most important thing about “Waiting for Superman” is that it is liberal, Al Gore-friendly types who are highlighting the fact that the teachers’ unions are putting their worst-performing members before the interests of America’s children. Class(room) war may be about to break out within the Democrats. Teachers’ union members are a vocal group within the party; but its rising stars—such as Cory Booker, the mayor of Newark, who has just persuaded Mark Zuckerberg, the founder of Facebook, to donate $100m to improve the city’s schools—are making school reform a priority.

To be fair, the unions are not all bad. As Bill Gates has pointed out, they are taking part in an initiative funded by his foundation to develop new measures of teacher performance, which could be the basis for a form of merit pay. Moreover, he notes, reform cannot succeed without the support of the majority of teachers. Even so, the fact is that the teachers’ unions are the primary obstacle to reform—which presents leading Democrats, and above all, Barack Obama, with a crucial test: will they be willing to confront a core part of their membership in the interests of America’s children? Mr Obama has gone further than many expected in pushing school reform, not least by setting up the Race to the Top competition for additional money. If he has any doubt as to which side he ought to be on, he need only ask that bellwether of public opinion, his old friend Oprah Winfrey. She recently invited Ms Rhee onto her show, where the audience gave her a standing ovation.

Leaders

Letters

On Boeing, India and Nepal, Canada's armed forces, Latinos, Mustique, higher education, South African politics, maps, foreign banks Sep 30th 2010

Boeing v Airbus

SIR – There were some fundamental inaccuracies in your article (“Another nose in the trough”, September 18th). While recognising the obfuscation around the World Trade Organisation (WTO) rulings on subsidies in the aircraft-manufacturing business, I point to some clear facts.

First, the WTO dismissed nearly all the claims that the alleged benefit to Boeing from tax breaks and defence and research contracts was an illegal subsidy. It reportedly found less than $3 billion of NASA research programmes to be impermissible under the rules, excluding claims that relate to past programmes already remedied by America. This is in stark contrast to the WTO’s finding this year that Airbus benefited from over $20 billion of illegal subsidies.

Second, the EU’s original WTO case, DS317, was withdrawn and later replaced with DS353. It was not filed “on the same day” as the American case but a significant period later creating an obvious delay. The American case against Airbus’s subsidies will complete in a few months’ time not in “another three years or more”. Airbus will have to comply with the ruling and remedy the outstanding prohibited subsidy for the A380 by either repaying or restructuring the loan to proven commercial terms.

Last, Airbus and its partner governments rejected an eight-point plan negotiated by the trade representatives of the EU and America before the WTO case began. America had no option but to fight its case through the WTO. Boeing is confident in the organisation’s processes and procedures. We will support the American government’s efforts to comply with any future requirements—and we call on Airbus to do the same as it is essential we all play by the same rules.

Ted Austell Vice president Executive, Legislative & Regulatory Affairs Boeing Washington, DC

Facing facts

SIR – You claim in your article (“Rivals on the roof of the world”, September 18th) that the Indian Ambassador to Nepal, Rakesh Sood, called up Nepali newspaper editors regarding a taped telephone conversation between senior Maoist leader, Krishna Mahara, and an unknown Chinese. This is baseless and untrue. A publication such as The Economist is expected to verify basic facts rather than indulging in speculative sensationalisation.

Apoorva Srivastava First secretary Embassy of India Kathmandu

Up in arms

SIR – In your article (“Fighting to keep fighting”, September 11th) you stated that Canada has focused on peacekeeping since the Korean war, and in another article in the same issue (“Into the storm”) that Canada limits its expeditionary goals to humanitarian interventions approved by the United Nations. Both statements are wrong.

Canada participated in the 1991 Gulf war and in NATO’s 1999 operation in and around Kosovo, the latter not authorised by the UN. In 2002 it deployed maritime forces to the Arabian Sea to interdict terrorists, and sent troops to Afghanistan under American command. Since 2005 it has been heavily involved in combat operations in Afghanistan. It is to that mission, rather than a peacekeeping or humanitarian intervention in Sudan, that it decided to devote its resources. It has never been Canadian policy to engage only in peacekeeping or humanitarian intervention under UN auspices; defence planning and purchases have always included war-fighting contingencies. That Canada focuses only on peacekeeping, an idea sparked by its role in establishing the 1956 UN Emergency Force, endures—but it is a myth.

Dr Elinor Sloan Associate professor Carleton University Ottawa

American immigration

SIR – Your article on Latinos in America was muddy thinking at best and baffling at worst (“Law of large numbers”, September 11th). After stating that 80% of the illegal immigrants in America are Latino, you went on to berate anyone not bowing to the “inevitable” browning of America, ignoring the fact that the opposition is not to Latinos specifically but to illegal immigrants.

However, if America did become a majority of people who considered themselves Latino first, we may well see a country with problems similar to Sunnis and Shias in Iraq, or French Canadians in Canada or the Basque in Spain. In such scenarios, there are no winners. To really be an American, you must share the concept of a land of opportunity; one protected by laws we can all depend on.

Don Reid Round Rock, Texas

SIR – Although I applaud your article for addressing the fact that many Hispanics have “deeper roots…than many Anglos”, I am tired of the population charts included in these types of articles. Rather than depict the image that Hispanics are invading America, it would be more helpful and refreshing to include a chart that shows, in states such as New Mexico, the number of Anglo immigrants.

Leticia Burke Paris

Island living

SIR – Your obituary of Colin Tennant (September 11th) though interesting asserted two misrepresentations. The first was your reference to the “fantasy island” of Mustique in the Grenadines, which suggested the Grenadines are a sovereign country when, in fact, Mustique is a part of the nation of St Vincent and the Grenadines.

The second was your disingenuous claim that the “locals...danced in nothing but gilded codpieces before his princess” as if these gilded codpieces were the sartorial norm on our island. In all fairness, you should have completed the story by indicating that these were costumed dancers at

Lord Glenconner’s elaborate birthday party.

La Celia A. Prince Ambassador Embassy of St Vincent and the Grenadines Washington, DC

Paying for higher education

* SIR – Regarding your leader on profit and education (“Learning the right lessons”, September 11th). In the 18th century, Britain shipped its criminals to Australia, and paid on the basis of numbers taken on board. Conditions were harsh and one in ten died before arrival. In 1792, the system was changed; merchants were paid for every convict delivered alive. From then on the mortality rate was negligible.

“Good rules” will not cure the abuses in the American for-profit education sector while it is paid on the basis of headcount—getting students on board, rather than on post-graduation incomes—arriving safely.

A solution would be to adopt the Lumni equity-based financing approach (“Making the grade”, September 11th) as the basis on which universities were paid. This would directly align the income of a university with that of its graduates. There can be no more certain way to guarantee that students get value from their years of study.

Peter Ainsworth London

South Africa’s trade unions

* SIR – Your suggestion that Jacob Zuma is caving in to the trade unions (“Zuma’s two bad calls”, September 4th) implies that there are better options for South Africa. The massive inequality in the country has always left it vulnerable to a regime of populist and patronage politics, only avoided through technocratic leaders (within a relatively unified ANC) leveraging the substantial political capital post-1994. This honeymoon has been waning since Thabo Mbeki left office in 2008. Now someone has to represent the interests of a frustrated poor majority. So, whilst I would agree that the actions of the Congress of South African Trade Unions (Cosatu) are focusing on a narrow, relatively well off segment of the population, the best we can hope for is that their influence grows as a moderate foil to the populism of Julius Malema.

Paul Plantinga Johannesburg

The lie of the land

SIR – At last, after 167 years of publication, you have produced a world map the right way up (“Nobody’s backyard”, September 11th). I’m on top of the world in New Zealand.

Graeme McLeod Waikanae, New Zealand

SIR – The point of your illustration showing an inverted map of the Americas was well taken, but why did you choose to use a projection that makes South America look much smaller than North America? The two are actually of roughly comparable sizes. It was a strange way to announce the rise of Latin America.

Gilbert Benoît Ottawa



Lost in translation

SIR – Foreign banks best succeed with a felicitous, rather than an accurate, transliteration of their foreign name (“Scrambled in Africa”, September 18th). When I worked for The Chartered Bank, now Standard Chartered, in Hong Kong, I had to live with our Chinese name, Cha Ta Ngan Hong, which could be translated as Squeeze Hit Bank. Our crosstown rivals, the Hong Kong and Shanghai Bank, had the foresight to choose Wei Foong Ngan Hong, or Bank of Abundant Remittances.

Iain Moffat Seattle

* Letter appears online only

Letters

Brazil's presidential election

Lula's legacy Life is better for Brazilians than it was eight years ago. But Lula is leaving unsolved problems for his chosen successor, who lacks his personal magnetism Sep 30th 2010 | BRASÍLIA

THE “best president ever” is how Sandro, a flower-seller in São Paulo, describes Luiz Inácio Lula da Silva. Who will he vote for in the presidential election on October 3rd? “Dilma, for sure.” Why? A shrug and a laugh: “Continuity. And because Lula chose her.” His reasoning is echoed across Brazil, especially among the rural poor and migrants to the big cities. The economy is growing strongly. Jobs are being created, and incomes are rising. The man who presided over this is barred by the constitution from running for a third term. Who better to succeed him, voters ask, than the woman he endorses?

A year ago pundits agreed that Lula’s vast popularity was strictly personal, and could not be passed on at will. He had tried without success to get allies elected as state governors or mayors of big cities. That may be why José Serra of the opposition Party of Brazilian Social Democracy, a seasoned politician who long led the opinion polls, barely started campaigning until it was too late. He seemed to think that Lula’s choice, Dilma Rousseff, a colourless technocrat who was Lula’s chief of staff but has never held elected office, would be easy to beat.

He was wrong. Lula’s popularity, it turned out, could be transferred—but only on his going and only to his chosen successor. If the polls are right (see chart), Ms Rousseff will be Brazil’s next president. That is despite several brewing scandals. The most serious concerns Erenice Guerra, a longtime associate of Ms Rousseff who took over from her as chief of staff when she stepped down to start campaigning. Last month allegations surfaced that people linked to Ms Guerra, including her sons, had extracted bribes in the form of retainers and success fees from businesses hoping to win government contracts. Ms Guerra was quickly defenestrated. No evidence implicating either the president or his candidate has come out.

The opposition has tried to get voters to worry about this (Ms Rousseff is either incompetent or complicit, Mr Serra claimed). But few seem to be listening. The affair has knocked only a few points off Ms Rousseff’s commanding lead.

Instead, Brazilians are revelling in a golden moment. A country that used to fall over whenever the world economy wobbled was one of the last to go into recession in 2008 and one of the first out in 2009. Median earnings are rising and, despite a minimum wage at its highest in real terms since 1979, so is employment.

Since 2003 some 20m Brazilians have emerged from poverty and joined the market economy. These new consumers buy everything from cars to cookers and fridges to flights. To this burgeoning domestic market, add China’s appetite for Brazilian iron ore, meat, soya and more,

Still a lot left for Dilma to do

and in economic terms this is probably “the best moment in the entire history of Brazil,” says Marcelo Neri of the Fundação Getulio Vargas, a university.

Brazil according to Lula

Lula’s remarkable life story—the child of dirt-poor migrants who became a metalworker and trade-union leader—and personal magnetism have helped him to sell “brand Brazil” around the world: a coming power, a profitable place to invest and a tolerant democracy where a man like him could become president. These qualities also mean that most Brazilians give him most of the credit for the improvement in their lot. Are they right?

In a recent interview with The Economist at the presidential palace in Brasília, Lula set out some ways in which Brazil has become a better place during his terms in office. “We are starting to lay steps so that the poorest begin to rise up to the lower-middle class and then to the middle-middle class,” he says. With national self-esteem rising and inequality falling, Brazil is poised under the next president to fulfil his dream of becoming “a country in which the great majority are middle-class” with high purchasing power and access to better education and health. Lula understands from personal experience what matters in helping poorer Brazilians get ahead. He is proud that, although he is the first president of Brazil without a university degree, he is the one who created the most universities and technical schools.

“Wherever you go in Brazil you will see work financed by the federal government,” he says, highlighting railways, power stations and basic sanitation. After 25 years in which the country failed to maintain its infrastructure, let alone build any more, it is “reacquiring the capacity to carry out the grand infrastructure works that Brazil needs.”

For many of the poor and working-class Brazilians who are his most ardent supporters, Lula’s crowning achievements have been big rises in the minimum wage and pensions, and the Bolsa Família programme, which gives 12m families small but life-changing amounts of cash in return for having their children vaccinated and keeping them in school. By boosting domestic demand, these policies have also contributed to economic growth.

Many better-off city dwellers agree that Lula deserves praise for bringing into the Brazilian mainstream the once-novel idea that reducing poverty is a proper aim of government (though others sneer snobbishly). But when asked what Lula has done for his country, such people also point to the policies he inherited from his predecessor, Fernando Henrique Cardoso.

As finance minister under Itamar Franco in 1993-94, Mr Cardoso tamed Brazil’s persistent hyperinflation with the Real Plan. As president between 1995 and 2002, he put in place policies that have given the country stability and growth. “Lula inherited sensible macroeconomic policies and was clever enough to realise it,” says André Villela of the Fundação Getulio Vargas. That involved ignoring the socialist economic ideas of his Workers’ Party (PT). Early in Lula’s presidency, his finance minister, António Palocci, saw off fears of default by tightening fiscal policy and repaying foreign-currency debt. Henrique Meirelles, a former international banker who has run the Central Bank for all of Lula’s presidency, has guaranteed monetary orthodoxy. Because of Lula, says Luiz Felipe Lampreia, who was Mr Cardoso’s foreign minister, “there is now a national consensus against macroeconomic foolishness.”

A mightier state

But the consensus breaks down on two issues. His critics argue that, given his popularity, Lula could have done more to fix some of Brazil’s deep-rooted problems. They also say that in his second term he allowed the state to become over-mighty.

The last time The Economist talked to Lula, in early 2006, he was emerging from a scandal that

engulfed his first administration and almost ended his political career. In a scheme known as the mensalão (roughly, “big monthly stipend”) the PT had bought votes of congressmen from allied parties. Lula said then that in a second term his priority would be tax, political, labour and pension reforms. These are sorely needed: the tax system is multilayered and burdensome, politics prone to corruption and gridlock, labour laws rigid and anachronistic and pensions for public employees absurdly generous. Yet none of these reforms happened, despite (or perhaps because of) Lula’s soaring popularity.

Not for want of trying, is Lula’s response. He talks up his efforts to reach consensus on most of these issues, and blames “hidden enemies” in Congress who refused to match verbal support with votes. Indeed, when asked what he has learned about his country during eight years as president, Lula speaks of the difficulties of getting things done, especially public-investment projects. A president can find that by the time he has cut through red tape and persuaded state and local governments to co-operate, his four-year term is over. A big infrastructure project—and Brazil needs many, from roads, ports and airports to sewage works and power plants—could easily take “five years to solve all the problems, and two years to get the job done”. In Brazil, he concludes, “the president cannot always do what he wants, he does what he can”.

Not good enough, retort critics, who see Lula as having surfed the commodity boom on Mr Cardoso’s unpopular, but necessary, liberalising reforms. They accuse Lula of using the recession as an excuse to expand the state’s grip on the economy, either directly (with oil) or indirectly (through loans by state banks). They worry that he has strayed from the path of fiscal rectitude. The government has lost control over day-to-day spending on pay and pensions, says Marcelo de Paiva Abreu, an economist at the Catholic University in Rio de Janeiro, losing its chance to boost investment in infrastructure.

The increase in public spending in 2008 shortened the recession, but much of it has not been reversed even as the economy roared back to life. Some of it involves printing money, disguised by accounting tricks: while the government’s net debt is falling its gross debt is rising, and its deficit helps to keep Brazil’s interest rates high (though they are lower than a decade ago). “Such pro-cyclical spending makes no sense,” says Mauro Leos of Moody’s, a ratings agency. “When times are bad—and bad times always come—Brazil will be sorry it hasn’t been putting money aside.”

Lula agrees that the expanded role of the state should be temporary. “I don’t want the proprietorial state,” he insists, adding that “I respect the workings of the market.” But the lesson of the financial crisis is that the state should regulate better and be prepared to intervene when the market fails, as well as “inducing” private investment and acting “for the sake of the people who need it the most”.

Rather than reforms, opponents say that Lula has given priority to cementing his party’s grip on government. The past eight years have seen an “unprecedented” increase in the award of government jobs to political clients, according to Maria Celina D’Araújo, a political scientist at Rio’s Catholic University. Almost a quarter of senior managers in the federal administration are PT members, her research shows, and 45% are trade unionists. Under Mr Cardoso 40% of managers of state pension funds were trade unionists; under Lula, more than half are.

Although Brazil is far from one-party hegemony, there are other signs that Lula and the PT increasingly conflate what is good for the country with what is good for them. One party leader responded to revelations of corruption by warning of the perils of “too much” press freedom, while Lula complained that some publications “act as if they were a political party”.

Asked about fears that Brazil’s democracy could be threatened by an extension of these trends, Lula says this is “unthinkable”. But if such fears are among the most commonly mentioned reservations about his legacy, that is because they are amplified by the huge deep-sea oil reserves (known as pré-sal, since they lie beneath a volatile layer of salt) discovered a few years ago. If these can be brought to the surface and to shore they will turn Brazil into an oil power. But oil has a nasty habit of bringing corruption with it. The fund Lula wants to set up with oil revenues could, as he says, help Brazil to overcome poverty, low standards in education and limited investment in science and technology. Or it could provide a lucrative way to reward loyalty to party and president.

Lula makes light of the risks in lifting the oil. The recent spill in the Gulf of Mexico was caused by the “irresponsibility” of a private company which tried to extract oil in the “cheapest and quickest way possible”. Standards in Brazil, he insists, are higher. He dismisses the idea that the state is counting its barrels before they are pumped. His government decided to grant sole operating rights in unallocated fields to Petrobras, the national oil company, rather than grant concessions, as before, because “you offer risk-sharing contracts when there is risk. In the case of the pré-sal oil, we are sure.” It is a strange way to talk of the most technically demanding oil-extraction project on the planet.

The government has used a huge ($67 billion) new share issue by Petrobras, launched on September 23rd, to raise its stake in the company from 40% to 48%. It is paying for this partly by selling oil deposits to the firm and partly by more accounting sleight of hand involving the National Development Bank (BNDES). In all, state bodies bought 60% of the offered shares.

But it must also raise finance, either private or public, for its grand infrastructure plans, made more urgent by hosting the World Cup in 2014 and the Olympics in 2016. Since Brazil’s savings rate remains low, foreigners will have to pay for most of the projects. At the moment they seem keen to. The current-account deficit has reached 2.4% of GDP so far this year. But capital inflows help to make the real stronger, which is hard on exporters.

What next?

“Dilma is going to surprise the world,” says Lula. That is a near certainty, given how little is known about her. In the 1960s she was a Marxist revolutionary; in the 1970s she was jailed and tortured by Brazil’s military regime. More recently, as Lula’s energy minister and then chief of staff, she has been a competent manager, though with a notoriously short fuse. She was not an obvious successor to Lula. He chose her partly for lack of alternatives: the PT’s more prominent leaders were caught up in the mensalão or other scandals.

Asked whether he will remain the power behind the throne, Lula starts with flat denial. “You can be sure of one thing: I’m leaving,” he says, adding that he has no plans to run for election in 2014. “If I get Dilma elected and she is good, she’ll have to be a candidate for re-election.” But then ambivalence creeps in. “I’m a politician, and I’ll continue to be politically active,” he says, musing that when he steps down he may find it easier to talk about tricky political matters. “I will start by convincing my own party to accept political reform as a priority.” In practice, Ms Rousseff may have to govern in Lula’s long shadow.

Since she has spent much of her political life behind the scenes, little can be said about her ability to cope with the limelight. She lacks Lula’s faith, rooted in his trade-union background, in his ability to negotiate a deal, whatever the circumstances. At home that helped him to dominate his party and coalition. Abroad, it led him to assert Brazil’s right to join the best talking shops, such as the United Nations Security Council. He believes passionately in the power of personal diplomacy. “If I could give one piece of advice to the world’s presidents, it would be: ‘don’t outsource politics’.” But many would say he overestimates its possibilities. His most serious misstep came in Iran, when his attempt (with Turkey) to persuade Mahmoud Ahmadinejad to



play by the world’s nuclear rules was spurned by the UN.

Ms Rousseff may feel the lack of such dealmaking abilities, as she tries to run a party and government no longer dwarfed by their leader, and perhaps in less favourable economic circumstances. She is likely to do less of Lula’s globetrotting while she feels her way at home.

What kind of government would she run? Plans for tightening fiscal policy have appeared in the press, attributed to sources close to her. So have predictions that Mr Palocci, who ran such a tight ship in Lula’s first term, might become her chief of staff. But also in that fight are people like José Dirceu, the architect of the mensalão, who plays an important role in her campaign. In September he told a group of PT members that the party would be more powerful under Ms Rousseff, since she represented the party project, whereas Lula was “twice as big as the party”. Luciano Coutinho, president of the BNDES and architect of the government’s industrial policy, might get the job of finance minister.

Then there is the PT’s main electoral ally, the Party of the Brazilian Democratic Movement (PMDB), a coalition of regional bigwigs with a voracious appetite for patronage. In August the PMDB’s leader, Michel Temer, who will be vice-president if Ms Rousseff is elected, told party members to campaign hard for her, saying that in return they would partake in what he described as the “sharing out of the bread”.

Where Ms Rousseff herself stands nobody bar her closest associates knows. Her early appointments and announcements will be scrutinised with unusual eagerness. Will she surround herself with austere economists, or party hacks, or believers in the state’s power to boost growth? Or a mix of all three? Does she plan to trim the budget deficit—or does she, like many on the left of her party, believe that growth makes such tedious rectitude unnecessary? Will she take some steps that Lula shirked, because of a desire to smooth her path to the throne, such as inviting private companies to run Brazil’s overstretched state-owned airports?

Ms Rousseff may have cause to wish that her predecessor had been bolder. But she is inheriting a better Brazil than he did, and that is in good part because of him. If one of Lula’s finest moments came right at the start of his presidency, another will come at the end, when he stands down after two terms, rather than changing the constitution to allow himself a third. “A popular left-winger but not a populist,” concludes Carlos Melo of Insper, a São Paulo business school. “This is something completely new and an example to the rest of Latin America.”

An edited transcipt of our interview with Lula

Briefing

Still a lot left for Dilma to do

The budget and the election

The red ink war Budget rows take centre stage as the mid-terms loom Sep 30th 2010 | WASHINGTON, DC

THE new fiscal year began in America on October 1st as it often does: without a budget. For five of the past seven election years, Congress has failed to agree on one. But even by that dismal standard, this year marks a new low. For the first time since the budgeting process was overhauled in 1974, neither chamber has voted on a budget resolution—the overall spending plan that is then fleshed out in 12 appropriations bills. The House of Representatives has passed only two appropriations bills so far; the Senate, none at all. Instead, Congress has resorted to a “continuing resolution”, which maintains spending at last year’s levels until early December, at which point the lawmakers will have to take the subject up again.

Worse, Congress has still not decided what to do about a big package of tax cuts that is due to expire at the end of the year. The Senate had already deferred the issue until its “lame-duck” session in November, after the mid-term elections but before those elected take office. And in the early morning of September 30th, the House also adjourned until mid-November without settling the matter. Should Congress fail to act when it reconvenes, America’s limping economy will be further hobbled by an extra $200 billion in taxes next year, on top of the tightening caused by the expiration of the stimulus package and an expected round of big state-level cuts.

Decisions about taxing and spending are especially fraught this year, thanks to the impending elections, in which America’s sluggish economy and huge deficit are likely to be defining issues. The root of both problems, the Republicans say, is the Democrats’ support for an overbearing state, which is too quick to spend, tax and regulate. The Democrats, mindful of the Republicans’ lead in the polls, are reluctant to take any votes that appear to confirm this image, by formally approving a big deficit, say, or allowing any taxes to rise.

The leaders of the Republicans in the House made both tax and spending cuts the centrepiece of the “Pledge to America”, a manifesto of sorts that they unveiled on September 23rd. They promised to reduce spending next year by $100 billion, permanently extend all the tax cuts due to expire at the end of the year (the president wants to allow taxes for the rich to rise), and repeal the reforms to America’s health-care system the Democrats passed earlier this year. In general, the wordy document contains much talk of restoring “fiscal discipline” and stopping “job-killing tax hikes”.

Critics have pointed out that these goals are largely contradictory. Extending tax cuts, after all,



will add to America’s fiscal woes. Moreover, even as they vow to shrink the government, the Republicans also promise to spare its most expensive parts—Social Security, Medicare and defence—from any cuts. There are few clues as to what Republicans might replace the Democrats’ health-care reforms with, and therefore whether they could save the government any money that way. Erick Erickson, a prominent Republican blogger, complains that the document focuses on “mom-tested, kid-approved pablum” at the expense of “stuff that will have any meaningful long-term effects on the size and scope of the federal government.”

Most of these objections are immaterial, however, since the Republicans will not be able to turn much of the “Pledge” into law. Even if they win control of both the House (which is likely) and the Senate (which is less so) at the mid-terms, they will still be constrained by Democratic filibusters in the Senate and by the president’s veto. That will almost certainly preclude them from overturning health-care reform, though they will try to chip away at it. As for the budget, by allowing the continuing resolution to pass unhindered, the Republicans have in effect agreed to maintain spending at levels they describe as ruinous for the time being.

But the debate about whether to extend the expiring tax cuts is certain to come to a head in November. During his campaign for president Barack Obama pledged to extend the tax cuts for individuals with incomes below $200,000 and for families with incomes below $250,000, while allowing them to rise for anyone richer. The Republicans insist that this will hinder job creation by siphoning money from the owners of small businesses, and thus further dampen the recovery.

There may be some truth to this, but extending tax cuts to the rich is not a very efficient way of boosting the economy. This week the director of the Congressional Budget Office said that both a full and a partial extension, although beneficial in the short run, would do the economy more harm than good in the long term by adding to the national debt. Earlier in the year the CBO examined 11 different forms of fiscal stimulus and concluded that extending unemployment benefits—a measure that the Democrats favour—would provide the most benefit to the economy; extending the tax cuts would provide the least.

Polling suggests that most Americans would be willing to see taxes rise on the rich. Yet Republican gibes that the Democrats are planning to throttle the recovery by raising taxes are making Democrats in marginal seats skittish. On September 28th 47 House Democrats wrote to the Speaker saying they would like to see some of the tax cuts, on capital gains and dividends, extended for all. Several Democratic senators have also spoken out in favour of an across-the-board extension.

Moreover, by the time the lame-duck session begins, Republicans are likely to be emboldened by their expected electoral gains. Some have suggested that if the Democrats do not go along with their ideas on taxes and spending, they will be forced to bring Congress to a standstill until they get their way. Most observers reckon that neither party will want to foment a crisis or stiff already disgruntled voters with a big tax rise, and so conclude that some sort of deal will be struck, perhaps involving the temporary extension of all the cuts for a year or two. That could make short-term sense; but it will set the stage for more budget battles to come.

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Ohio

Back and forth Our correspondent returns to a state he found swinging to the Democrats in 2006, and finds it swinging back again Sep 30th 2010 | COLUMBUS

THERE is no keeping away from Ohio in the autumn of an election year. It is a whole America in miniature, with dying post-industrial Cleveland balanced by booming white-collar Columbus, with the rich farmland around Cincinnati in the west contrasting with the sad decaying steel towns along the Ohio River to the east. No other state captures the national mood quite so conveniently.

And no state can beat Ohio’s record for voting the same way as the nation as a whole in presidential elections. Likewise, at the previous mid-terms in 2006 the gain of a House seat, a Senate seat (and the governorship) by the Democrats paralleled their takeover of both chambers of Congress that year. As goes Ohio, so the old saying has it, so goes the nation.

If that is still true, then the Democrats are right to be worried this year. Ohio occupies 18 seats in the House of Representatives in Washington, and no fewer than six of them are now reckoned by the pollsters to be in play, all of them Democrat-held. Add to that the easy retention of a Senate seat, the predicted capture of the governor’s mansion and the possible takeover of the state assembly and this most closely-watched of states has the potential to deliver a decisive boost to the Republicans.

Rob Portman looks set to win his Senate race easily, after the Democrats’ attempt to make his a competitive race fizzled out. Mr Portman ought to be an easy target; he served under George Bush junior as budget director and as trade representative, associations that should have made him toxic at a time of economic hardship; in fact, he is ahead by double digits.

A tenser battle is the one for governor. It pits a Democratic incumbent, Ted Strickland—who was elected in 2006 by a thumping 61%-37% and whose approval ratings were sky-high until the recession started to bite—against, of all people, a former Lehman banker. Yet John Kasich is leading by anything from one to 17 points, depending on which of September’s many Ohio polls you believe. Until recently, Mr Kasich looked as though he had it in the bag; but attacks on his Lehman record have tightened the race. The attacks are not exactly fair: Mr Kasich spent most of his life in politics, serving in the state’s Senate and as a congressman in Washington, and was never involved in exotic trading. But they seem to have hurt.

The challenger is the nearest thing to a tea-party candidate to be found in Ohio, where Republicans tend to be fiscal and social conservatives (Mr Kasich recently wrote a book on faith, and when in Congress played a big role in the budget and welfare reforms of the mid-1990s). His Croatian descent appeals to Ohio’s white working-classes, many of whom are of central European stock. Yet he has vulnerabilities, not least a stubborn insistence that he knows how to close a predicted $8 billion hole in the state budget while refusing to explain how. He has promised not to raise taxes, and to eliminate Ohio’s state income tax, which accounts for almost half of its revenues. Again, he has not said how. But Mr Strickland is vulnerable too; Ohio’s 10.1% unemployment rate is the ninth worst in the country and his promise in 2006 to fix the economy

Strickland fights back



has fallen flat.

But in the end it is the House races that will matter the most: if the Republicans are to achieve their aim of taking back the chamber, they need 39 wins, so three or four from Ohio will be hugely valuable. One hopeful is Steve Stivers, running for a district that includes most of Columbus, the capital, and a big swathe of suburbia. A lean lieutenant-colonel in the National Guard who deployed to Iraq in 2005, Mr Stivers reckons that the deficit will be a big issue to a lot of his voters (he has a national debt clock on his website). The stimulus money “has done nothing at all for the private sector,” he reckons: Ohio’s biggest chunk of it comes in the form of $400m for a high-speed railway for which the studies have not yet even been done. And Mr Obama’s health reforms, he reckons, are strangling small businesses, which are already seeing premiums rise by 25% or more. Jobs, though, are the biggest concern. “Everyone in the state knows someone who has lost their job,” he says.

Out in the hotly-contested 16th congressional district, Jim Renacci has high hopes of unseating his rival, John Boccieri, who only took the seat for the Democrats in 2008. His motives are personal; he used to run a successful car dealership which was closed following the government takeover of General Motors last year: he calls the GM takeover “the darkest day in the history of capitalism”. He is hammering his opponent, as so many Republicans across the country are, for Democratic policy; Mr Boccieri’s vote in favour of cap-and-trade is extremely damaging in a state that depends on coal for almost all of its power.

But the Democrats refuse to give up hope. The Ohio branch of the party is one of the best-organised in America. It is working seamlessly with Mr Obama’s own campaign machine, Organising for America, while it is an open secret that the various Republican campaigns are a badly co-ordinated mess. But Republican voters are fired up in a way that Democratic ones are not, in marked contrast to their gloomy mood in 2008. Thank the waning of Mr Obama’s star, so bright two years ago, for that.

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Governors' races

The rest of the Midwest Democrats may lose control of state capitals throughout the Midwest Sep 30th 2010 | ANN ARBOR, MICHIGAN

“CHANGE is going to come,” a hoarse Barack Obama insisted in Madison, Wisconsin on September 28th. It was the president’s third trip to the state in six weeks. Scott Walker, who is running for Wisconsin’s governor, is thrilled by the attention. “Every time he comes,” Mr Walker explains cheerfully, “we get a massive rush of volunteers.” Mr Walker is the Republican candidate.

As Democrats struggle to keep control of Congress, another desperate fight is being waged over state capitals. Thirty-seven states will elect governors this year. For Republicans, no states offer riper fruit than those near the Great Lakes, America’s most beleaguered and politically volatile region. Elections there matter not just to the states themselves, but the rest of the country, too.

The mid-term elections usually see about five governors’ seats switch from the president’s party to that of the opposition, according to the Democratic Governors Association. This year may bring more dramatic change. Economic despair has fuelled anger at incumbents. In Minnesota a Democrat may succeed the Republican governor, Tim Pawlenty. But Democratic governors have overseen the downturn in Michigan, Illinois, Iowa, Ohio and Wisconsin.

Democratic governors have tried to revive their ailing states. Michigan’s Jennifer Granholm, who will retire after two terms, invested in retraining and hoped to foster a green economy. Ohio’s Ted Strickland (see article) has provided seed money for entrepreneurs. But economic revival is a slow process. Voters are impatient for change.

Republicans have fielded some attractive candidates, like Michigan’s Rick Snyder, who calls himself “one tough nerd”. However, Democrats are so unpopular that even lacklustre Republicans may win. The Republican in Illinois, Bill Brady, had a mediocre career in the state legislature. He once proposed a bill to allow mass euthanasia of unwanted pets. Yet he leads the Democratic incumbent, Pat Quinn, by a wide margin.

The hard work will begin in January. New Republican governors will face budget deficits and high unemployment. Each Republican in the region promises to trim spending and keep taxes low. But ailing manufacturing states require strategic investments in higher education and infrastructure. It will be difficult to cut taxes while balancing the budget and charting a new economic course.

Republican governors may take solace, however, in the simpler task of skewering Democrats in Washington. Governors throughout most of the country will help to redraw congressional districts next year. But those in the Midwest will have particular clout, as they must not only redesign districts but eliminate some. Meagre population growth will probably ensure that Michigan, Iowa and Illinois each lose one congressional seat and Ohio two. Then governors in Midwestern swing states can wield their power again in 2012, deploying supporters on behalf of the Republican presidential candidate. Mr Obama was in Wisconsin to rally support for the midterms. We can be sure that he was eyeing 2012, as well.

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Louisiana's 2nd House district

How now, Mr Cao? The only Vietnamese-American in Congress faces defeat Sep 30th 2010 | NEW ORLEANS

IN DECEMBER 2008, as the world was still absorbing the magnitude of Barack Obama’s victory, another piece of election history was made when Anh “Joseph” Cao won the congressional seat in New Orleans to become the first Republican to represent the city since 1891 and the first-ever Vietnamese-American elected to Congress. Since then, Mr Cao, who, like Mr Obama, was once a community organiser, has worked hard for his constituents. He visited the Lower Ninth Ward recently as part of an effort to spruce up that shattered neighbourhood, which, he thinks could take up to another ten years to recover fully from Hurricane Katrina.

Mr Cao won Louisiana’s 2nd district by defeating William Jefferson, a congressman whose freezer famously stocked $90,000 in cash. Mr Cao believes voters were just fed up with Mr Jefferson, but his victory stunned the heavily African-American and Democratic city. The 2nd is drawn as a black-majority district. It covers most of New Orleans and a few suburbs on the west bank of the Mississippi.

Cedric Richmond is the Democratic candidate this time. Only 37 years old, he has represented Orleans Parish in the state legislature since 2000. In the Democratic primary on August 28th he got 60% of the vote on an estimated turnout of 8%. He was endorsed by all the big local names, including the mayor, Mitch Landrieu, and his sister, Senator Mary Landrieu, but the primary was marked by a slew of negative advertising from Mr Richmond’s opponents that questioned, among other things, his involvement in a bar-room brawl over a game of pool in 2007.

Mr Cao will have a tough time retaining the seat. A big factor in his 2008 win was that the congressional election had been postponed until December as Hurricane Gustav had disrupted the autumn’s primary schedule. Turnout dwindled on the day and Mr Cao’s winning total was just 33,000 votes; Mr Jefferson had drawn 93,000 votes in the November primary. In this Democratic stronghold Mr Cao has made great play of his close relationship with Mr Obama in tackling post-Katrina and BP oil-spill problems, going so far to say that he “loves” the president.

Mr Cao trained as a priest, yet his gentle manner belies a tough fighting spirit. Born in Vietnam, he was sent to America as a boy when Saigon fell. His mother remained to tend to his father, who was held in a re-education camp. He was the only House Republican to vote for the health-care bill last year, though he switched to a no over abortion funding, and is frustrated by petty partisanship on Capitol Hill. He has toiled on many poverty-related issues and is a champion of the Vietnamese-American community that works in the shrimp industry on the gulf coast. In June Mr Cao suggested that the head of BP America commit hara-kiri because of his poor handling of the oil spill. Mr Cao will hope that on November 2nd New Orleanians will be less harsh in their assessment of his time in office.

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Guns and state borders

Trekking north Most guns recovered from crime scenes come from ten lax states Sep 30th 2010 | ATLANTA

THE Iron Curtain kept Europeans in the communist east from travelling westward. The Iron Pipeline keeps guns travelling northward. That nickname has accrued to I-95, a highway running along America’s east coast from Miami all the way to Maine, which gun traffickers have long used to haul guns bought in southern states with relatively lax purchasing laws to sell in north-eastern states such as New York and New Jersey, which more strongly regulate gun sales. But gun-trafficking is far more complex and extensive than simply buying in Atlanta and selling in Newark, as detailed in a new report by Mayors Against Illegal Guns—a coalition of more than 500 mayors from across America dedicated, says the group’s mission statement, to “protecting the rights of Americans to own guns, while fighting to keep criminals from possessing guns illegally”.

Using gun-trace data provided by the Bureau of Alcohol, Tobacco, Firearms and Explosives, the report shows that in 2009 ten states (Arizona, California, Georgia, Florida, Indiana, North Carolina, Ohio, Pennsylvania, Texas and Virginia) supplied almost half the interstate-trafficked guns recovered at crime scenes.

The report also argues that the stricter a state’s gun laws are, the less likely that state is to export trafficked guns recovered at crime scenes. State reinforcement of federal penalties for providing false information when buying a gun, running background checks on buyers at gun shows, allowing local discretion to police when issuing concealed-carry permits, requiring purchase permits for handguns and allowing municipalities to set their own gun laws are all associated with lower gun-trafficking rates.

This is not the first report from this coalition on gun-trafficking—another released this month found that 90% of the guns recovered from crime scenes in Mexico and traced led back to American dealers. And it has attracted the sort of response one might expect: Andrew Arulanandam, director of public affairs for the National Rifle Association, called Mayors Against Illegal Guns “intent on enacting some form of gun control” and predicted that people would be “wary about believing so-called studies that come from groups that have an interest in the outcome.” And he ought to know.

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Households

Cramped quarters As children postpone their departure, households get larger Sep 30th 2010 | WASHINGTON, DC

IT IS hard to be an optimist about the housing market these days, but those so inclined like to note that as long as the population keeps growing, so should the demand for homes. But what if the larger population decides to share the same number of homes?

America’s census bureau has been publishing massive amounts of data from several, parallel surveys of the population in recent weeks. One of its more intriguing findings is that after shrinking for decades, households have started to grow. Last year the average household had 2.59 people, up from 2.56 two years earlier, marking the first increase since 1993.

This is not because parents are having more children. According to Julia Coronado and Yelena Shulyatyeva of BNP Paribas, a bank, it is because the children they have are taking longer to move out. They calculate that the proportion of adults aged 25 to 34 still living with their parents has risen to 13.4%, from 12.7% in 2008.

There are other signs that Americans are more inclined to stay put these days. The proportion of people who changed homes last year fell to 14.9% from 15.4% in 2007, due no doubt both to the lack of employment opportunities and the inability to sell a home that is worth less than its mortgage. People are delaying marriage: the proportion of people who have never been married rose sharply, to 28.6% of women and 35.2% of men. They are also having fewer children.

Much of this is almost certainly a response to the recession and the surge in unemployment. For young people who have lost their job or cannot find their first one, living with their parents becomes more attractive. Census data have corroborated the devastating impact on households. Median income fell 0.7% after inflation, in 2009, finishing the decade down a shocking 5%; the poverty rate rose to 14.3%, the highest since 1994, from 13.2% and the proportion of the population lacking health insurance also rose, to 16.7%.

As the economy recovers, some of those people will move out of their shared homes and buy their own. But the reversal could be a way off, and slight. Ms Coronado notes that household size shrank over recent decades first as birth rates declined, then as baby boomers’ children moved out. The latter is almost a spent force. Another factor that had driven down household sizes in the last decade was the proliferation of mortgages allowing people to buy their first home with little or no money down. That was unsustainable.

If households are slow to shrink back, it has sobering implications for many industries. It will slow the process of reoccupying vacant homes and bringing construction back to life. Larger households means more people sharing televisions, refrigerators and cars, and so fewer sales of new ones. The share of households with two or more cars dropped to 57.5% from 58.2% in 2007. When young people do move out, they are more likely to rent than buy. The proportion of households who rent has risen sharply since 2007, as has the number of people in each rental household.

At least the homes themselves are not getting any smaller. The typical home has more bedrooms than it did two years ago. But, as Ms Coronado speculates, “The cleanliness of the bathroom has



probably deteriorated.”

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Energy in Texas

The search for power Pondering alternatives to oil and gas in the land of the wildcatter Sep 30th 2010 | MIDLAND, TEXAS

THE Permian Basin, named for the geological era in which much of it was formed, stretches across hundreds of miles of eastern New Mexico and western Texas, capped by the deceptively modest-looking cities of Midland and Odessa. Much of the wealth in Texas came from oil and gas trapped here, and although oil production in Texas has dropped by two-thirds from its high in the early 1970s, the state’s reserves are sizeable still. Texas has nearly a quarter of America’s crude oil reserves, and 30% of its natural gas. Taxes on their production fill state coffers, allowing Texas to be one of the few states without income tax.

But in recent years, renewable-energy sources have captured more attention in Texas. Pride is a factor; Texas is a national leader in energy production (as well as consumption), and loth to let that go. But more to the point is that circumstances demand the switch. The state’s population is growing quickly, and energy needs will keep pace. Oil and gas will not be enough.

Texas already leads the nation in wind- power capacity, and in 2009 some 6% of its electricity was pulled from the air. The sky over west Texas is studded with wind turbines, which dwarf the drilling rigs that used to dominate the landscape. But critics notes that wind power can be erratic: if the wind slows (as it did for an extended period earlier this year), conventional power must be there for backup. And growth in the sector is constrained, at the moment, by transmission. Texas has its own electric grid, which was not built to handle so much generation from west Texas.

Though the state’s Public Utility Commission is building additional lines, advocates for other energy sources want a bigger piece of the pie. Nuclear power made up 14% of the state’s electricity generation in 2009, and several more reactors may be built, pending approval from the federal Nuclear Regulatory Commission. But nuclear power has staggering capital costs, and brings the controversial question of how to dispose of or recycle nuclear waste. Solar power has an intuitive appeal under the blistering south-western sun, but it is still expensive per megawatt. Meanwhile, efficiency experts chime in that some share of the state’s growing needs could be obviated by tighter standards.

Jobs are a key consideration. A report from the Cynthia and George Mitchell Foundation suggests that the more ambitious scenarios for renewable-energy investment in Texas could bring an

Invisible gold



additional 23,000 jobs to the state each year until 2020. Already the wind farms have hired thousands of workers in west Texas.

The oilmen, for their part, are fretting less about competition than about interference from Washington, DC. “They don’t understand our industry,” says Kevin Sparks, the president of Discovery Operating, shouting to be heard over the noise of a drill on a hot Midland afternoon. He was pessimistic about new taxes, and new federal regulations against hydraulic fracturing (a method of freeing underground fossil-fuel deposits by blasting the rocks with water and chemicals). There is a worry that the process contaminates groundwater, and the Environmental Protection Agency is studying the issue. It is a particular concern in Texas as a huge gasfield, the Barnett Shale, sits under the city of Fort Worth.

The oil industry’s bugbears, in addition to the environmentalists, include the not-quite-dead possibility of cap-and-trade regulation, and the ramifications of the BP oil spill in the Gulf of Mexico. Industry spokesmen think it unfair that all should be punished for the misdeeds of one, and hope that pragmatism will prevail. If the issue is power and jobs, it probably will.

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Lexington

The loneliness of Barack Obama His domestic team is dispersing. But national security is the area where the president could use closer friends Sep 30th 2010

BOB WOODWARD’S latest fly-on-the-wall White House potboiler, “Obama’s Wars”, is among other things an essay in the loneliness of command. Having inherited a failing war, a fresh young president is bombarded on all sides by conflicting advice and has in the end to set the strategy himself, pleasing nobody. It would be a fascinating tale at any time, but it is especially poignant in present circumstances. For one reason or another, many of the advisers who have surrounded Mr Obama since he took office at the beginning of 2009 are deserting the listing ship. If he were not from the planet Vulcan (“birthers” take note) and therefore incapable of feeling emotion, he would have every reason to feel lonely right now.

Two members of his economic team—Christina Romer and Peter Orszag—have already left the White House and Larry Summers, his chief economic co-ordinator, will return to Harvard University after November’s mid-term elections. Rahm Emanuel, the White House chief of staff, is expected to announce his departure at any moment so that he can pursue his longtime ambition to become mayor of Chicago in place of Richard Daley. David Axelrod, the president’s political adviser, he of the sad eyebrows, is meanwhile reported to dislike his bachelor existence in the nation’s capital and to be keen to return to his life, his family and Manny’s deli in the Windy City. The need to prepare Mr Obama’s 2012 election campaign gives him the perfect excuse.

The president has so far taken these impending departures in his stride. He will be working closely with Mr Axelrod in the presidential election, and Mr Emanuel was never a close friend anyway. Valerie Jarrett, a senior adviser who is indeed close, appears to be staying, as does his press secretary Robert Gibbs, one of the original Obama team. There is, however, one departure in the works that may cause even a Vulcan some worry. The thought provoked by Mr Woodward’s book is that the loss of Robert Gates, the defence secretary, may damage Mr Obama most of all.

Mr Gates served as George Bush’s defence secretary but agreed to stay on to provide continuity in the Iraqi and Afghan wars and the war on terrorism. Keeping a Republican CIA veteran at the Pentagon was an inspired decision by a president acutely conscious of his own lack of security experience. But politics can be cruel. The presence of Mr Gates has not prevented “ownership” of the failing Afghan war from shifting rapidly to Mr Obama. All presidents eventually own the wars America fights on their watch, whether they started them or not. What is special about



Afghanistan is that Mr Obama rejected both of the big ideas his subordinates promoted in the great hand-wringing review the White House conducted in the autumn of 2009. Instead, he constructed a compromise, in which, if Mr Woodward is to be believed, only he has confidence.

The big idea that bubbled up through the chain of command was a long-haul counter-insurgency campaign. The opposing idea from Joe Biden, the vice-president, was “counterterrorism-plus”: keep only enough force in, near and above Afghanistan as needed to prevent al-Qaeda returning from Pakistan, which should in fact be the focus of American policy. In the end, eager as he was to find an exit from a war his own party hated, Mr Obama rejected the Biden plan. But nor, quite, did he accept the generals’. He sent 30,000 new troops, not the 40,000 General Stanley McChrystal in Afghanistan wanted, and according to Mr Woodward insisted to his commanders that “this is not a nationwide counter-insurgency strategy”, because the public would not accept a plan that could cost up to $1 trillion and break the budget. He also wanted the troops to start leaving by July 2011.

Was this a brilliant compromise or a refusal to take a hard decision? The answer may not come until the withdrawal is due to begin next summer. By then, however, Mr Gates could well have quit. He says that he might depart in 2011, but has not said whether he will stay until the fateful deadline. He may not relish being stuck in a new fight between the president and his generals.

The thinning ranks

If Mr Gates does go, Mr Obama will miss him. Nobody else can provide the same support and cover. Hillary Clinton is still a potential rival. Jim Jones has outlasted serial rumours of impending defenestration, but Mr Woodward’s book suggests that the national security adviser’s relations with Mr Obama are at best proper, verging on awkward: the towering former marine is no consigliere. Nor will Mr Obama have a trusted ally on the ground: General McChrystal has been replaced by General David Petraeus, a registered Republican who remains a stubborn believer in the counter-insurgency strategy he invented for Iraq and which Mr Obama says America cannot afford in Afghanistan. The president is intimate with no foreign ally in the way that Mr Bush was with Tony Blair. Even if he sought such a friendship, it might not be forthcoming: British prime ministers have now learnt the perils of poodledom, whether real or perceived.

Inside the White House, of course, there is still the loyal Mr Biden. The vice-president is one of the surprises of Mr Woodward’s narrative. His prolixity is a legend, yet he emerges as an original thinker and iconoclast, more familiar than his master with Afghanistan and Pakistan and more willing to challenge the military’s most basic assumptions, such as the one that maintains that America’s vital interests are still at stake in a country from which Osama bin Laden has long since fled. Had the vice-president been able to exercise the same influence over Mr Obama as Dick Cheney did over Mr Bush, America might already be winding down its war. But this is a president who does his deciding alone, no matter how widely he consults. Just as well, perhaps. Mr Obama faces the prospect of a lonely summer in 2011.

Economist.com/blogs/lexington

United States

Venezuela's legislative election

The revolution checked The opposition bounces back Sep 30th 2010 | CARACAS

AFTER five years in the wilderness, Venezuela’s opposition is back in parliament and in contention. By winning 65 seats in the 165-member, single-chamber National Assembly, in an election on September 26th, the Venezuela Unity coalition dealt a blow to the hopes of Hugo Chávez, the leftist president, of exercising indefinite hegemony. Even worse for the president and his claim to be leading a popular revolution was the fact that the overall vote of 5.4m for the ruling United Socialist Party (PSUV) and its communist allies, was just below that of their opponents (5.7m).

Only blatant gerrymandering of constituencies and an electoral reform that abolished proportional representation allowed Mr Chávez to keep control of the legislature. Even so, he failed to retain the two-thirds majority he had said was vital for his regime’s future. Without it, the government must negotiate appointments to key posts, such as supreme court justices and members of the electoral authority (the CNE). And it cannot pass, or amend, laws which affect constitutional rights. Particularly irksome will be the fact that it may not be able to muster the 99 deputies required to authorise Mr Chávez to rule by decree, as he has been wont to.

In his 11 years in power Mr Chávez has profited from the opposition’s mistakes, which have included an attempted coup in 2002 and an ill-judged boycott of the previous legislative election in 2005. Over that period he has won a dozen national votes (the only exception being a constitutional referendum in 2007). The opposition’s rehabilitation began with a strong showing in big cities in a regional vote two years ago. For the legislative election, its multitude of constituent groups managed to hammer out a united front. Their success increases the chance that they will unite behind a single candidate against Mr Chávez in the presidential election that is due in two years’ time.

Having campaigned as if the assembly election were a plebiscite on his rule, Mr Chavez this week said it was “not about me”. He claimed a “solid victory”, arguing that the 3.2% of the vote won by a party of moderate chavista dissidents (whom he had earlier denounced as “traitors”) should not be counted with the opposition. He promised to “end 2010 at a gallop” and to continue “building socialism”.

On paper, he has the means to press ahead. The outgoing assembly will have free rein to rewrite



rules until the end of the year. Thereafter Mr Chávez will still control the courts, the armed forces, the all-important oil industry and other state bodies. If the new assembly becomes deadlocked—for example, over the appointment of new members to the CNE—he may use the supreme court to bypass it.

Will sticking to his course allow him to recover enough votes to win a third consecutive six-year term in December 2012? He will have his work cut out. He has lost ground in urban Venezuela. In some poorer districts that are traditional PSUV strongholds, it was hard to find a single chavista voter on election day. In greater Caracas, the opposition won over 860,000 votes to the PSUV’s 634,000.

Just 24 hours after the polls Mr Chávez announced a new billion-dollar fund to build houses in the capital. But the electorate has grown used to unfulfilled promises. The housing shortage has worsened every year since he took office in 1999. Crime is at record levels, the economy in recession and food prices are rising at over 40% a year. Public services such as water, electricity and health care are close to collapse in many areas.

The good news for Venezuela is that representative democracy—which Mr Chávez promised to replace with a “participatory” version—is still alive. Turnout was 66%, and there were few claims of irregularities. Although there was a delay of a few hours in announcing the results, when they came neither side challenged them. Those in the opposition who maintain that voting is a waste of time continue to mutter on the sidelines but these days fewer people are listening. Even the brazen use of government resources, voter intimidation and other dubious tactics failed to produce the result the president wanted.

Mr Chávez had called on his followers to “demolish” the opposition. Instead, it has emerged stronger than at any time in the past decade. Its next job will be to come up with a plausible presidential candidate, capable of communicating with ordinary Venezuelans. But with the country split down the middle, a pluralist parliament could promote the understanding and dialogue that Venezuela sorely needs. Whatever the president’s wishes, demolition seems to be off the agenda.

The Americas

Security in Colombia

The beginning of the end Demise of the FARC’s top killer Sep 30th 2010 | BOGOTÁ

WHEN Juan Manuel Santos took over as Colombia’s president in August, he said that the door to peace talks with his country’s guerrillas was “not locked”. The response of the FARC, the main guerrilla army, was a wave of attacks and ambushes. In little more than six weeks it killed more than 40 soldiers and police, raising concerns that the improvement in security under the outgoing president, Álvaro Uribe, might be in jeopardy and that army morale was slipping.

Such doubts were quelled in the most dramatic way possible on September 22nd, when government forces staged a lethal and carefully planned bombing raid that killed Víctor Julio Suárez, the FARC’s senior military commander, who is better known to Colombians by his nickname of “Mono Jojoy”. It was, said Mr Santos, the “most resounding blow against the FARC in its entire history”, and marked the “beginning of the end” of the guerrillas.

That judgment does not seem exaggerated. The blow to the guerrillas is both symbolic and operational. Jojoy was a mythical figure within the FARC, having grown up within its ranks. A member of the seven-member ruling secretariat and commander of the powerful Eastern Block, he was the FARC’s chief military strategist. He was responsible for organising frontal attacks that overwhelmed isolated army garrisons in the 1990s and, thereafter, a wave of kidnappings of politicians, many of whom were held in jungle prisons for years. He controlled vast crops of coca leaf, the raw material for cocaine.

When Manuel Marulanda, the FARC’s founder, died of natural causes in 2008, he was replaced as the group’s commander-in-chief by Alfonso Cano, its political leader. But it was Jojoy who inherited Marulanda’s mantle as the man who inspired most respect from the FARC’s fighters—and terror and repulsion among the vast majority of Colombians.

Though similar to a bombing raid just inside Ecuador that killed Raúl Reyes, another member of the FARC’s secretariat, in 2008, the attack on Jojoy was on a much-larger scale. Jojoy’s base was a concrete bunker in a complex of camps and tunnels in La Macarena, an isolated mountain range that swells up from Colombia’s eastern plains, protected by concentric rings of FARC troops. But police intelligence officers managed to infiltrate the bodyguards, and to persuade some guerrillas to become informers. In a massive military operation in the early hours of September 22nd, a squadron of 30 Brazilian-made Super Tucano ground-attack aircraft launched seven tonnes of explosives on the camps, while some 600 special-forces troops descended by rope from helicopters, opposed by 700 guerrillas.

Officials said 20 guerrillas died in the attack, although initially only seven bodies—including Jojoy’s—were retrieved. At the bombed camp, soldiers seized 15 laptop computers, 94 memory sticks and 14 hard disks containing what police experts say may be a treasure-trove of information on FARC activities, structures and the whereabouts of 20 servicemen being held hostage. Information retrieved from laptops after the raid on the camp in Ecuador was an

Jojoy and Marulanda, both irreplaceable



intelligence gold mine; officials say the new find is 11 times as big.

Mr Santos can take much of the credit for the operation’s success. When defence minister between 2006 and 2009 he improved co-operation among Colombia’s feuding security forces. In the intelligence operation and raid on Jojoy’s camp, the police, army, marines and air force worked together as never before.

Does Jojoy’s demise mean that an end to Colombia’s armed conflict is on the horizon? Not in the short term. During peace talks from 1999 to 2002, the FARC carried on killing, kidnapping and recruiting. As a result, Mr Santos will not agree to talks unless the guerrillas order a complete ceasefire. The FARC has rejected that. Although much diminished by defeats and desertions, it retains perhaps 7,000 active fighters in the far-flung mountains and jungles of the country.

As if to show that it is still in business, the FARC quickly announced replacements for Jojoy as military commander and head of the Eastern Block. It is a sign of the group’s decline that Pastor Alape, the new military boss, is much less well known. No FARC leader will again threaten Colombians in the way that Jojoy did. But the group will fight on, and may splinter into criminal bands long before it contemplates peace.

The Americas



Measuring Mexico's economy

Getting bigger National accounts in the Wal-Mart era Sep 30th 2010 | MEXICO CITY

WHEN Italy rejigged its method of counting GDP in 1987, the updated figures saw it edge ahead of Britain. Il sorpasso, as the overtaking was called, was trumpeted in Rome. Mexico has kept quieter about its recent accounting revision, but it also involves a big jump. After a new methodology was introduced in 2008, official GDP figures were boosted by nearly 15%. In 2007, the latest year for which both old and new indices are available, income per head was equivalent to $9,694 per year, not $8,445 as the old method suggested.

The old methodology was revised in 1993 but drawn up as long ago as 1980, when Mexico’s economy “was like Russia’s: all oil and corruption,” according to Luis de la Calle, an economist. The new formula gives due importance to services and to trade. It adopts the economic classification system shared by the United States and Canada, breaking the economy down into 750 different activities, rather than 362 as before.

But even the new method may underestimate Mexico’s output. It probably undercounts the informal economy and remittances. It also fails to take into account the rise in quality and fall in price of many goods since Mexico opened up its economy in the 1990s, argues Mr de la Calle. The true figure could be a tenth higher, he believes.

Arturo Blancas, a senior official at INEGI, the national statistics agency, says it plans yet another methodological revision, though it must first be approved by Congress. He thinks it will bring another upward revision in GDP, though not by as much.

Other official data suggest Mexicans eat about twice as much meat as they did in 1990, and visit the cinema four times as often, while retail square-footage has more than tripled since 1993. These apparent improvements are not reflected in the statistics. “Who do you think is right: the intellectuals, or Wal-Mart?” asks Mr de la Calle.

The Americas

China

The debate over universal values It is not quite true that China is rejecting Western values such as democracy. Rather, it is fighting over them Sep 30th 2010 | BEIJING

ON JULY 19th the graduates of one of China’s leading business schools settled down in their academic finery to listen to a farewell address by Qin Xiao, the chairman of a state-owned bank. They little expected what they were about to hear. Instead of rallying them to further the cause of China’s socialist modernisation, Mr Qin urged them to resist the lure of worldly things and to pursue “universal values” such as freedom and democracy.

Mr Qin’s speech to an audience of 2,000 people in Tsinghua University’s sports centre fanned the flames of an ideological debate that has been smouldering in China for the past two years. A philosophical question of whether universal values exist has turned into a political fight, dividing scholars, the media and even, some analysts believe, China’s leaders. The schism is likely to become more apparent as the Communist Party prepares for a sweeping change of leadership in 2012. Liberals will try to goad incoming leaders into making their views clear.

Mr Qin, who retired on September 21st after nine years as chairman of China Merchants, the country’s sixth-largest bank, said recognition of universal values was at the heart of big issues facing China’s development, from urbanisation to the provision of public services and the ownership of state assets. “Universal values tell us that government serves the people, that assets belong to the public and that urbanisation is for the sake of people’s happiness,” he said. Supporters of the “China model”, he added, believe the opposite: that people should obey the government, the state should control assets and the interests of individuals are subordinate to those of local development.

The term “universal values”, or pushi jiazhi, is a new one in Chinese political debate—surprising given that concepts commonly associated with it, such as freedom, democracy and human rights, have been bickered over incessantly for 30 years. Many Chinese scholars think the debate really took off in 2008 after an earthquake in Sichuan province that killed around 80,000 people. Ten days after the disaster, a liberal newspaper in the southern province of Guangdong, Southern Weekend, published an editorial that praised the government’s swift response. It said it had “honoured its commitments to its own people and to the whole world with respect to universal values”.


That single mention of the term was enough to enrage hardliners. A flurry of commentary appeared in Beijing newspapers and on conservative websites attacking the idea of universal values as a Western plot to undermine party rule. China was preparing to host the Olympics in August 2008 with the slogan, “one world, one dream”. But conservatives feared that embracing universal values would mean acknowledging the superiority of the West’s political systems. In September, after the games, the party’s own mouthpiece, the People’s Daily, weighed in. A signed article accused supporters of universal values of trying to westernise China and turn it into a laissez-faire economy that would no longer uphold “socialism with Chinese characteristics”.

The debate picked up in December 2008 when hundreds of liberal intellectuals and out-and-out dissidents signed a manifesto in support of universal values, known as Charter 08. China faced a choice, it said, of maintaining its authoritarian system or “recognising universal values, joining the mainstream of civilisation and setting up a democracy”. This was a step too far for the party leadership. Recently, Chinese officials have been issuing warnings about diplomatic trouble if the Nobel Peace Prize, due to be announced on October 8th, goes to the charter’s organiser, Liu Xiaobo. Mr Liu, who is the bookies’ favourite to win the award, is serving an 11-year jail term for his role. On September 28th, a Chinese foreign-ministry spokeswoman said his acts were “completely contrary to the aspirations of the Nobel Peace Prize”.

China’s strong economic performance during the global financial crisis has been a morale booster to conservatives. In a veiled demonstration that China has its own values, the authorities in Beijing this week staged the capital’s first large-scale celebrations of Confucius’s birthday (his 2,561st) since Communist Party rule began. Conservatives like to contrast what they see as a Confucian stress on social harmony and moral rectitude with the West’s emphasis on individual rights.

But the rival camps are still at daggers drawn. Liberals see the prime minister, Wen Jiabao, as a champion of universal values. In November 2008 an article posted on Guangdong newspaper websites named both Mr Wen and President Hu Jintao as supporters of the notion. Neither man has used the term pushi jiazhi publicly, but the liberals’ case for Mr Wen, at least, is a strong one. He wrote in 2007 that “science, democracy, rule of law, freedom and human rights are not unique to capitalism, but are values commonly pursued by mankind over a long period of history.” An appeal by Mr Wen in late August for political reform has prompted a slew of veiled responses in the conservative media, castigating Western-style democracy.

Conservatives claim support from the party’s publicity department, which controls the media in Beijing. They were encouraged by a speech on September 1st by Vice-President Xi Jinping, who is all but certain to take over from Mr Hu as party chief in 2012 and as president a year later. Mr Xi’s speech was peppered with references to values, but did not come close to suggesting that any were universal. He cited the examples of several ordinary party members who, by devoting themselves to its interests, had answered “the basic question of what the main goals and highest values are for a communist”. A Chinese scholar with close ties to conservative officials says there are divisions among top leaders over universality.

They have certainly vacillated. The government’s first white paper on democracy in China, in 2005, began: “Democracy is an outcome of the development of political civilisation of mankind. It is also the common desire of people all over the world”. A drafter says he now believes those words were “inappropriate”.

A list of relevant sources can be found at www.economist.com/node/21011301

Asia


Kyrgyzstan's election

A vote into the unknown Parliamentary elections may not calm simmering ethnic tensions Sep 30th 2010 | BISHKEK

IT IS the eve of parliamentary elections on October 10th and Kyrgyzstan is in campaign mode. So many posters and party flags have been nailed to trees in Bishkek that environmentalists, fearing for the plants’ health, have started to remove them and replace them with ribbons.

With more than 3,300 candidates from 29 parties competing for just 120 parliamentary seats, Kyrgyzstan is far from the region’s authoritarian norm. Television viewers are inundated by party advertisements every few minutes and news broadcasts report the main rallies of the day. Central Asia has never seen such a competitive race, says Edil Baisalov, who heads the Aikol El (Magnanimous People) party. “If it weren’t for those bloody events, this would be a time to celebrate,” he sighs.

“Those bloody events” refers to the explosion of violence in June between ethnic Kyrgyz and ethnic Uzbeks in the south of Kyrgyzstan that killed at least 371 people and sent more than 75,000 Uzbeks fleeing into neighbouring Uzbekistan. It destabilised the country and sent shock waves across the region. It also dampened the sense of hope many had felt after the bloody overthrow in April of the dictatorial president, Kurmanbek Bakiyev, and the pledge by the interim government under Roza Otunbayeva (now president) to bring in a parliamentary republic. Despite the violence and uncertainty, a constitutional referendum was held in late June and approved by more than 90% of voters.

But the election may disappoint those hoping for a new start. An anxious and sombre mood prevails, reflected in party slogans such as “Fear or Security? Choose!” or “Unity, Stability, Security.” The elite seems unlikely to change. Feliks Kulov, a former prime minister and leader of the Ar-Namys (Dignity) party, for example, is said to have a good chance of getting into parliament, along with five or six other parties. He is ethnically Kyrgyz with a reputation as a law-and-order man, who appeals to the ethnic Uzbek and ethnic Russians as well as to the urban Kyrgyz.

The Uzbeks, who are the second-largest ethnic group with 14.5% of the population (compared with almost 70% for the ethnic Kyrgyz), feel vulnerable. According to a recent Human Rights Watch report, some government forces, knowingly or unwittingly,

It’s not all black and white for Otunbayeva



encouraged attacks on Uzbek neighbourhoods in June. Widespread violations have taken place during the authorities’ investigation into the violence, which took place around the cities of Osh and Jalal-Abad, mostly populated by Uzbeks.

Though some of the parties go out of their way to present people of different ethnicities in their advertisements, relations between Uzbeks and Kyrgyz remain tense. “We are surviving on good luck at the moment,” says Paul Quinn-Judge of the International Crisis Group, an NGO. He fears that Ms Otunbayeva has not taken enough advantage of the current lull to forestall future violence.

Whatever the election result, it will take time for trust to be rebuilt. Reconciliation needs a new government and parliament, not a caretaker government, says one diplomat. Nobody knows whether parties that fail to pass the dual thresholds of 5% nationally and 0.5% regionally will accept the results. “We are all going about our daily business as usual, but no one is planning 2-3 months ahead,” says Dinara Oshurahunova, executive director of the Coalition for Democracy and Civil Society. “Everyone is waiting for election day.”

Asia

North Korea

We three Kims of Orient are The long-awaited conference of the ruling party finally opens Sep 30th 2010 | SEOUL

HE HAS just been anointed the guardian of socialism in an economically troubled country, leaping ahead of a sidelined elder brother and representing a new generation. But enough about Ed Miliband. This week, Kim Jong Un, the third son of Kim Jong Il, emerged—as expected—to become dictator-in-waiting in North Korea, which is fast becoming the world’s only communist monarchy.

When the Korean Workers’ Party began its long-awaited conference on September 28th, the younger Kim was quickly made a four-star general, member of the party’s central committee and vice-president of the central military commission. Despite spending much of his life in Switzerland, and never having held any position of significance at home, the twenty-something Mr Kim has—on paper—become one of the most powerful people in the country.

This is the first step towards giving him enough power and experience to ensure that there is a smooth succession when his father dies. As Moon Chung-in, a professor at Yonsei University in Seoul, puts it, he will be “patronised by three layers of support groups, the military, the party, and the family clan.”

Of the five other generals appointed at the same time, two have probably been chosen purely to help his cause. One is the little-known Choi Ryong Hae, a Kim family loyalist, who has been a friend of Kim Jong Il since childhood and is the son of a man who served under Kim Il Sung, the founder of North Korea and the current ruler’s father. The other, Kim Kyung Hui, is another family member: the sister of the Dear Leader himself. No less important, she is the wife of Chang Sung Taek, the vice-chairman of the National Defence Commission (the country’s main decision-making body) and the second most powerful man in the country. It is assumed that Mr Chang and his wife will take responsibility for the tutelage of Kim the Third, shielding the little prince as if they were regents.

Some analysts had expected that the conference, the first such gathering for 30 years, would also mark a renewal of influence of the Korean Workers’ Party itself, which has been neglected by Kim Jong Il in favour of the army. China, North Korea’s main ally, is thought to have been pressing him to boost the party’s role. But this may not be happening. Kim Jong Un was

All in favour say Kim



appointed a general first, and party official second—a sequence widely interpreted as meaning that the military-first policy would continue.

Although the leadership appointments have understandably attracted the most attention, there is more at stake than just the succession. Vacant positions in the party leadership need to be filled (so far, there has been only one: the predicted reappointment of Kim Jong Il as the party’s secretary-general). And there is talk of economic reform. The North Korean leadership is thought to be afraid of opening up, following a disastrous currency reform last year that led to the execution of the official blamed for it. But China is pushing for change—and its influence over the regime seems to be growing. Reforms would probably include the revival of the Sinuiju special economic zone, which has been mothballed since its first governor, a businessman called Yang Bin, was jailed in his native China for tax evasion in 2002.

Asia

Education in Vietnam

Low grades for the party The Communist Party’s grip is holding back the country’s best and brightest Sep 30th 2010 | HO CHI MINH CITY

WHEN Ngo Bao Chau won a Fields Medal, the mathematics version of a Nobel prize, it made headline news in his native Vietnam. The president sent a telegram of congratulations. Mr Chau is the first Vietnamese winner. But he does not ply his trade in Vietnam. Mr Chau is a professor at the University of Chicago and a naturalised citizen of France, where he completed his PhD.

Who can blame him? Vietnam’s university system is “archaic”, says Hoang Tuy, another mathematician. Teaching methods are outdated, universities are stuffed with cronies and smothered by Communist orthodoxy. Censorship and interference are pervasive.

For an emerging economy trying to build a technology sector, this is both discouraging and damaging. Top-notch research universities and innovative manufacturing go hand-in-hand. Vietnamese universities do little original research, and are rarely cited by scientific scholars, says a recent UN-financed study. Graduates are poorly prepared: as many as 60% of new hires by foreign companies needed retraining, according to a Dutch report.

Vietnam already spends more on education than its neighbours (see chart). Literacy rates are high, and parents sacrifice much to put their children through college. Enrolment at Vietnamese universities rose from about 900,000 in 2001 to over 1.6m by 2006. But most students study at lacklustre public universities or at private diploma mills. Those who can afford to go overseas. The best and brightest, like Mr Chau, rarely return.

Efforts to reform public universities have floundered. So the government has seized on the idea of creating four new research-oriented institutions from scratch, with foreign universities as partners and, crucially, promises of autonomy. The first of the new breed, the Vietnamese German University (VGU), opened in 2008 in Ho Chi Minh City. A French-backed technology school in Hanoi will follow.

VGU has around 220 students, enrolled in engineering and economics programmes which are taught, in English, by visiting German professors. Within ten years, it hopes to have 5,000 students. Its independent charter, a first for a Vietnamese university, allows it to hire professors and design its own courses. In theory this should boost academic freedom.

For the moment, VGU gets most of its money from Germany. Vietnam contributes a modest €365,000 ($500,000) a year. But it must eventually bear the running costs, which are forecast to reach €45-50m by 2030. Proper equipment and top-class professors do not come cheap. Vietnam’s government has to be willing to pay for global talent, otherwise VGU “will fail”, says Wolf Rieck, VGU’s president.

Luring back high-fliers such as Mr Chau would be a start. China faces similar problems but has managed to woo some overseas talent by appealing to patriotism and giving academics a chance to work in an innovative economy. It should not be hard. Professors might take less pay if it means being at the cutting edge of research. Most want to be closer to their families.

But academics in both China and Vietnam are hemmed in by political dogma. This is as much of a



drag on higher education as low pay, says Professor Tuy, who retired two years ago as a maths professor on a salary of $250 a month. “A good scientist needs not only money but competent colleagues and academic freedom.”

Asia

Cambodia and Islamism

Courting the Cham A cultural revival gathers pace. So do worries about fundamentalism Sep 30th 2010 | PHNOM PENH

IN THE so-called war on terror, Cambodia is a sleepy outpost on a tense South-East Asian front that stretches from the Philippines to Thailand. Western governments are, however, worried that trouble may be brewing in this backwater.

Security experts fret about the possible perversion of a cultural revival by Cambodia’s Muslims, who mostly belong to the 400,000-strong Cham minority. In the genocidal 1970s the Khmer Rouge executed most leaders of the Cham and tried to exterminate both the tribe and Islam from the Maoist paradise they said they were building. Ben Kiernan of Yale University estimates that 90,000 out of a population of 250,000 died, a higher rate of loss than any other ethnic group. Only 21 imams survived out of 113, along with perhaps 15% of Cambodia’s mosques.

As they struggled from the wreckage, poor Muslim congregations came to depend on foreign charities for help rebuilding their mosques, whose numbers have risen tenfold to around 250 today, says Bjorn Blengsi, an anthropologist. They also became receptive to imported versions of Islam, which tend to be stricter than the traditionally relaxed local variety. Agnès de Féo, another anthropologist and author of “L’Islam au Cambodge et au Vietnam” says both Wahhabism from Saudi Arabia and Tablighi Jemaat from India are gaining adherents.

Nothing wrong with that, perhaps. Most Islamic charities teach the faith and help the poor. But not, alas, all. In one much-publicised incident in 2002, according to the American government, a local member of the Kuwaiti-based Revival of Islamic Heritage Society (RIHS) helped an Indonesian fugitive, Riduan Isamuddin (alias Hambali), the mastermind behind the nightclub bombings in Bali. Hambali, who is now in prison in Guantánamo Bay, reportedly said he had hoped to bomb the American and British embassies in Phnom Penh and to use Cambodia as a base for terrorist operations throughout South-East Asia. RIHS, which has been cleared of links with terrorism by Kuwait’s government, remains active in Cambodia. A local affiliate, the Kuwait-Cambodia Islamic Cultural Training Centre, recently met the president of parliament.

The influence of foreign religious organisations seems to be growing along with rising government loans from Gulf states. These loans include help for rebuilding religious institutions. In January, for example, Cambodia approved an agreement with Kuwait from 2008 in which the oil-rich state promised loans of $546m, mostly for energy and agriculture, and including $5m for new mosques and madrassas (Islamic schools). The only unusual thing about this was that the religious component was revealed. According to Milton Osborne of the Lowy Institute, an Australian think-tank, most aid packages from the Gulf include such a component but do not make it public.

Nothing wrong with that either, of course. But suspect and banned organisations seem to be moving in the slipstream of genuine charities. According to Ms de Féo, the al-Haramain Islamic Foundation and the International Islamic Relief Organisation have both worked in Cambodia. Branches of these bodies appear on the United Nations’ list of organisations banned for their links

New theatre of terror?



with al-Qaeda. Several other Kuwaiti charities in Cambodia are on America’s list of groups which finance terrorism, including some local affiliates of RIHS.

The concern of security experts is not that scores of terrorist actions are being carried out or even averted just in time. The most recent example of a terrorist plot hatched in Cambodia was as long ago as 2004, when three people connected to a madrassa in Phnom Penh were convicted of planning to bomb embassies there.

Rather, the worry is that unsavoury organisations are coming into the country to take advantage of the Cham revival. Though the Cham themselves do not seem to be embracing extremism, they remain—understandably given their history—suspicious of outsiders (including Cambodia’s government). Few people really know what is happening inside the areas they control. Fundamentalism remains a force in South-East Asia, and lawless Cambodia is no safe haven.

Asia

Banyan

A half-pike up the nostril China’s overreaction to a Japanese “provocation” has set its regional diplomacy back years Sep 30th 2010

WHEN he woke up in Lilliput, bound by a lattice of slender ligatures, to find dozens of tiny men disporting themselves on his chest, Lemuel Gulliver let out a roar “so loud that they all ran back in fright”. Another waking giant, China, seems these days to be adopting a similar foreign policy. It has found it just as effective. But as Gulliver discovered, it has its drawbacks.

The loudest roar has been aimed at Japan. After a Chinese trawler on September 7th rammed two of its coastguard vessels in waters off the disputed, Japanese-administered, islands known as Senkaku in Japan and Diaoyu in China, Japan detained the captain for a fortnight. China’s reaction was, in the words of Seiji Maehara, Japan’s foreign minister, “fairly hysterical”. And Mr Maehara saw signs of Chinese pressure “in various places”.

Indeed, as Chinese officials issued dire warnings of unspecified consequences if their skipper were not freed, some odd things started happening. Sino-Japanese trade was held up by unusually thorough customs inspections. Exports of rare earths were subject to an unannounced weeklong ban (see article). And it was hard to see the detention of four Japanese construction-company employees on mysterious charges of photographing military facilities as mere coincidence.

Japan seemed to take fright. On September 24th local prosecutors freed the captain. Bizarrely, they cited the importance of relations with China, as if the foreign ministry had subcontracted its diplomatic responsibilities to a low level of the judiciary. China refused to be mollified, insisting it was owed an apology and compensation. Japan’s prime minister, Naoto Kan, smarting from criticism for the climb-down, demanded that China pay for the repair of the damaged boats. But after the initial exchange of indignation, tempers seemed to cool (and China released three of the four Japanese detainees). Just as well. A crowded calendar of multilateral talkfests looms. After the Asia-Europe meeting in Brussels on October 4th come, in a few weeks, the G20, East Asian and Asia-Pacific Economic Co-operation summits. It would be embarrassing if all were dominated by speculation about whether the Chinese and Japanese leaders shake hands.

As diplomatic trials of strength go, this one seems fairly easy to score: China 1, Japan 0. Mr Kan’s administration has appeared unco-ordinated, confused and weak. It has made a mockery of the idea of judicial independence, and managed to make China seem to have greater respect for legal



process. China, on the other hand, has forcibly demonstrated that it regards the islands as its own, despite Japan’s control of them, and has shown that it has the commercial and diplomatic clout to make its point.

The message was heard elsewhere. Members of the Association of South-East Asian Nations (ASEAN), alarmed by China’s vague, unexplained but sweeping claim to sovereignty over most of the South China Sea, encouraged America to involve itself in the issue. In July Hillary Clinton, the secretary of state, obliged. She told a regional forum in Hanoi that the sea was an American national interest, and made an oblique rallying-call to unity among China’s various rival claimants for bits of the sea.

A mild iteration of this was included in a draft of the joint statement to be issued after the second America-ASEAN summit—held by President Barack Obama in New York on September 24th. The draft deplored the “use or threat of force by any claimant attempting to enforce disputed claims” in the sea—ie, it was a warning to China. When the statement emerged, however, cooler heads in ASEAN prevailed. It avoided mention of the sea at all, merely reaffirming “the importance of regional peace and stability, maritime security, unimpeded commerce, and freedom of navigation”. Also motherhood and apple pie.

India, too, has been watching carefully. Manmohan Singh, the prime minister, has voiced concern about China’s maritime ambitions. His government has been worried by China’s provocative refusal to give a proper visa to an Indian general, apparently because he served in a “disputed” region, Kashmir. China has in the past couple of years seemed eager to prod the two countries’ huge but dormant territorial quarrels—over what India thinks of as Ladakh and Arunachal Pradesh—back into life.

As a vigorous rising power, China is predictably prickly about its sovereignty. But it must be debatable whether its “victory” over Japan has really furthered its own interests. As Japan’s Mr Maehara puts it, its behaviour over the disputed islands gave “quite a few countries a glimpse of the essence of China”. It is fair to guess they did not entirely like what they saw.

China sneezes, Asia shivers

To list some of the effects of China’s fierce—almost bellicose—reaction: forcing America to confirm that its security treaty with Japan covers conflict over the disputed islands; concentrating Japanese minds on seeking other sources of raw materials such as rare earths; and pushing South-East Asian countries closer to America. As China’s own officials might say: it picked up a rock only to drop it on its own feet.

Japanese officials see this in terms of the growing clout of China’s armed forces, a power struggle ahead of the transfer of leadership to a new generation at the next Communist Party congress in 2012 and the search for something (such as nationalism) that might give the party a new source of legitimacy. But perhaps such rationalisations miss the point. The second time Gulliver wakes up in Lilliput, it is after passing out, having drunk wine laced with a sleeping-draught. A curious Lilliputian, inspecting his comatose form, puts the sharp end of his half-pike a good way up his nostril. It tickles. Gulliver sneezes violently. Sometimes, awakening giants simply can’t help themselves—which was of scant comfort to the Lilliputians.

Economist.com/blogs/banyan

Asia

Reform in Saudi Arabia

At a snail's pace Saudis have gained a bit more freedom but still await fundamental change Sep 30th 2010

SHORTLY after assuming the throne five years ago, King Abdullah declared that henceforth September 23rd, the anniversary of Saudi Arabia’s unification in 1932, would be an official holiday. The move proved wildly popular with ordinary Saudis, and not just because it gives them a rare excuse to do silly things in public, like sporting neon wigs and cruising about noisily in green-painted cars decked with the Saudi flag. Conservatives had long banned secular festivities such as birthdays, insisting that Islam forbids anything but religious holidays. The king’s defiance of this view seemed to augur a break from decades of deference by the ruling Al Saud dynasty to killjoy puritans.

Saudi Arabia has certainly grown less grim in the reign of King Abdullah, who is now 86. Reforms in state administration, education and law have loosened arcane strictures. Some arch-conservative clerics have been ousted from top posts and forbidden from proclaiming obscurantistfatwas. The notoriously intrusive religious police have been told to curb their enthusiasm. Women have won slightly more freedom. The large Shia minority feels a little less shunned than it was under previous kings. The press is a bit feistier.

Many of these changes are subtle, reflecting shifts in society as much as in policy. This Ramadan for instance, “Tash Ma Tash,” a top-rated Saudi television comedy, took a dig at national hypocrisies towards sex and religion. One sketch showed a fictional wife behaving like a pampered Saudi man, deciding to dump one of her four husbands because she wanted a sexier new one. Another portrayed two brothers meeting a long-lost Lebanese relative and being shocked to find that he was not only a Christian priest, but actually a nice guy. Some conservatives attacked the show as insidious infidel propaganda, and threatened to prosecute its makers. But most public reactions were enthusiastic, and the fact that the show received no official reprimand, as it had done in previous years, was also a sign of progress.

Yet the changes remain, in many ways, cosmetic. King Abdullah has championed international dialogue between religions, for instance. But when Saudi schools reopened in September, parents were surprised to find that in the new, “reformed” religion curriculum, supposedly purged of bigotry as part of a post-September 11th initiative to promote a more tolerant Islam, students are still taught that it is wrong to say hello to non-Muslims.



A recent report on political reform in Saudi Arabia by Human Rights Watch, a New York-based lobby group, argues that although gradual changes are welcome, unless they are properly institutionalised the kingdom risks sliding backwards again, as it has done many times before. “Newly gained freedoms are, for the most part, neither extensive nor firmly grounded,” the report concludes. “The limited reform that has taken place suggests the elite is still floating trial balloons, undecided about the type of government and society it wants to steer towards.”

On some specific human-rights issues, the report praises the kingdom’s progress: reform of the justice system, women’s rights and freedom of expression. Yet it notes with concern that, whereas legal reform is one of the areas where changes are under way, new courts have yet to materialise, and new, transparent procedures have yet to be put into practice. Greater freedom of speech is not codified, and so remains subject to arbitrary intervention by the state. Earlier this year, a newspaper editor made the mistake of printing a blunt critique of puritan religious beliefs, and was summarily fired. As for women’s rights, an official loosening of the ban against the mixing of the sexes in public places has not been widely implemented. The same goes for an ostensible liberalisation of rules that require women to have a male “guardian”. Women are still forbidden to drive.

As for other issues, the report discerns no real progress either in ending religious discrimination against the Shia minority or in improving the position of Saudi Arabia’s estimated 8m immigrant labourers. Gestures of tolerance to the Shia by the king himself have not been matched by a relaxation of restrictions on Shia worship. Shia dissidents still face harsh, systematic repression. Most foreign workers lack basic rights and, unlike other Gulf countries, Saudi Arabia has taken no steps to abolish the onerous kafala or sponsorship system, whereby Saudi employers take possession of expatriates’ passports, and can deny them the right to travel.

And there remains one big subject that the report leaves aside. Saudis have heard barely a whisper of one day setting the pace of change themselves, by winning the right to vote in elections.


Israel and Palestine

Stumbling at the first hurdle Building starts again in the Israeli settlements Sep 30th 2010 | JERUSALEM

PEACE talks between Israelis and Palestinians hit a rough patch this week. As soon as a ten-month moratorium on building Jewish settlements in the West Bank ran out on September 26th, the bulldozers whirred into action. For Palestinians this might mean an early end to the talks.

Binyamin Netanyahu, the Israeli prime minister, has called for restraint on settlement construction, but has shied away from extending the moratorium. Foreign allies, led by America, poured opprobrium on him for not doing so. But he has thus far resisted the efforts of America’s special envoy, George Mitchell, to make a deal.

Mr Netanyahu’s supporters say that he is simply trying to shore up his right flank before embarking on substantive negotiations. His resistance to foreign pressure has duly won praise from domestic allies. One group of settlers says that it wants to name a road after him. But Mr Netanyahu may yet need more support to rein in his most hawkish partners. Among them is his own foreign minister, Avigdor Lieberman, who this week used the dais of the UN General Assembly to dismiss the current round of negotiations as a non-starter. Greater government discipline will be critical if Mr Netanyahu is to bring the negotiations to a successful conclusion.

Still, he is better placed than his predecessor to achieve this. There is currently no obvious challenger inside his camp. Whatever his pretensions, Mr Lieberman is not ready to spearhead a revolt. And the left tacitly supports the peace talks. Mr Netanyahu, in short, appears to be a rare Israeli leader—one who has just about enough backing to see through a peace agreement.

Yet the Palestinians remain sceptical. Had Mr Netanyahu been more forthcoming in the past, they say, it might have been easier for them to ignore this latest hiccup. Two recent rounds of negotiations in Washington and in the Egyptian tourist resort of Sharm el-Sheikh got the pleasantries flowing but without making significant progress. The question of the settlements remains toxic.

What has kept the two sides at the table so far is that success is just about possible to imagine. Informal talks in years past have narrowed the distance between the two parties on the demarcation of borders to only 1% of the area to be carved up. “We could conclude the territorial issue between the parties within two weeks,” says a Palestinian businessman, Samir al-Hulileh,

Ready, steady, build



who is one of the back-channel negotiators. Mr Netanyahu’s continuing slipperiness over the settlements has made Israel’s allies and neighbours wonder how much the prime minister wants to make peace. Some are even asking if it would perhaps be better to end the talks, just three weeks after their launch.

For now Mahmoud Abbas, the Palestinian leader, has postponed a decision over whether to continue. He has asked a meeting of an Arab League committee on October 4th to decide. If the talks collapse, the consequences could be bad. With no agreement on an alternative, the Palestinian Authority might plunge into a crisis. Hamas, the Islamist movement that controls Gaza, would be the likely beneficiary.

Jewish settlers have bet all along that the talks will come to nothing. When Ehud Olmert, Israel’s previous prime minister, embarked on direct negotiations with the Palestinians, settlement construction was concentrated within or close to the likely borders of Jewish territory, on the assumption that other land would be evacuated. By contrast, at the end of Mr Netanyahu’s freeze on settlement building, construction work has restarted deep inside the West Bank. Plans are even under way for a new Jewish shopping mall.




How Syria controls its dissidents

Banning travel When the regime gets edgy, it stops its critics from going abroad Sep 30th 2010 | DAMASCUS

RATHER than kicking troublesome figures out, some countries, especially in the Middle East, like to keep them in. In Syria travel bans have been routinely used to prevent people from going abroad. Their use seems to be rising.

Statistics are hard to come by since bans are issued by the country’s opaque security agencies. But human-rights campaigners say Syrian bans have expanded significantly since 2006. Seasoned campaigners, such as Mazen Darwish, who headed the Syrian Centre for Media and Freedom of Expression, now shut down, are conspicuous cases. But lesser-known and younger Syrians, including writers, artists and those who work for international charities and lobbies, along with their families, are finding themselves stopped more often at the borders, especially when they are trying to set off to attend international conferences, however innocuous. Often those who do attend are refused re-entry.

The regime tends to tighten the screws when it feels edgy. Originally used in the 1980s, travel restrictions were revived in 2002. The bans have two aims: to limit communication between campaigners and the outside world, and to help the regime gather information. After America’s invasion of Iraq, when neoconservatives close to George Bush hoped that Bashir Assad’s regime in Syria might fall too, repression—and spying on dissidents—increased.

Travel bans are common throughout the Middle East: the governments of Iran, Bahrain, Saudi Arabia, Yemen, Libya, Egypt, Tunisia and the United Arab Emirates all impose them. And Israel curbs the movement of Palestinians inside the territories it occupies and can prevent Palestinian politicians from going abroad. But Syria is the worst offender among Arab states. An opposition report says 400 or more people are affected, compared with only a few dozen elsewhere.

Though illegal under international law, the bans are generally applied with impunity. In some Arab countries, however, they have been challenged. In March an Egyptian court quashed a travel ban on Muhammad Badei, the Muslim Brotherhood’s supreme guide. But Syrian courts refuse to interfere in matters of “national security”. Some people prevented from travelling think it is worth ending their activities or even co-operating with the authorities to free themselves of the ban; others get tired of waiting for a visa and apply for temporary travel permits which are for specified time periods and sometimes to specified countries.

The bans are an effective way to control people. Public protests are rare. Outside interest is thin. The best people think they can do is to write anonymously online about their experiences. Many fear even to do that. In any event, campaigners say the internet is no substitute for face-to-face meetings to keep their cause alive.




Yemen's bad habit

You can't easily qat it out Despite endless efforts to eradicate it, Yemenis still love chewing qat Sep 30th 2010 | SANA’A

THE mountains of Yemen are covered in green terraces growing qat, a mildly narcotic plant that takes up more than half the country’s arable land. Its shoots are gathered daily, packed in bags or wrapped in leaves and carried by lorry to noontime markets. A big fistful goes for about $2, depending on provenance, tenderness and taste. In Sana’a, lunch is often large but hasty, eaten quickly to line the stomach for an afternoon’s chewing. Those not invited to a mafraj—a sunlit living-room at the top of Yemeni homes—chew qat in the street or at work.

It was not always like this. Thirty years ago, chewing qat leaves for their curious effect of physical relaxation and mental stimulation was an occasional pastime. Now more than half of Yemenis chew it daily. This has bad effects. A World Bank report estimates that a quarter of working hours are spent chewing and that Yemenis spend money on qat instead of food for their often malnourished families. Irrigating qat is also a drain on water reserves that are anyway drying up fast. And it can cause oral cancer. A local pundit, frustrated by people’s reluctance to protest against Yemen’s poverty, corruption and violence, describes the people as “anaesthetised by qat”.

But proposals put forward by foreign lobbies and backed by the World Bank to eliminate the leaf have been met with dismay. At least 2,000 tonnes of qat are bought and sold in Yemen every day. This transfers money to the 70% of the population living in the countryside. It supports more than 2.5m people and may discourage the growth of urban slums in a poor country with a fast-growing population. Alternative crops would be less profitable. Yemenis and Yemen-lovers bridle at the idea that this is a nation on drugs, pointing out that qat is weaker and less dangerous than alcohol.

Chewing qat is an unproductive hobby that has grown up in an unproductive country. One of Yemen’s millions of civil servants says he chews at work because there is little else to do. The civil service is a social safety-net, paying its workers little money for less labour, but consuming government resources and stifling reform. Fuel subsidies, which make diesel-powered wells cheap to operate, encourage the cultivation of qat. But as corrupt elites exploit subsidised fuel for their own gain, these handouts are unlikely to be cut anytime soon. A messy, tooth-rotting waste of time it may be, but qat is a symptom not a cause of Yemen’s problems.




Drugs in Africa

A lot of pain Africans need more morphine Sep 30th 2010 | NAIROBI

GERARD was five years old when he died this year of AIDS. He lived in a slum in the Kenyan capital, Nairobi, and was nursed by his mother. “I could tell he was in a lot of pain,” she says. Yet Gerard received no relief except for ibuprofen, a mild painkiller.

For the dying, dignity and comfort often means prescribing powerful drugs. The most important is morphine, considered essential by the World Health Organisation (WHO). Since it is derived from opium, it is a controlled drug: governments have to report its usage. The supply is plentiful, but the distribution uneven.

The International Narcotics Control Board, a UN body that oversees controlled drugs, says 90% of the world’s morphine is administered in rich countries. By contrast, morphine and other painkillers such as pethidine and dihydrocodeine are hard to find in state systems in poor countries. So Africans with AIDS, cancer, sickle-cell disease, victims of car crashes, gunshot and machete wounds, and women in labour, suffer severe pain without relief.

Kenya is ahead of many African countries in palliative care, with its own hospice movement, but only seven of its 250 hospitals have ready access to morphine. Even when it is in stock, the annual supply is limited to some 1,500 patients. Yet 180,000 Kenyans die each year of AIDS and cancer alone. A 75mg daily dose of morphine would make all the difference.

Why is morphine so hard to get? Money is not the obstacle. Soluble morphine costs only a few cents a dose and Africa gets big money for AIDS victims. A little could be diverted to palliative care. Morphine can be easily stored and administered.

Sadly, many Africans do not know that severe pain can be relieved. Among African medics a stigma attaches to morphine, which is considered addictive and likely to lead to indolence. Doctors and parents are especially loth to prescribe morphine to children, arguing that it amounts to giving up on them. Furthermore, the law in many African countries is poorly written, leaving hospitals liable for misplaced controlled drugs, a big concern when so many drugs are pilfered and are then flogged on the black market.

In any case, the failure to offer pain relief shows up some bigger holes in the treatment of the very ill in Africa, particularly those with cancer. Few African countries have a cancer registry, so nobody really knows the rates of various cancers. The WHO estimates that 10m of the 15m cancer cases diagnosed every year by 2015 will be in countries with little morphine. Because Africans often see doctors too late and chemotherapy is rarely available, cancer treatment is mostly about helping people to die without pain.


Dying for relief

The sacked mayor of Moscow

Medvedev 1, Luzhkov 0 President Dmitry Medvedev’s dismissal of Yuri Luzhkov, the veteran mayor of Moscow, cements the Kremlin’s grip on power in Russia Sep 30th 2010 | MOSCOW

DMITRY MEDVEDEV has been long on talk and short on action ever since he became Russia’s president in 2008. That is why some were surprised on September 28th when he dramatically fired Yuri Luzhkov, the mayor of Moscow since 1992, citing a “loss of confidence”. The 74-year-old Mr Luzhkov was one of Russia’s most powerful politicians and a senior figure in the ruling United Russia party. He is a household name all over the country; his wife, Yelena Baturina, a construction magnate, is Russia’s richest woman.

Mr Luzhkov’s departure was not itself such a shock, after a furious open fight had broken out with the Kremlin some weeks ago. A slew of programmes on state-owned television had raked over longstanding allegations of the mayor’s corruption and mismanagement. Mr Medvedev made it clear that he wanted him to step down. What was a surprise was that, after a short Kremlin-sanctioned holiday, a defiant Mr Luzhkov returned to his office on September 27th, insisting that he would not resign. This left Mr Medvedev with no alternative but to sack him.

The Kremlin has fired or replaced all the most powerful regional leaders in Russia over the past 18 months. It has the power to do this because it changed the law to abolish elections to these posts in 2004. Mr Luzhkov, who in 1999 was briefly a serious candidate for the Russian presidency instead of Vladimir Putin, is by far the biggest name to have gone so far.

He had been at odds with Mr Medvedev for some time. But it is only recently that the mayor seems to have lost the support of Mr Putin, now prime minister. Mr Putin has long been intolerant of alternative centres of power in Russia, but he owed Mr Luzhkov a favour for his backing in 1999. The last straw seems to have been a newspaper article Mr Luzhkov published in early September criticising Mr Medvedev’s decision to suspend construction of a new road between Moscow and St Petersburg. He also wrote of the need for the government to “recover its true authority,” a phrase widely interpreted as a call for Mr Putin to return as president in 2012.

Observers quickly detected a bid by the mayor to drive a wedge between Mr Medvedev and Mr Putin. Mr Medvedev’s decision to sack Mr Luzhkov was similarly hailed by some as a new assertion of independence on the part of the president. Yet the truth is that he could not have acted without Mr Putin’s approval. Mr Putin said this week that he had discussed the matter with



Mr Medvedev, adding pointedly that “the mayor is subordinate to the president, not the other way round.” Indeed, that Mr Medvedev took so long to do the deed and proved unable to talk Mr Luzhkov into going quietly will be seen in some quarters as a sign of weakness, not strength.

Mr Luzhkov’s ousting is the end of an era. He oversaw Moscow’s oil-fuelled transformation from the drab capital of the Soviet Union into the glitzy showpiece of modern Russia. He delighted pensioners with handouts and rebuilt the gold-domed Christ the Saviour Cathedral, destroyed by Stalin. But he also cracked down on anti-Kremlin protests and refused to allow gay-pride marches, calling homosexuality “satanic.” He became a hate figure among architectural buffs by bulldozing hundreds of historic buildings and replacing them with hideous replicas.

He may now fear for his future (although he is said to be considering an appeal against his dismissal). To some, his sacking was reminiscent of the arrest of Mikhail Khodorkovsky, a business oligarch, in 2003. The real offence was not the accumulation of vast riches (Mr Khodorkovsky) or the stench of corruption (Mr Luzhkov), neither of which upsets the government. It was rather the challenge to the Kremlin’s “vertical of power”; in Mr Luzhkov’s case a hint that regional elections ought to be revived. Mr Luzhkov may not be pursued by prosecutors (and his wife spends most of her time in Austria). But they have already set their sights on some in his entourage. It would not be a surprise if some of the Luzhkovs’ assets find their way into the hands of Kremlin associates.

The implications of Mr Luzhkov’s sacking for Russia’s political future are less clear. Although Mr Medvedev is seen to have reasserted some of his authority, and may still have an eye on running for president again in 2012, a return by Mr Putin still seems more likely. One of Mr Luzhkov’s offences was to seem to belittle the office of the presidency itself. Whatever he thinks about the performance in the Kremlin of his erstwhile loyal lieutenant, Mr Medvedev, Mr Putin wants to uphold the dignity and power of the office—presumably because he plans to take it back.

Europe

Italy's political ruptures

Silvio the survivor Italy’s prime minister scrapes through another political showdown Sep 30th 2010 | ROME

TOO many ugly things have been said. The marriage is in tatters. They will sleep in separate beds but, for reasons of convenience, under the same roof. Such is the unhappy future that seems to await Italy’s conservative government after a confidence vote in the Chamber of Deputies, the lower house of parliament, on September 29th. The house endorsed, by 342 votes to 275, a revised government programme submitted by the prime minister, Silvio Berlusconi.

The vote was meant to have closed a rift on the right that opened two months ago when followers of Gianfranco Fini, once the prime minister’s closest ally, founded their own group in parliament, Future and Freedom for Italy (FLI). Most of the rebels actually backed Mr Berlusconi’s programme. But they did so with many an “if” and “but”, leaving the impression that they had acquiesced largely because they were not yet ready for the election that would have been likely had Mr Berlusconi lost. They may not remain unprepared for long, however. In a break from the debate, Mr Fini called a meeting for October 5th to discuss a “new political project”—widely taken to mean starting a new party.

The atmosphere on the Italian right is poisonous. Since early August, Mr Fini has come under sustained attack from newspapers close to the prime minister. And they have scored some direct hits. They have shown that an apartment in Monaco rented by Giancarlo Tulliani, the brother of Mr Fini’s partner, was originally bequeathed to Mr Fini’s old party and sold at what they claim was a knock-down price to companies registered in the Caribbean island of St Lucia. They allege the companies belong to Mr Tulliani. Mr Fini has said he will stand down as lower-house speaker if this is proved. (St Lucia’s finance minister, in a break with traditions of corporate confidentiality, has said it can be.)

The affair has damaged Mr Fini. A prime justification for his rebellion was dissatisfaction with Mr Berlusconi’s lackadaisical view of alleged corruption in his government and his party. The FLI’s leader has also been tested by disagreements in his fledgling group. Some members want to stay as a faction within Mr Berlusconi’s People of Freedom (PdL); others relish the prospect of belonging to a new party.

The FLI nevertheless poses a genuine threat to the government, as Mr Berlusconi’s unexpected decision to go for a confidence vote showed. He had planned for a different sort of test that would show he could gain an absolute majority for his plans without the FLI’s support. But despite a recruitment campaign that added several defectors to the governing majority (and prompted fresh corruption allegations from the opposition), Mr Berlusconi’s parliamentary managers were unable to guarantee him the numbers. So he opted instead for a confidence vote that could be won with a simple majority.

It remains to be seen whether the outcome will restore the stability Italy needs, and if so for how long. For almost a year the government has been semi-paralysed. First, there was a string of

It’s all getting a bit much



scandals over the prime minister’s private life. Next, his government was plunged into the first of several controversies over allegedly crooked dealings by ministers and aides. And then came the split with Mr Fini.

Mr Berlusconi told parliament that Italy had weathered the crisis better than any other European country. But, though the budget deficit is smaller than others’, this is nonsense. GDP fell by 5% in 2009. The OECD forecasts that by the end of 2010 it will have inched up by 0.1%, making Italy the slowest-growing member of the G7.

Mr Berlusconi has still to find a replacement for an industry minister who resigned almost five months ago. And debate within the government on stimulating growth—always tricky in an administration with no common economic philosophy—appears to be at a standstill.

This week’s victory will allow Mr Berlusconi to continue his loveless alliance with Mr Fini. But, like other partnerships of convenience, it scarcely offers a solid basis on which to build plans for the future.

Europe

Bosnia's election

So this is democracy A small country prepares to elect a bewildering number of politicians Sep 30th 2010

FRUSTRATED Bosnians sometimes remark that what their country, population 3.8m, needs is a mayor, not a complex series of overlapping governments. On October 3rd, however, they will vote for everything except mayors: the parliament of their weak central state, parliaments for the two parts of their country, cantonal parliaments and several presidents. Nobody expects this flurry of voting to change anything in this troubled country.

In November Bosnians will mark the 15th anniversary of the end of the war that devastated their homeland. In 1995, corralled into an airbase in Dayton, Ohio, their leaders agreed to a complex set of formulae that ended the conflict but left Bosnia with an awkward political legacy, formally splitting it into the Serb-dominated Republika Srpska (RS) and a federation of Bosniaks (Bosnian Muslims) and Croats.

Immediately after the war Bosnia drifted. Then came a period of dynamism and reform. But the past four years have seen a fall back into stagnation. In 2009 GDP contracted by 2.9%. This year growth is forecast to be an anaemic 0.8%.

Yet economic reform is not a priority for some of the country’s politicians. Milorad Dodik, prime minister of the RS, now running for its presidency, has been denying that Bosnian Serb forces committed genocide in Srebrenica in 1995, when they killed 8,000 Bosniaks after the town’s fall. An electoral video doing the rounds sums up Mr Dodik’s style. It shows a giant truck, festooned with party banners, crushing two small cars representing the opposition.

In the Bosniak-Croat federation, several parties are competing for the Bosniak vote. One big question is whether a new actor on the political scene, Fahrudin Radoncic, a controversial businessman and owner of one of the main dailies, makes a breakthrough. Croats, strongly outnumbered by Bosniaks in the federation, have the choice of two Croatian parties or one, the SDP, that also appeals to Bosniaks and Serbs.

Months of bargaining will follow the elections. Competing parties and politicians will jostle for cabinet seats in Bosnia’s various administrations, and for control over the big state-owned companies that finance their parties. All this makes the prospect of enacting the reforms the country badly needs extremely doubtful. The Bosniak-Croat federation faces particular problems: virtually bankrupt, it is saddled with large pension obligations for war veterans. An attempt to rein in the payments triggered violent protests in April.

As so often in Bosnia, the main prod to reform may come from outside. In the wake of a failed attempt a year ago to get some agreement between Bosnia’s competing ethnic groups, Europeans and Americans seemed briefly to have given up on the country. But that may change when the new governments are in place.

As elsewhere in the Balkans, the biggest prize for Bosnia would be EU membership. The presence of an international representative with the power to remove elected politicians technically makes the country ineligible to apply for candidacy, although Bosnians hope that the EU will bend the rules. In the meantime, Bosnia (and Albania) may win visa-free travel to the EU’s Schengen zone,



thanks largely to hard work in law enforcement. If, however, France tries to torpedo this, as recent reports suggest it might, the EU’s credibility in the Balkans will be further damaged—and Bosnians will learn that politics can trump rules. That would be a terrible message to send.

Europe

Spain's economy

Sideshow in the streets Spain’s prime minister has more to worry about than a general strike Sep 30th 2010 | MADRID

RARELY can a general strike have been so placid. When Spain’s unions called workers out on September 29th, the government all but laid down a red carpet for them. “I respect the strike,” said José Luis Rodríguez Zapatero, the Socialist prime minister, against whose austerity measures the unions were protesting. “I will not be the one who criticises the unions.” Such gentle talk was heard less elsewhere, as governments confronted demonstrators across Europe, with unions turning the day into one of continent-wide protest.

Mr Zapatero had sweetened the pill by announcing a tax increase for the rich in 2011. In any case, his cherished unions were performing more out of duty than rage. But the protests and the tax rise are reminders of the underlying problem. As Spain attempts to distance itself from more troubled euro-zone countries like Portugal and Ireland, it has to rein in a budget deficit that last year stood at 11.1% of GDP.

The tax rise, aimed at Spaniards earning over €120,000 ($163,000), will do little to help. Fewer than 200,000 people will be caught. Other better-off Spaniards already find ways to avoid paying. Mr Zapatero does not dare raise taxes for lower earners for fear of losing support for his beleaguered party. This is why all the talk is of austerity. The 2011 budget, unveiled on September 24th, aims to slash spending by 3%, on top of this year’s cuts, partly by freezing civil-service pay and some pensions. The goal is to cut the deficit to 6%.

Mr Zapatero may not want to raise taxes but not all regional governments, which account for half of public spending, are as restrained. Reduced funding from the centre and a drastic fall in construction taxes and land sales have cut local-government income by an average of 15%. Town halls and regional governments are increasingly tapping taxpayers, creating an uneven tax map. Rates for high earners are up to five percentage points higher in Socialist-led Catalonia or Andalusia than in Madrid, run by the conservative People’s Party.

Spending cuts are also part of the mix. Yet so far, says Pedro Arahuetes, the mayor of Segovia, the axe has fallen mostly on investment and non-essential services. The summer fiestas celebrated across Spain were a little less magnificent this year. “Instead of hiring ten bands, you hire seven,” says Mr Arahuetes.

Juan Bravo, Madrid’s finance chief, predicts that the city’s income will not return to 2007 levels until 2016. Refuse collection and street cleaning are being cut. But it is the companies that provide services to Madrid and other cities that are suffering most. “Last year I paid bills in 60 days, now I am paying in six or seven months,” says Mr Bravo. In the worst-hit municipalities, even town-hall workers are paid late. “I just cannot pay the basic running costs,” says Alejandro Sánchez, mayor of La Línea de la Concepción, in the south-west.

Most of the blame lies with mayors. Drunk with cash in the boom years, they binged on populist

But his heart’s not in it



projects, building nursery schools and care homes, in some cases taking business away from private providers. Now the government has placed strict limits on their debt levels, which will mean many contractors go unpaid.

Mr Zapatero’s minority government will get its budget through parliament only thanks to support from the Basque Nationalist Party, which is being repaid with yet more devolved powers for the Basque regional government. But there is more to be done. The government has revised its unemployment forecast for 2011 up to 19.3%. Its growth forecast of 1.3% looks optimistic. On September 30th Moody’s, a credit-rating agency, downgraded Spain’s debt. Markets will be convinced by Mr Zapatero’s belated conversion to reform only if he hits his deficit targets. More cuts, or higher taxes, may yet be needed. Strikes are the least of Mr Zapatero’s worries.

Europe



Press freedom in Turkey

Don't cross Erdogan How tolerant of criticism is Turkey’s prime minister? Sep 30th 2010 | ISTANBUL

AT A recent meeting with Turkey’s top newspaper editors, the prime minister, Recep Tayyip Erdogan, declared that “we don’t expect the press to take our side.” Yet ever since his Justice and Development (AK) party shot to power in 2002, Mr Erdogan has been accused of seeking to quash dissident voices.

Such claims grew louder late last month when Bekir Coskun, a militantly secular columnist for a mass-circulation daily, Habertürk, was sacked. Pressure from the government had nothing to do with it, said the newspaper’s owner. It was Mr Coskun’s “aggressive style”, which violated the newspaper’s editorial line, that was to blame.

Either way, a steady cull of anti-government journalists from the mainstream press has reinforced the view that Mr Erdogan is intolerant of criticism. The biggest row came in September 2009, when Aydin Dogan, a powerful media magnate, was slapped with a huge fine for alleged tax fraud (with accrued interest, the fine stands at $3.7 billion). Mr Dogan’s leading titles have since demoted or fired some of their shrillest anti-AK hacks. Dogan-affiliated journalists say they face constant pressure to temper their copy. Mr Dogan is reportedly in talks with Rupert Murdoch, among others, to sell his media empire.

“Under AK the press has been declared the enemy,” says Ferai Tinc, who runs a media watchdog. According to the International Federation of Journalists over 40 Turkish journalists are in jail and around 700 others face trial, many of them Kurds accused of spreading separatist propaganda. One, Irfan Aktan, was sentenced to 15 years in prison in June for quoting a rebel of the Kurdistan Workers’ Party (PKK). Mehmet Baransu, an investigative reporter who has exposed a string of alleged coup plots and episodes of army incompetence, has faced 40 separate court cases and received six convictions in the past 15 months. The AK government has reneged on promises to ease tough media laws.

One might feel more sympathy for the establishment press if it devoted more space to the likes of Mr Aktan. As Mr Erdogan likes to recall, hundreds of journalists (again, mostly Kurds) were imprisoned or kidnapped at the height of the PKK insurgency in the 1990s. Scores of others died in so-called “mystery murders” thought to have been carried out by rogue security forces. Yet few in the mainstream press uttered a peep, for fear of falling foul of the generals.

Back then, as now, media bosses often bowed to state pressure to protect their business interests. The difference today is that almost everybody, be they Kurdish, secular or anti-army, is under pressure. “The net,” concludes Mrs Tinc, “has widened like never before.”

Europe

French education

A chorus of disapproval A system under attack for being too tough on pupils, not too easy Sep 30th 2010 | PARIS

AT THE end of every academic year, when British school-leavers get their A-level exam results, a chorus rings out about grade inflation and indulgent marking. This year, some 27% of British students who took the exam secured either an A or the new A* grade. Across the channel in France, the worries could scarcely be more different. Some educationalists fret that lycée (upper secondary-school) pupils work too hard, are graded too fiercely and are victims of a system designed to fail them.

A handful of new books are stirring this debate. In one, Richard Descoings, head of SciencesPo, an elite university in Paris, laments that French schools are “training generations of anxious youths, who worry about their future, feel treated like numbers [and] distrust one another and the system”. Last year, Mr Descoings visited 80 schools and met 7,000 pupils as part of a government review of lycées. Pupils told him, he reports, that in school they veered “between boredom and dread”.

In another book, Peter Gumbel, a British journalist-turned-academic, argues that France’s harsh grading system is “a veritable wound that has damaging results on morale, self-confidence and student performance.” It is almost impossible to get full marks in the baccalauréat, the school-leaving exam invented by Napoleon. This year, just over 30 pupils, or 0.006% of those who sat the bac, were awarded 20/20, whereas 8% of British A-level students got the new A*. Only 22% of French pupils scored more than 14/20. A report by the University of Cambridge exam board warns British universities considering applicants with the bac that “an overall result of 16/20 is a rare and outstanding achievement” and “that 14/20 is attained only by the top flight candidates”.

Is such toughness necessarily a problem? It was the need to distinguish excellence that led the British to introduce the new A* grade. The French lycée system has plenty to recommend it, not least its meritocratic flavour, since the country’s best schools are state-run. The broad-based nature of the bac, which does not impose early specialisation and gives all students a grounding in subjects such as philosophy and languages, is an advantage. For the best of the crop, the system is an efficient generator of a highly qualified elite.

The trouble, say critics, is the combination of strict grading with an overloaded timetable and a focus on learning through failure. Lycée pupils have long days, often from 8am to 6pm—designed, says Mr Descoings, to suit the needs of teachers rather than pupils. An official report says that, including homework, lycée pupils work an average of 45 hours a week (this in the country that invented the 35-hour week for adults). The education ministry in Paris dictates how many hours a week are devoted to each subject for each year group. There is little evidence that long hours translate into better grades (see chart).

Not only is marking demoralisingly harsh. Any pupil who cannot keep up has to repeat the year. By the age of 15, 38% of pupils have done so at least once, compared with an average in OECD countries of 13%. Studies show that French pupils report unusually high levels of stress and anxiety. Every year 130,000 leave school without any diploma at all. “The gap between the best students and those in difficulty keeps getting wider,” said a



report by the Cour des Comptes, the state auditor, earlier this year.

Luc Chatel, the education minister, has begun to make some changes. A reform this term, which offers 15- to 16-year-olds new options in such subjects as art and technology, gives all pupils time with a personal tutor to help with learning difficulties. Some 100 pilot schools are trying out a new timetable, with academic subjects in the morning and sport in the afternoon (only 20% of secondary-school pupils now take part in school team sports). The government has launched a nationwide consultation on school hours.

Whether any of the new ideas will come to anything is another matter. The French education establishment, and its 1m-strong teaching body, is filled with powerful lobbies, which fiercely defend subjects, teachers, students and other corporatist interests. It “has an interest in keeping the system as it is,” says Mr Descoings. French education ministers have perfected the art of lengthy consultation. They are less skilled at doing things, especially if student or teaching unions take to the streets. Indeed, too few stick around to do the job. Since 1981 the average tenure for an education minister in France has been just two years. Good effort, could do better.

Europe

Charlemagne

Economic sanctions? Yes, please Brussels wants to delve deep into the running of national economies. It should beware of digging too far Sep 30th 2010

THEY came to Brussels this week in their tens of thousands, from Finland to Greece, to say no to austerity. Their message was simple: the poor and the workers are being made to pay for the sins of the bankers and the speculators. To judge from some banners, they may have a new category of enemy: Eurocrats.

José Manuel Barroso, president of the European Commission, keeps saying that the days of stimulus spending are over; now is the time for budget cuts. To ensure that members of the European Union maintain fiscal discipline, he proposed on September 29th stern new measures to give the commission power to scrutinise their budgets and impose hundreds of millions of euros’ worth of penalties on the profligate. Even those that pig-headedly refuse to reform their economies could be punished.

For Mr Barroso this “economic governance” is the only way to ensure the survival of the euro. But outside the commission, demonstrators see things differently. To John Monks, general secretary of the European Trade Union Confederation, the EU is turning into a “punishment squad”. Left-wing members of the European Parliament are in a quandary. They want “more Europe”, but in this case more Europe means more austerity.

This year’s Greek crisis exposed the inadequacies of the euro, a single currency without a joint economic or fiscal policy. Trouble in even a peripheral country like Greece, whose GDP is less than a tenth of Germany’s, posed dangers to all. Loose agreements have not proved strong enough to stop reckless behaviour. Sanctions exist, in theory, in the stability and growth pact, which requires euro-area countries to keep deficits below 3% of GDP and government debt below 60% of GDP, but they have never been imposed. Governments have been reluctant to criticise each other in public, let alone to mete out fines.

The commission’s suggested solution is to appoint itself as fire warden, firefighter and prosecutor. European leaders agreed earlier this month to submit their budgets to Brussels for scrutiny six months earlier than they used to. Countries will be monitored not just for excessive deficits and debts, but also for imbalances and falling competitiveness. Penalties for the recalcitrant will include warnings and deposits of up to 0.2% of GDP into, first, interest-bearing accounts, and


then into non-interest bearing ones. In the end, these funds could be forfeited entirely.

The idea is to impose sanctions early in the process rather than at the end, when they would only exacerbate a country’s fiscal problems. It is also to focus as much on debt levels as on annual fiscal deficits. To reduce ministers’ temptation to protect each other, the commission suggests “reverse voting”: instead of a majority being required to impose sanctions, the penalties would be approved unless a majority votes them down.

All this would apply at first only to the euro zone, for which the legal powers are clearer. But later there could be a parallel system, based on withholding future EU payments, for those outside the euro. This would have to wait for next year’s round of budget negotiations. Britain will keep its opt-out, but several non-euro members want shackles. As a senior EU source says, “it’s strange to hear countries saying: ‘We want sanctions!’”

As Eurocrats tell it, most countries accept the thrust of these ideas. Germany has, for now, dropped its demand that heavily indebted countries should lose voting rights. Only a few quibble. France dislikes “semi-automatic” sanctions. Italy is against the focus on debt. Spain does not want sanctions for uncompetitiveness. Yet some scepticism is still in order. Even if EU leaders give their nod at a summit next month, months of detailed negotiations lie ahead. All 16 members of the euro zone now breach the 3% deficit threshold, and 12 also violate the 60% debt limit. They are not about to engage in mutual flagellation. The new rules will not be retrospective, and many sanctions will not bite until 2013. There is an escape clause to avoid penalties if Europe faces a general shock such as the financial crisis.

Powers like these might have done something about Greece. But would they have saved Spain or Ireland? Both had healthy public finances before the crash, and yet are now among the most troubled countries. Eurocrats argue that monitoring of imbalances and scrutiny by a new EU financial regulator could have spotted their problems sooner. Perhaps. But imbalances are easier to identify after a bust than during a boom. As one Eurocrat mockingly puts it, “We are now like communist central planners. We know everything.”

Whipped or skinned?

None of this is the economic integration that federalists dreamed of. It is more like a deal to police minimum standards than a joint economic policy. It is born of fear of the markets, not a love of Europe. Being whipped by Brussels is less scary than being flayed by bond traders. Hard discipline may be needed to preserve the euro, and to mollify German voters who do not want to bankroll irresponsible neighbours. But there are also dangers.

The plans would give Brussels unprecedented power to intervene. Depoliticising sanctions to make them credible risks delegitimising them. The commission would be less of an impartial referee and more of an active player in domestic politics. Gauging competitiveness is a murky business, with no obvious benchmarks. In any case, balancing spending and taxes, deciding the level of wages and reforming labour markets ought to be tasks for elected leaders, not appointed bureaucrats. Will Mr Barroso and Olli Rehn, the commissioner for economic and monetary affairs, really tell the likes of Christine Lagarde, Wolfgang Schäuble, Giulio Tremonti and George Osborne what to do, and fine them if they refuse? The next time protesters hit Brussels, they may not just march past the commission, but right into it.

Economist.com/blogs/charlemagne

Europe


Labour's new leader

Red, ready or neither? Ed Miliband, Labour’s new leader, might not be the ‘Red Ed’ of caricature. But he might not be electable, either Sep 30th 2010

HISTORIANS are often mocked for seeing an inevitability in events that felt like messy happenstance when they actually occurred. The opposite intellectual error is to describe as surprising an outcome that was actually fairly predictable. Ed Miliband’s rise to the leadership of the Labour Party—which he claimed on September 25th, defeating his elder brother David not so much narrowly as barely—was nothing like as unexpected as folklore is threatening to record.

True, David had long enjoyed leader-in-waiting status, and had toyed with challenging Gordon Brown as prime minister more than once. But it is easily forgotten that his brother dazzled at the Labour conference a year ago, outshining his colleagues on the main stage and the fringe circuit (“if the conference had a star…it was Ed Miliband,” concluded The Economist at the time). And a year ago, the joint head of Britain’s biggest trade union, Unite, declared the younger Miliband his favoured successor to Mr Brown: the first sign that the then energy secretary could count on the unions in a future leadership contest. When he announced he was running for the top job after Labour’s eviction from power in May, he was the second-favourite in a field of five. A campaign pitched to the left of David’s always stood a chance of seducing a party that had grown tired of suppressing its instincts for the sake of mere electability.

However, the exact nature of Mr Miliband’s victory was alarming even for those who had supported him (henceforth, Ed will surely be the default “Mr Miliband”). David won more votes among Labour MPs and party members; his brother owed his victory to his popularity among trade unionists, the third chunk of the party’s electoral college. Even then his overall margin of victory was just 1.3%, after the second and subsequent preferences of those who voted for the other three candidates (Ed Balls, Andy Burnham and Diane Abbott, who finished third, fourth and fifth respectively) were counted. The Conservative-Liberal Democrat government has already begun gleefully to brand their new opponent as “Red Ed”, a man beholden to special interests and to the left of his brother, who advised Tony Blair as prime minister; Mr Miliband, during those years, worked for Mr Brown.

Many Labour MPs privately cursed the shape of the result during their party’s subdued conference in Manchester, which began the day after the leadership announcement. Mr Miliband’s nervous acceptance speech on the day of his victory did not fill activists with confidence, and David’s

much better valedictory effort two days later fed an unmistakable mood of regret at the conference (even among the minority present who had actually backed Ed). Mr Miliband’s main speech on September 28th was more confident, if not altogether convincing (see Bagehot).

The defeated Miliband considered fulfilling his campaign pledge to serve in the shadow cabinet if his brother became leader. But, as most suspected he would, he announced his withdrawal from front-bench politics on September 29th. His mind may have been made up by an embarrassing exchange caught on camera during his brother’s speech: David was seen disdainfully to ask Harriet Harman, the party’s deputy leader, why she was applauding the speech’s condemnation of the Iraq war, given that she had voted for it. This stoked fears of a new era of Labour psychodrama to rival the Blair-Brown years, with David’s every utterance scrutinised for signs of fraternal disloyalty. His departure may not be permanent, however: some believe he will come back, though others think he will seek a job in international diplomacy.

His brother’s leadership, meanwhile, will be shaped by the decisions he takes in its first weeks. Labour MPs will soon begin voting on which of their colleagues should make it into his shadow cabinet. When the results are known on October 7th, Mr Miliband must choose who gets the crucial job of shadow chancellor. Then, on October 20th, George Osborne, the chancellor of the exchequer, will set out the results of the government’s spending review. Mr Miliband must decide whether Labour’s response is to stick with the plan drawn up by the previous chancellor, Alistair Darling, to halve Britain’s deficit in four years, as David Miliband seemed to favour.

The alternatives are to move closer to the government’s position, which aims virtually to eliminate the structural deficit by the end of this parliament, or to propose something slower than the Darling plan. The former is not going to happen, given that Mr Miliband has described the government’s plan as “dangerous”. The latter is favoured by the party’s left, especially Mr Balls, who covets the shadow-chancellor role (see article). The day before the spending review, Mr Miliband is due to participate in a union rally against spending cuts. For a politician accused by some of ignoring the deficit, it is a risky gesture. David was alone among the leadership candidates in refusing to commit himself to joining the protest.

Although the Tories are delighted to be facing the younger Miliband, they are not complacent. Labour won 258 seats at the general election; large oppositions tend to go on to win power. The party is already neck-and-neck with the Conservatives in some opinion polls, before spending cuts have even been felt. And not all of Mr Miliband’s advantages are external. He has shown a gift for communication (albeit to audiences who already agree with him), and could attract left-leaning Lib Dems aggrieved by their party’s involvement in the coalition. He also has more experience of government than David Cameron did before becoming prime minister.

Still, two very heavy doubts hang over the new Labour leader: one to do with policy, the other personality. His defenders are correct that he is no far-left ideologue. But his views on almost everything—political economy, foreign policy, criminal justice—are those of the metropolitan soft left. (On school choice and other market-based reforms of the public services, his thoughts are obscure.) Neil Kinnock did not lose two consecutive elections as Labour’s leader, in 1987 and 1992, because voters thought him a revolutionary socialist; they had in fact seen him face down his party’s extremists. But being just a bit to the left of most people was still electorally lethal.

Mr Miliband’s rumoured take on these calculations is intriguing—and bold. The conventional wisdom is that, having tacked to the left to win the leadership, he will now race to the centre ground. But he apparently believes that a general election can now be won on a platform a few notches to the left of where Mr Blair triumphed in 1997, 2001 and 2005. His view is that 13 years of Labour government, and a recession that turned the public against financial elites, have nudged the centre ground leftward.

The other doubt about Mr Miliband is whether he has the mysterious mix of gravitas, normality and charisma that marks someone out as a plausible prime minister. This may seem a superficial



worry, but it has a habit of doing for leaders of the opposition; voters could never picture Mr Kinnock or William Hague, who led the Tories to crushing defeat in 2001, on the doorstep of 10 Downing Street. Some Tories believe that targeting Mr Miliband’s personality—his perceived lack of heft, his self-confessed geekiness—will be more fruitful than attacking his beliefs.

A theory doing the rounds in Westminster is that the political cycle of the 1980s is back. The opposition, however good or bad, will enjoy mid-term popularity as the government forces through painful economic change. Closer to election time, though, that easy goodwill will vaporise as voters focus on the choice between the parties. If this is right, Mr Miliband is likely to lead the Tories in the polls in the coming years, and pick up eye-catching by-election victories while he is at it. Persuading voters to choose him over Mr Cameron as their prime minister will be much tougher. Given the extraordinary closeness of his victory over his brother, any sign that he is not quite up to it will leave a gloomy party wondering what might have been.

Britain


The other Ed

The unofficial winner Labour’s most important tension might now be between the two Eds Sep 30th 2010

IN A leadership contest in which two brothers hogged all the attention, many people thought Labour’s best performer was actually Ed Balls. The shadow education secretary is another forty-something professional politician with dark hair and a curious intensity about him, but he offered qualities his rivals did not. A speech he gave in August on the danger to the economic recovery from the government’s austerity plan was the most acclaimed of the race. He landed blows on Michael Gove, the education secretary, over the government’s schools-reform policy. And instead of the last-placed finish some expected (and hoped) for him, he came third.

But while Mr Balls’s combination of intellect and aggression will make him an asset to Ed Miliband, his new leader, he could also prove hard to handle. For a start, he craves the shadow chancellorship. If he gets it, he may turn all economic policy into his personal fief—as did Gordon Brown, his old mentor, who once almost made him the real chancellor of the exchequer. As he is a less zealous deficit-cutter than many of his colleagues, never mind his opponents, this could provoke splits. If he does not get the job, his disappointment could turn to mischief. Mr Balls is better liked than in his years as Mr Brown’s henchman, but he has retained his sharp elbows and a reputation for plotting.

Compounding all this is the rumour that Mr Balls does not think much of Mr Miliband. The pair were colleagues in Mr Brown’s entourage, but Mr Miliband was very much the junior one. Mr Balls prides himself on intellectual rigour and political clarity; Mr Miliband is said to strike him as soft-headed. They also speak for different wings of the party on issues such as crime and civil liberties. Mr Balls, whose fan base is in Labour’s working-class heartlands, comes from the no-nonsense camp. Mr Miliband is part of the metropolitan left that regarded New Labour as overly authoritarian.

This has implications for Mr Balls’s future. Some think that he would be cannier to ask for the job of shadow home secretary. He would relish bashing the government as posh liberals wringing their hands over popular policies such as CCTV and sending lots of people to prison. Tony Blair made his name in that post. But that stance would be hard to reconcile with Mr Miliband’s softer views. Meanwhile, his furious opposition to the government’s plan for “free” state-funded schools might also make it hard for Mr Miliband, who wants to leave his options open on that issue, to keep Mr Balls in his current role.

For all the credit he has earned since May, when his stock sank because of his links with the defeated Mr Brown, Mr Balls’s finest hour may be to come. More than any other politician, he has cautioned that austerity could kill the recovery. If he turns out to be right, the vindication could propel his career. His party may even look to him as a future leader.

Britain


The nuclear deterrent

Gunning for Trident The coalition government is divided over whether and to what extent Britain should remain a nuclear power Sep 30th 2010

WHEN David Cameron, the Conservative prime minister, set up the government’s cost-cutting Strategic Defence and Security Review (SDSR), he doubtless expected noisy lobbying from the top brass: to be told, for example, that severe cuts to the defence budget could “seriously damage morale” in the armed forces, carry “grave political consequences” and “limit severely the [military] options available”. He may not, however, have reckoned on those sentiments being publicly attributed to the defence secretary, Liam Fox, as they were this week when a letter to him from Dr Fox was leaked to the Daily Telegraph.

As the SDSR reaches its conclusion, arguments about how to cut defence spending have become rancorous. Among the bitterest fights is one that Mr Cameron had hoped to avoid—over Britain’s nuclear deterrent. He originally exempted the deterrent, based on the American-designed, submarine-launched Trident ballistic missile, from discussion. The Trident-armed submarines are expected to need replacing in the early 2020s; the system is due to be renewed, at a cost of £20 billion ($32 billion). But his Liberal Democrat coalition partners—who say they are against a “like-for-like” replacement for Trident, but would quite like Britain to ditch its nukes altogether—won the right to examine the cost-effectiveness of the plan. There is talk of delaying the order for new submarines or finding a cheaper alternative.

Mr Cameron should have known better. Controversy has always attended Britain’s nuclear deterrent. No other country agonises so much over whether it should abandon or downgrade its nuclear capability. In France, the nuclear power closest to Britain in outlook, the force de frappé is widely seen as an untouchable symbol of prestige and independence.

By contrast, Britain’s liberal left has never overcome its distaste for the deterrent. It was a Labour prime minister, Clement Attlee, who resolved that Britain must have nuclear weapons, but his party has always been bitterly divided over them. When the House of Commons voted to renew Trident in 2007, the Labour government suffered one of its biggest rebellions; the decision was only approved with Tory help.

Many of those hostile to renewing Trident are against nukes on moral grounds. Others argue that the existing system was designed to deter the Soviet Union, and that a humbler model would suffice in a world where there is virtually no existential threat to Britain from nuclear-armed states (see map), nor much prospect of one.

Trident’s boosters reply that the reasons for having it have not gone away. The number of countries with nuclear weapons, some of them hostile towards the West, might grow to nearly 20 over the next 40 years. China might throw its increasing military weight around. Russia might resort to nuclear blackmail. And while America still offers Europe nuclear protection, a second line of nuclear defence complicates the calculation foes must make.

Critics of Trident who cite its cost are more convincing, not least because renewing it might mean sacrificing conventional kit, such as army helicopters or frigates for the navy. At the least, they argue, a decision can be postponed by a few years, because the Vanguard-class submarines now fitted with Trident missiles can actually be kept going until 2025—or even longer.



The notion, advanced by some, that there is a credible, cheaper alternative is less persuasive. Nobody suggests Britain should have a land or aircraft-based deterrent: both are too vulnerable to pre-emptive attack. An idea that has some support, however, is to equip the new Astute-class submarines with nuclear-armed Tomahawk cruise missiles, or with a new longer-range, faster cruise missile.

The former is wildly impractical. The Tomahawk only has a range of about 1,500 miles, which is inadequate; it flies at only 550mph and can be easily shot down. And because Britain deploys conventionally armed Tomahawks, a target country detecting a missile launch might wrongly believe it was under nuclear attack and react accordingly. The idea of an improved cruise missile is not much better, not least because the huge development costs would be borne entirely by Britain. Those for Trident are met mainly by America.

There is, however, one solution that would save money while maintaining a reasonably effective nuclear deterrent. The current doctrine of always being able to keep one missile submarine on patrol, known as Continuous At-Sea Deterrence (CASD), could be relaxed. According to this argument, Britain need only be certain to have a boat on patrol at times of heightened tension—a requirement that could be met by three or possibly only two submarines, rather than the current four.

Supporters of the status quo say that diluting CASD would be risky, allowing enemies the chance to time an attack (or to threaten one) when Britain had no boats at sea or to destroy a submarine as it left its base. Sailing at a time of crisis could be interpreted as an act of provocation in itself. Some defence experts, however, believe that CASD could be maintained with three Vanguard-class boats, and would certainly be viable with just three of the new, more reliable Trafalgar-class submarines.

If the government were to delay the order for new boats by two or three years, and then opt for only three, it could save several billion pounds in 2015-2020, when the defence budget will be under the greatest strain. There is one problem: politics.

Postponing most of the investment until after the next general election—due by 2015—would make it easier for an incoming government to ditch Trident or, more likely, prevaricate for so long that it amounts to the same thing. That prospect pleases Lib Dems but dismays many Tory MPs, who think too many concessions have already been made to placate their coalition partners. Dr Fox is not the only Conservative to regard defence of the realm as a sacrosanct, perhaps even resigning, issue.

Britain

The Supreme Court

Cheap at the price Britain’s new highest court has made few headlines. It matters all the same Sep 30th 2010

LURKING on a recently leaked list of quangos the deficit-cutting government supposedly wants to run its eye over is an unexpected name: that of the new Supreme Court. Created by statute in 2005, it opened its doors on October 1st 2009, replacing the Appellate Committee of the House of Lords (known as the “law lords”). The idea behind setting it up was, in conjunction with other reforms, to draw a clear dividing line between politics and the rule of law. Some hoped—or feared—that it would encourage the “Supremes” to take on Parliament more assiduously than when they were members of it.

The government is hardly about to kill off a new institution (few would term it a quango) that cost almost £58m to put in place and has received broadly favourable reviews since then. It could, however, trim its feathers: the Supreme Court is undeniably more expensive than its predecessor. The question is, has moving the law lords made a real difference either to what they do or to how they are perceived?

Take perception first. The numbers of visitors rolling into the court’s premises are gently encouraging, and 19,000 people use its website each month. Judgments are made available quickly and intelligibly. Nothing suggests that the British public has been overwhelmingly struck by the judiciary’s new independence, but, for the curious citizen, the Supreme Court is a distinct improvement on its murky forebear.

As to content, the court has not so far broken new judicial ground, but then it was never likely to, as Lord Phillips, its president, points out. The justices have the same powers the law lords enjoyed (they cannot, unlike America’s supreme-court judges, strike down primary legislation), and are mainly the same people. And the law lords themselves were already ditching judicial deference, certainly after the incorporation into English law in 1998 of the European Convention on Human Rights. As it happened, no landmark case came to the Supreme Court in its first year.

Yet many think the court’s institutional independence will in time whet its appetite for a fight, adding to the checks and balances that restrain executive power. “You need a new generation before this kind of change shows real results,” says Vernon Bogdanor, a constitutional expert. In the meantime, an increase in three sorts of cases is likely to try the court’s mettle.

All dressed up and somewhere to go



On one estimate, almost a third of its work concerns alleged human-rights violations, which made up a vanishingly small percentage of the law lords’ caseload a decade ago. That share could well increase. Robert Hazell, of the University of London, points out that social change percolates up slowly through the court system. On issues such as the right to help the terminally ill to die, for example, on which politicians have been reluctant to pronounce, the court might have to step in.

Devolution cases—judging whether Scotland, say, has exceeded the powers granted it by Britain’s Parliament—could loom larger too, especially now that less public money is available to lubricate relations. So may European issues, such as current moans in Brussels that Britain breaks EU law by limiting migrants’ benefits. Just as lawyers have grown more adept at using human-rights law to build cases, so they will become more familiar with European law, suggests Lord Phillips.

“In five years’ time, it is quite likely that the Supreme Court will look more interventionist,” says Lord Goldsmith, a former attorney-general. Philippe Sands, a barrister who also teaches at University College London, agrees this is the likely evolution over time, but sees a countervailing cycle at work in the next few years. Courts tend to intervene more, he thinks, when Parliament is weak and the executive strong, because the legislature is unable or unwilling to hold the government to account. Now that Parliament is rediscovering its teeth in the face of a coalition government, the judges may be relatively restrained.

Whatever the long-term effects of making the court independent, in the short run it has one presumably unintended consequence. As part of Parliament, the law lords had a relatively direct tap into government coffers; the free-standing court must bid for money through the Ministry of Justice, which has cash-guzzling prisons to fund too. Almost any outfit can lose some fat but the Supreme Court’s budget, currently £12.8m a year, is not especially bloated. If losing the funds it needs to do its job proves the price of independence, this particular bit of constitutional reform will come to seem inept.

Britain

Rural broadband

Wiring Arcadia The private sector is trying to bridge the “digital divide” Sep 30th 2010

GIVEN its reputation for surfing and the slow life, Cornwall has a surprisingly solid technological pedigree. It is where the transatlantic cables that carry much of Britain’s telephone and internet traffic land. Its Goonhilly satellite station is among the world’s biggest. And on September 30th, its council confirmed that, thanks to fibre-optic cables costing £132m (£78.5m from BT, the formerly state-run telephone monopoly, plus £53.5m in aid from the European Union), its residents will soon enjoy some of the fastest internet access in the country. Alas, other country-dwellers are less well-connected.

Despite Britain being the fifth-biggest broadband market in the OECD, a club of rich nations, a rump of about 11% of British homes remain too remote to receive the 2 megabit-per-second internet access the government thinks should be the minimum. The Euro-millions that will wire up Cornwall are available only because Cornwall is, by British standards, very poor.

The previous Labour government hummed and hawed about this rural-urban “digital divide”. Eventually, in 2009, it proposed levying a 50p tax on every fixed telephone line in the country: the proceeds were to be given to BT to allow it to connect even the remotest hamlets by 2012. The new coalition administration abandoned that plan, ditching the tax and pushing the target date back to 2015. Jeremy Hunt, the Conservative culture secretary, insists that the private sector ought to be able to bring broadband to the rustics. Only if it fails will the government consider subsidies.

Mr Hunt may be right. A string of small firms are offering fast broadband to offline areas, via cables, satellites or the airwaves.

Rutland Telecom, for example, has laid fibre-optic cables to several small villages in and near Rutland, a technology that BT is only beginning to deploy in big cities. For around £30 a month, subscribers get super-fast internet access. Rural Internet, another niche provider, is a Cumbria-based firm that grew out of a not-for-profit initiative run by Bill Knowles, a local businessman, to bring broadband to villages too inaccessible for the big commercial internet service providers (ISPs). It now advises customers all over the country. Kijoma, a small company based near Portsmouth, offers long-range, high-speed wireless internet to around 1,000 subscribers in an irregular arc from Basingstoke to Lewes.

Since their overheads are low, such companies can turn a profit from small numbers of customers, and can tailor their offering to local needs. Rutland Telecom’s first project, in the village of Lyddington, became profitable with just 40 subscribers. Because Kijoma uses radio waves to bring the internet to its customers, it has no fixed-line infrastructure to maintain. They can be flexible about funding, too, tapping grants from local councils, charitable trusts or even rich benefactors. And they can compete with the big firms on quality of service. “If we promise you a certain speed, you’ll get that speed,” says Bill Lewis, Kijoma’s boss, contrasting his firm’s offering with big ISPs, whose connection speeds often fall short of their marketing.

Struggling to order the internet shopping



Will this nimbleness and enthusiasm suffice to wire up the roughly 3m homes without fast broadband? Many of the new rural broadband specialists have no grand ambitions. “A lot of the work we do is still not for profit,” says Mr Knowles of Rural Internet. Mr Lewis says Kijoma is “more interested in offering a good service to existing customers than in growing fast”.

But even if small firms cannot do it all themselves, their business models may be instructive. In 2009 the Labour government estimated that it would cost around £1,750 per home to connect all of Britain’s country-dwellers to the web. David Lewis, Rutland Telecom’s boss, says that figure is far too high. Costs could fall further, he says, if firms are allowed to run their own cables through BT’s ducts and telegraph poles (something that Ofcom, the industry regulator, is keen on), to as little as £500 per house. Such arguments seem to be convincing at least one bigger player: tiny Rutland Telecom is currently negotiating a partnership with a big, FTSE-listed firm.

Britain



Financing small business

The mother of invention New sources of finance aim to compensate for the inertia of big banks Sep 30th 2010

SCOTMAS, a family-owned company based in Scotland, is the kind of business on which Britain’s economic recovery might depend. It exports water-treatment chemicals and equipment, competing with giants such as Siemens and GE. In August it wanted to bid to run a water-disinfection project in Dubai, but its bank, Royal Bank of Scotland, said it would take eight to ten weeks to approve the £30,000 of funding it needed to secure in advance. Happily for Scotmas, there was an alternative: a new financing platform called Funding Circle, which found it the money within two weeks.

Funding Circle matches businesses seeking cash with individuals or funds that want to lend it. Its website owes something to the online auction house eBay, and to Zopa, a person-to-person lending platform set up in 2005. An established company registers its needs and invites bids. The more interest there is, the lower its financing costs. Scotmas managed to raise £30,000 for three years at 7.8%. Indigo Clothing, a London-based T-shirt printing agency, recently used Funding Circle to raise £20,000 at 7.6%. It took all of two hours to put in the application, says Alex Walker, its boss; the money was secured within seven days. Funding Circle has raised over £500,000 for 18 companies since August, says Samir Desai, one of its founders.

It is one of a number of operators that are emerging to help small companies hitherto dependent on a handful of big—and, recently, stingy—banks. Around 90% of all banking services to small and medium-size companies are provided by Britain’s five biggest banks, according to Mintel, a market-research firm. Anecdotal evidence suggests they are starving many small companies of capital. Lending to British companies by the dominant high street banks has been declining across the board since early 2009 (see chart).

Other new, niche providers include Fundingstore.com, an online financial dating agency that hopes to go live soon, which will allow lenders to browse lists of companies seeking loans. Most such firms currently go to their accountant or house bank, says Nick Montague, Fundingstore’s chief executive. He hopes that all kinds of funders, including government agencies and venture capitalists, will use the site. Meanwhile Jono Shorrock, a former banker, has begun raising capital for his British Enterprise Bank, which will be aimed purely at funding small business.

Should the big banks be shaking in their boots? Probably not. But these alternatives may encourage them to sharpen up their act.

Britain

Bagehot

Get it, or it will get you Ed Miliband says he represents a “new generation”. But he is weirdly out of touch with austerity Britain Sep 30th 2010

BACK in the 1970s, a third of Britons routinely tuned into the “Generation Game”, a heroically drab television game show. In the first stirrings of what would become a national mania for consumerist glitz, Britain gazed in helpless envy as modest prizes (a salad bowl, some towels, an electric teamaker) wobbled past on a conveyor belt.

The Labour Party used a similar ploy to cheer delegates at its annual conference in Manchester, just before Ed Miliband gave his first speech as its leader on September 28th. A film reminded delegates of what Labour achieved in 13 years of power. A dizzying succession of expensive public goods flashed across a giant screen. It soon became a bit of a blur: tens of thousands of extra nurses and police, thousands of new or rebuilt schools, free bus passes and television licences for old people, free school fruit, free museum admission, rises in benefits and the minimum wage. Just before Mr Miliband strode on stage, a slogan flashed on screen: “Don’t Let Anyone Say We Didn’t Make A Difference”.

Delegates cheered. A more thoughtful MP called the film a “weird” response to election defeat. He was right. Voters know Labour made a difference; shiny public works are everywhere. Instead, the problem is that many think Labour spent the country into a hole. Perhaps in part because ordinary Britons themselves let spending rip in the boom, taking on scary mortgages and maxing out credit cards, swathes of the country feel something close to buyers’ remorse about the golden decade after 1997.

In his conference speech, Labour’s new leader asked his party to be “humble” about mistakes such as the Iraq war, the parliamentary-expenses scandal or the former government’s closeness to plutocrats and the City of London. In contrast, Mr Miliband told the party to be “proud” of its spending on schools, hospitals and aid for the developing world. In short: no remorse for the boom. And that puts Mr Miliband in a different place from some vital blocks of voters, especially in the south.

At the 2010 general election, Labour suffered its worst losses in the south and middle of England, winning just 49 out of 302 seats in those regions. Choose your route carefully, says Liam Byrne, a former Treasury minister, and you can drive from Edmonton in north London to the banks of



the Humber at Grimsby before hitting a Labour seat. After this wipeout, Policy Network, a think-tank, commissioned a poll of southern voters. It found they trusted the Conservatives to run the economy by a margin of 44% to 16% over Labour. Most damningly, 47% of southerners thought public spending under Labour had been largely wasted. Such voters no longer see Labour as “fair” to working families, calling it a party for benefit claimants, unions and immigrants.

The crunchiest debates in Manchester involved the survivors of Labour’s southern wipeout. In fringe meetings far from the fuchsia-pink main stage they shared tales of doorstep rage from voters convinced that Labour largesse had passed them by. Mr Byrne, a Birmingham MP, quoted couples who told him they worked crushing hours, paid their dues, but earned just too much to receive state help—then pointed with rage to feckless neighbours “doing nothing and getting everything”. Such voters feel they are the victims of overlapping systems of selfishness, said Mr Byrne: above them, bankers and politicians looking after themselves; below them the work-shy or newly arrived immigrants tapping benefits. Fiona Mactaggart, a formidable Scot who represents Slough—one of Labour’s tiny clutch of Home Counties seats—put it pithily: voters thought Labour stood for “taking their money and giving it to people who are taking the piss”.

Mr Miliband knows this is a problem. “I get it,” he declared after beating his elder brother, David, to the leadership (notably with the help of votes from the trade-union movement). People feel they work long hours without reward and fret that immigrants are driving down their wages, Mr Miliband says. He vows that Labour will be on the side of the “squeezed middle”. Scorning tabloid bids to paint him as “Red Ed”, he admits that Labour would be imposing spending cuts if it were in power, and says he will not support “irresponsible” strikes.

A new generation, just like the old one

Yet Mr Miliband’s courage is asymmetric. He is full of fierce plans for those squeezing the middle classes from above. He talks of using regulation to prod employers into paying higher wages. He wants whopping levies on banks and a formal probe into the fattest pay packets. But when it comes to those at the bottom of the system who enrage the middle classes, he offers coy platitudes or ideas that cost money. In his speech, a hint about tackling welfare fraud was qualified with anxious words for those in “genuine fear” of tests designed to catch cheats. Welfare reform is not about “stereotyping” the jobless, he waffled, but “transforming their lives”. On immigration, he suggested tougher labour standards would prevent employers undercutting locals’ wages.

Mr Miliband seemed happiest of all discussing his vision of the “good society”: ie, his riposte to David Cameron’s “Big Society”. Work is not all that matters in life, he mused; people wanted more time with their children, green spaces and “love and compassion”. For instance, Labour should back communities trying to stop chain stores invading their local high street. A new generation of “optimists” has taken charge of Labour, he said.

What was he thinking? The boom is over. Out in squeezed middle England, millions are terrified about their mortgages and jobs. Yet Mr Miliband wants to talk about work-life balance, the joys of quaint local shops and other expensive luxuries. Austerity has its own cultural codes: the “Generation Game” was loved precisely because it was cheap. Britain’s mood has changed. For now, Mr Miliband does not seem to get it.

Economist.com/blogs/bagehot

Britain



Correction: Hastings Sep 30th 2010

Our article on Hastings (”One in the eye”, September 23rd) said that the Jerwood Foundation is part-sponsoring a £10m waterfront art gallery in the town. In fact the Jerwood Foundation is fully funding a £4m gallery as part of a £9m waterfront development. Sorry.

Britain

The Stuxnet outbreak

A worm in the centrifuge An unusually sophisticated cyber-weapon is mysterious but important Sep 30th 2010

IT SOUNDS like the plot of an airport thriller or a James Bond film. A crack team of experts, assembled by a shadowy government agency, develops a cyber-weapon designed to shut down a rogue country’s nuclear programme. The software uses previously unknown tricks to worm its way into industrial control systems undetected, searching for a particular configuration that matches its target—at which point it wreaks havoc by reprogramming the system, closing valves and shutting down pipelines.

This is not fiction, but fact. A new software “worm” called Stuxnet (its name is derived from keywords buried in the code) seems to have been developed to attack a specific nuclear facility in Iran. Its sophistication suggests that it is the work of a well-financed team working for a government, rather than a group of rogue hackers trying to steal secrets or cause trouble. America and Israel are the obvious suspects. But Stuxnet’s origins and effects are unknown.

Stuxnet first came to light in June, when it was identified by VirusBlokAda, a security firm in Belarus. The next month Siemens, a German industrial giant, warned customers that their “supervisory control and data acquisition” (SCADA) management systems, which control valves, pipelines and industrial equipment, were vulnerable to the worm. It targets a piece of Siemens software, called WinCC, which runs on Microsoft Windows.

For security reasons SCADA systems are not usually connected to the internet. But Stuxnet can spread via infected memory sticks plugged into a computer’s USB port. Stuxnet checks to see if WinCC is running. If it is, it tries to log in, to install a clandestine “back door” to the internet, and then to contact a server in Denmark or Malaysia for instructions. (Analysis of traffic to these servers is continuing, and may offer the best chance of casting light on Stuxnet’s purpose and origins.) If it cannot find WinCC, it tries to copy itself on to other USB devices. It can also spread across local networks via shared folders and print spoolers.

Initially, Stuxnet seemed to be designed for industrial espionage or to allow hackers to blackmail companies by threatening to shut down vital systems. But its unusual characteristics suggest another explanation. WinCC is a rather obscure SCADA system. Hackers hoping to target as many companies as possible would have focused on more popular systems. And Stuxnet searches for a particular configuration of industrial equipment as it spreads. It launches an attack only when it



finds a match. “The bad news is that the virus is targeting a specific process or plant,” says Wieland Simon of Siemens. “The good news is that most industrial processes are not the target of the virus.” (Siemens says it knows of 15 plants around the world that were infected by Stuxnet, but their operations were unaffected as they were not the intended target.)

Another odd feature is that Stuxnet uses two compromised security certificates (stolen from firms in Taiwan) and a previously unknown security hole in Windows to launch itself automatically from a memory stick. The use of such “zero-day vulnerabilities” by viruses is not unusual. But Stuxnet can exploit four entirely different ones in order to worm its way into a system. These holes are so valuable that hackers would not normally use four of them in a single attack. Whoever created Stuxnet did just that to boost its chances. They also had detailed knowledge of Siemens’s industrial-production processes and control systems, and access to the target plant’s blueprints. In short, Stuxnet was the work neither of amateur hackers nor of cybercriminals, but of a well- financed team. “Behind this virus there are experts,” says Mr Simon. “They need money and know-how.”

So what was the target? Microsoft said in August that Stuxnet had infected more than 45,000 computers. Symantec, a computer-security firm, found that 60% of the infected machines were in Iran, 18% in Indonesia and 8% in India. That could be a coincidence. But if Stuxnet was aimed at Iran, one possible target is the Bushehr nuclear reactor. This week Iranian officials confirmed that Stuxnet had infected computers at Bushehr, but said that no damage to major systems had been done. Bushehr has been dogged by problems for years and its opening was recently delayed once again. Given that history, the latest hitch may not have been Stuxnet’s work.

A more plausible target is Iran’s uranium-enrichment plant at Natanz. Inspections by the International Atomic Energy Agency, the UN’s watchdog, have found that about half Iran’s centrifuges are idle and those that work are yielding little. Some say a fall in the number of working centrifuges at Natanz in early 2009 is evidence of a successful Stuxnet attack.

Last year Scott Borg of the United States Cyber-Consequences Unit, a think-tank, said that Israel might prefer to mount a cyber-attack rather than a military strike on Iran’s nuclear facilities. That could involve disrupting sensitive equipment such as centrifuges, he said, using malware introduced via infected memory sticks.

His observation now looks astonishingly prescient. “Since the autumn of 2002, I have regularly predicted that this sort of cyber-attack tool would eventually be developed,” he says. Israel certainly has the ability to create Stuxnet, he adds, and there is little downside to such an attack, because it would be virtually impossible to prove who did it. So a tool like Stuxnet is “Israel’s obvious weapon of choice”. Some have even noted keywords in Stuxnet’s code drawn from the Bible’s Book of Esther—in which the Jews fight back to foil a plot to exterminate them.

International

Rare earths and China

Dirty business China is squeezing the supply of vital rare earths. But not for long Sep 30th 2010 | TOKYO

RARE by name, though not by nature, 17 elements in the periodic table—the “rare earths”—are among the most sought-after materials in modern manufacturing. In tiny amounts, their unique magnetic and phosphorescent properties make them vital ingredients in a host of gadgets and components, ranging from hard drives to lasers. Though abundant in nature, extracting them is difficult, costly, time-consuming and dirty.

China is the world’s largest (and for some of them the only) producer of rare earths. Fears are growing about the political effects of that clout. In September Japan claimed that China was blocking supplies in response to the arrest of a Chinese fisherman in disputed territorial waters. Japan, with its electronics and car industries, uses a fifth of the global supply, making it the world’s biggest importer of rare earths.

China denies that it has interfered with shipments, but Japanese traders say that supplies were stuck in Chinese ports for a week. The Chinese dominance comes from heavy investments in the 1980s. Deng Xiaoping later said that rare earths would be to China what oil was to the Middle East. As Chinese production came on stream, prices plummeted and other producers closed.

Since 2006 China has behaved in a way that resembles OPEC, the oil-producers’ cartel, cutting exports by 5-10% a year. In July the export quota was cut by 40%. Prices have soared: the cost of cerium oxide (often used as a catalyst) has increased sixfold since the start of the year, and is 20 times higher than in 2005.

The squeeze comes as a surge in demand for high-tech equipment has sent demand for rare earths soaring. In 2003 some 85,000 tonnes were shipped, valued at $500m. This year’s sales are expected to total 125,000 tonnes, worth nearly $2 billion. Demand is forecast to increase by around two-thirds over the next five years.

For now, China’s position is strong. It holds 35% of global reserves but supplies more than 95% of demand, of which 60% is domestic, according to Industrial Minerals Company of Australia (IMCOA), a consultancy. In “heavy” rare earths such as dysprosium, which helps magnets keep their properties at high temperatures, its market share is nearly 100%.

China cites environmental concerns to justify its export curbs. The real reason is probably to persuade foreign firms to move manufacturing to China before non-Chinese mines are on stream and its market control ebbs.

Market forces should be providing an answer already. But they face peculiar snags. The quantities of rare earths used in technology components are so tiny that higher prices are invisible in the cost to consumers. Recycling is tricky: just half a penny’s worth of neodymium helps a mobile phone vibrate.

In the next four years new production is starting in Australia and in California (where it ceased in 2002). Capacity is being increased at mines in India and Vietnam. The newcomers will shrink China’s market share by 15%, says Dudley Kingsnorth of IMCOA. The only existing producer outside Asia not dependent on Chinese ores is Silmet, a rare-metal firm in Estonia, which says it is now besieged by eager customers. It hopes other producers come online soon.

International



Viktor Bout

Man in the dock The Americans may finally get Viktor Bout. But what will he tell them? Sep 30th 2010 | BANGKOK

A STREAM of foreigners trickles in, and usually out, of the fetid jails of Bangkok. Rarely is such a big fish seen as Viktor Bout, a former Russian military-intelligence officer turned arms trader, who faces an extradition hearing on October 4th that could send him to New York to stand trial.

Mr Bout’s business was extraordinary and his protectors a mystery. Now his future is the subject of a diplomatic spat. He was lured to Bangkok in 2008 in an American sting operation. Mr Bout insists that he is a legitimate businessman framed by Russia’s enemies. His loyal wife has insisted that he went to Thailand to take a cooking course. The foreign ministry in Moscow says that the extradition could bust the “reset” in Russian-American relations.

How much backing Mr Bout had from Russia, from whom, and when, is unclear. In general, says Simon Taylor of Global Witness, a campaigning group, it “beggars belief” to imagine that Russia’s security apparatus did not know what he was up to. Mr Bout’s old connections certainly helped him build a global empire in the 1990s, trading the surplus armouries of the Soviet empire for cash and minerals.

Critics say he stoked the fires of Africa’s bloodiest civil wars: a British government minister once dubbed him the “merchant of death”. He showed a remarkable ability to dodge UN sanctions and evade investigators. His exploits were loosely portrayed by Nicholas Cage in the film “Lord of War” (Mr Bout took a dim view of this).

America has been on Mr Bout’s case for years. Before the September 2001 terrorist attacks, American agents plotted to snatch him and hand him to the authorities in South Africa or Belgium to face criminal charges, according to the New York Times. But when Washington’s priorities changed, Mr Bout breathed more easily. His planes, some say, ran supplies to American troops in Iraq. How much of this is bravado, how much rumour and how much fact is hard to say. Mark Kramer, a Russia-watcher at Harvard University says that Mr Bout has deliberately fostered “mythology” about his actions.

A trial in America may not illuminate such shadows. Mr Bout may strike a deal with America’s spooks, or with prosecutors, perhaps to expose other countries’ dirty secrets, or to conceal America’s.

So far, even the extradition has proved surprisingly tricky. The Thai government has squirmed under arm-twisting by Russia and America, involving offers of weapon sales and cheap oil. A parliamentarian from the governing party tried to persuade Mr Bout to implicate an exiled former prime minister, Thaksin Shinawatra, in his dealings. Judges have struggled with the political nature of the case. The first verdict in August 2009 went Mr Bout’s way, stunning American officials, who thought they had “home field advantage” in Thailand, says Paul Quaglia, a former CIA officer who is now a security consultant.



Even after the Department of Justice won an appeal on August 20th, Mr Bout has stayed put. His lawyers argued that the court must rule on two other charges filed against him at the behest of American prosecutors who feared a defeat on the conspiracy charge. Eager American officials had already sent a plane to Bangkok’s military airport to collect Mr Bout. After a few days on the tarmac it turned tail for Washington. Mr Bout was moved from a relatively lax remand prison to Bangkok’s more secure central jail. Russia’s foreign minister, Sergei Lavrov, said the appeal-court verdict was politically motivated.

Some think more legal chicanery may be in store. Mr Bout has slipped out of tight corners before. His cargo business ran on quicksilver changes of aircraft names, registration and ownership, usually one step ahead of investigators, says Alex Vines at Chatham House, a London-based think-tank, who served on UN panels dealing with sanctions in Africa.

Mr Bout’s latest troubles started in March 2008 when he flew to Bangkok to meet Drug Enforcement Administration officials disguised as representatives of Colombia’s FARC guerrillas. He was caught on tape allegedly offering to sell them hundreds of missiles that could shoot down American aircraft, plus other weapons. The indictment alleges that Mr Bout conspired “to kill Americans” and supply arms to a “terrorist organisation”.

Selling missiles to the FARC so they can shoot down American aircraft would seem attractive to hardliners in Russia, even if not to the present Russian government. It also chimes with Russia’s efforts to help Hugo Chávez’s Venezuela, a foe of both America and Colombia.

Mr Bout may be past his prime. Some question his judgment in falling for America’s trickery; greed or boredom do not really explain why he took the bait. Others say that his cargo business thrived during anarchic wars of plunder that have, thankfully, subsided. That at least should be cause for celebration, not regret.

International

Measuring global poverty

Whose problem now? Awkward questions about how best to help the poor Sep 30th 2010

POOR people—the destitute, disease ridden and malnourished “bottom billion”—live in poor countries. That has been the central operating assumption of the aid business for a decade.

The thesis was true in 1990: then, over 90% of the world’s poor lived in the world’s poorest places. But it looks out of date now. Andy Sumner of Britain’s Institute of Development Studies* reckons that almost three-quarters of the 1.3 billion-odd people existing below the $1.25 a day poverty line now live in middle-income countries. Only a quarter live in the poorest states (mostly in Africa).

This change reflects the success of developing countries in hauling themselves out of misery. In 1998 the World Bank classified 61 countries (out of 203) as low-income (meaning an annual income per head of less than $760, in money of that era). In 2009 the number had shrunk to 39 out of 220. India, Pakistan, Indonesia and Nigeria all moved to middle-income status during that time (China passed the threshold earlier). But even excluding China and India, the share of global poverty accounted for by other middle-income countries tripled between 1990 and 2008, to 22%. Other figures support Mr Sumner’s finding. Of the world’s undersized children (a good indicator of malnutrition), 70% live in middle-income countries.

In one sense it hardly matters to a destitute Nigerian or Indian that his country has been reclassified by some distant development bank. But it raises hard questions about whether foreign aid should be for poor people or poor countries. Britain, for example, has a rule that 90% of aid is supposed to go to the poorest countries. Aid charities strongly support that focus. The result, as taxpayers’ money runs scarce, is that donors have consigned programmes in middle-income countries to a “bonfire” says Alex Evans, a former adviser at Britain’s Department for International Development. Yet these are the countries where the vast majority of the poor live.

On September 29th, Bob Zoellick of the World Bank called for a profound “change [in] how we conduct development research”. President Barack Obama wants a rethink of America’s muddled aid programme. Mr Sumner’s data make that look overdue. Poverty, he says, may be turning from being an international distribution problem into a national one. Most middle-income countries, through national conditional-cash-transfer schemes such as Brazil’s Bolsa Família, have

Send Western taxpayers’ money, quickly



proved better at helping their own poor than anything invented and financed by the international aid industry. Giving is easy. Thinking can be a lot harder.

* “Global poverty and the New Bottom Billion”. By Andy Sumner. Institute of Development Studies.

International

The return of advertising

The box rocks As the advertising market recovers, two clear winners are emerging: the internet and television Sep 30th 2010

AS WESTERN economies slid towards recession three years ago, media and advertising executives began to ask worrying questions. Would the advertising slump prove structural or cyclical? Would marketing money return to all media, or just a few? The answers are becoming clear. There are two surprises, says Sir Martin Sorrell, chief executive of WPP, the world’s biggest ad agency. The first is the health of the American advertising market, which has benefited from government stimulus. The second is the recovery of old media.

But not all old media. Advertising is still leaching out of newspapers, particularly regional ones. It is returning only slowly to magazines. Billboards are faring better. Yet the greatest old-media winner is television—in most countries the main advertising medium. In December 2009 GroupM, which is part of WPP, predicted that spending on British TV would fall by 0.2% this year. It now forecasts growth of 11.6% (see chart), roughly reversing last year’s drop. Other market-watchers are even more optimistic about the box.

The resurgence of the 30-second commercial has revived companies that had been in crisis. Early in 2009 it looked as though ITV, Britain’s largest free-to-air commercial broadcaster, might go bust. ITV is now much healthier: its advertising revenues shot up by 18% in the first half of this year. At CBS, an American broadcast network, turnover from ads rose from $4 billion to $4.5 billion in the same period. Shares in both companies have more than tripled from last year’s lows, although they are still well below pre-recession peaks.

“Usually advertising lags other economic trends,” says Joe Uva, chief executive of Univision, America’s biggest Spanish-language broadcaster. “This time it led, in both directions.” Mr Uva detected weakness in local TV advertising as early as the summer of 2007, as a rash of housing foreclosures broke out in states like California and Florida. The national recession arrived half a year later. By the spring of 2009, with consumer confidence still depressed, local advertising began to come back. Helped by the World Cup, Univision’s TV revenues were 28% higher in the second quarter of 2010 than a year earlier.

A rebound effect is at work: car dealers and banks that stopped advertising in 2008 have decided they cannot stay out of the market for ever. Yet there is no inherent reason why a drop in advertising must be followed by a rise. Just look at newspapers, where a painful fall in advertising in 2008 was followed by another steep drop in 2009, with a further fall expected this year. Television is recovering more strongly than other media because it has two distinct, and growing, advantages.

First, its power to monopolise attention is undiminished. Many newspaper readers have moved online, where they are worth less to advertisers. Not so TV viewers. In the first quarter of this year the average American spent 158 hours per month in front of the box, according to Nielsen, a research firm. That was two hours more than a year earlier. By comparison, he spent just three hours watching video online and three-and-a-half hours watching it on his mobile phone. Keith Weed, the head of marketing at Unilever, a huge consumer-goods firm, is excited by the potential of online and mobile video. But for now, he admits, “it doesn’t have the same presence” as television.

That is in the most technologically advanced markets. Elsewhere TV simply dwarfs other platforms. Most estimates suggest less than 30% of Chinese regularly use the internet, whereas 93% watch TV. In Brazil, TV advertising was worth 15 times as much as internet advertising last year. So healthy is its growth in emerging markets that ZenithOptimedia, a media agency, believes television’s share of world advertising will rise from 38% in 2008 to 41% in 2012. Companies that want to make the emerging middle class aware of their brands inevitably turn to television. That is its other big advantage.

As Laura Martin, an analyst at Needham & Company, an investment bank, observes, the internet now competes fiercely for the kind of advertising that is carried on the radio, in newspapers and in many magazines. Campaigns to persuade people to consider one product over another, or actually to go out and buy something, are well-suited to digital outfits, with their superior ability to track and segment audiences. Mobile ad platforms know where people are. Google can hit customers when they seem to show an interest in products. Such marketing is also measurable, which appeals to firms when budgets are tight. In the past four years the share of American online advertising spending that is bought on the basis of performance has risen from 41% to 59%, according to the Interactive Advertising Bureau.

The danger from friends

Search engines and online banners are not nearly so good at making people aware of new products. Nor do they offer emotional experiences. Television’s ability to build brands by surrounding adverts with gripping content is unsurpassed. Online video is still not a serious competitor, partly because viewers are less tolerant of ads, partly because much of it is poor. Yet some websites are closing the gap.

Many companies are experimenting with social networks, where people are more engaged. Pages dedicated to products have multiplied, with some achieving almost television-like scale. Disney’s “Toy Story” film franchise has 5.6m “likes” on Facebook. Although firms may buy advertising on social networks, much of their activity would not appear in a spending chart. “You don’t buy it. You do it,” says Stewart Easterbrook, the British boss of Starcom MediaVest. Yet companies are beginning to see social networks as an alternative means of building brands through discussions, which makes them a threat to TV advertising. Mr Weed of Unilever forecasts a drift from paid advertising to “earned” media, including Facebook.

Technology companies can hurt media firms in a number of ways. Silicon Valley has not just created strong competitors for advertising money, such as Google. It has also created free competitors, such as Craigslist, which has thoroughly disrupted the classified-advertising business. The danger for media firms is that Facebook will turn out to be a potent combination of



the two.

Business



Prisa and Spanish media

The cost of Liberty A Spanish media giant gets a hand from a homeless billionaire Sep 30th 2010 | MADRID

THE economic downturn has done for many media firms. Now Prisa, the world’s largest Spanish-language media group, has given up most of its family ownership in return for a lifeline from foreign investors. The Madrid-based publisher of El País, the best-selling newspaper in Spain, will soon receive a $900m cheque from Liberty Acquisitions, provided the deal is approved by regulators in October.

Prisa’s troubles began after an expensive foray into pay-TV was followed by the financial crisis and a downturn in advertising. That left the group with debts of €4.7 billion, more than 12 times its shrunken stockmarket value.

The deal, revised from an earlier one because of fears over Spanish sovereign debt, will massively dilute existing Prisa shareholders. It also marks the end of an era for one of Spain’s most powerful families. Prisa was built by Jesús de Polanco, who headed the conglomerate until his death in 2007. His son, Ignacio, is the chairman. The family’s stake will be reduced from 70% to 30% with Liberty getting nearly 58% of the firm at a price that is near to its historic lows.

Still, the pain may be bearable for the Polancos. Since Liberty is backed by multiple investors, the family will remain the biggest single shareholder. Liberty’s sponsors, who intend to hold nearly 10% of the shares, are Martin Franklin, chairman of Jarden, an American consumer-products group, and Nicolas Berggruen, an art collector’s son and investor who is often described as a “homeless billionaire” for living out of luxury hotels. Just in case Liberty’s remaining shareholders do not end up approving the deal, they have lined up $500m from other investors and its creditor banks.

Prisa’s balance-sheet may be a mess, but at least its assets, including El País, are profitable. Less than a third of its sales are from cyclical advertising. “These assets could do much better,” says Mr Berggruen. He recently took over Karstadt, a bankrupt German retailer, and knows Prisa well. In the early 1990s he acquired a stake in Portugal’s Media Capital, built it up and later sold shares to Prisa at a fat profit. He will sit on Prisa’s board (which is unusual for his investments) along with Mr Franklin.

With the banks off its back, Prisa can concentrate on its operations, which include plans to grow its education-publishing business in Brazil and Mexico. It is also eyeing the fast-growing Hispanic media-market in America, so may start challenging the dominance of Univision and Telemundo, the two biggest Spanish-language networks. The Polancos may have a smaller slice of the firm, but the pie should start to look a lot bigger.

Business

Retailing

The beast goes on safari Can Wal-Mart make it in Africa? Sep 30th 2010 | NEW YORK

FOUR billion dollars doesn’t count as an “every day low price”, but Wal-Mart, the world’s biggest retailer, hopes it has found a bargain. That is how much ($4.1 billion to be precise) the Arkansas-based “Beast of Bentonville” has offered to acquire Massmart, a retailer with 288 stores in 14 countries in sub-Saharan Africa. On September 27th Massmart’s management confirmed it is in exclusive negotiations to sell the South African-based firm to Wal-Mart. The deal is being overseen by Andy Bond (pictured right), who ran Wal-Mart’s British arm, Asda. As Massmart’s shares initially traded above the offer price, it suggests some investors think there may be other bidders, and that Mr Bond might have to come up with some more money to clinch the deal.

This is the clearest sign yet that Africa is now near the top of the agenda for the world’s leading businesses. The continent still has its problems, but it is no longer “hopeless”—as this newspaper once described it—especially for anyone wanting to be part of a fast-growing consumer market. Last year, while the global economy struggled with the aftermath of the financial crisis, Africa as a whole continued to advance and is expected to grow by at least 4.3% this year. Some economies, such as Nigeria and Ghana, are racing ahead. As the middle class and urban working class expand rapidly, food consumption is expected to grow strongly, along with sales of other consumer products.

There had been speculation that Wal-Mart would go for Shoprite, a rival African retailer, but Massmart offers a lot of products besides food, which is more in keeping with the expanding range of products that Wal-Mart sells elsewhere. Massmart operates under nine different names, including Dion Wired (an electronics retailer) and Builders’ Warehouse (a bit like Home Depot). Wal-Mart, which has built its recent success on world-class logistics, is said to be particularly keen on Massmart’s low-cost distribution system.

Initially, Massmart would be barely visible within Wal-Mart’s global empire, which this year is expected to earn profits of around $14 billion on sales of $405 billion in more than 8,500 outlets under 55 different names in 15 countries. It is the growth potential of Africa that is appealing, especially as sales have disappointed of late in America, even though Wal-Mart has been well-placed to benefit from consumers trading down.

Critics of the deal point out that some of Wal-Mart’s international adventures have gone badly, most notably its expansion into Germany, which it eventually abandoned. But there is a world of difference between the mature, highly competitive German market and using its global clout to shape an African market that is still in its infancy. It will have to deal with unions, which have been agitating recently at Massmart, perhaps having got wind of Wal-Mart’s potential offer. But outside America, Wal-Mart is not the ideological enemy of organised labour that it is at home. And it has thought sufficiently hard about social engagement—especially since it got green religion in the aftermath of Hurricane Katrina—that it knows it will need to view South Africa’s



black-empowerment laws as an opportunity not a cost.

Massmart’s management is reportedly negotiating with the expectation of being retained after the acquisition, which seems plausible given their local knowledge and impressive track record. Mr Bond is certainly no good ol’ boy from Arkansas. But nor is Mike Duke, Wal-Mart’s chief executive, who took the top job after heading its international operations. The bid for Massmart is an attempt to gain a first-mover advantage by one of the world’s most sophisticated companies, and it is likely to be seen as the moment when the beasts of the corporate world recognised that Africa is the next big growth market. And what if it all goes wrong, as it might? The great thing about being a big beast is that you can lose $4 billion and barely notice.

Business

Tablet computers

Chasing King Apple BlackBerry’s creator joins a growing list of pretenders to tablet-computing’s throne Sep 30th 2010 | SAN FRANCISCO

THE early days of personal computing were marked by a spectacular free-for-all as companies big and small fell over one another in a mad rush to become the dominant player in a brand-new business. Now history is repeating itself as one technology firm after another piles into the fledgling market for touch-screen “tablet” computers, which are set to disrupt the computing industry. On September 27th Research in Motion (RIM), the Canadian firm that makes the BlackBerry smartphone, became the latest to announce plans for a tablet when it unveiled its PlayBook, which will go on sale in early 2011.

RIM joins a long line of businesses, including Dell, Samsung and Hewlett-Packard (HP), which have set their sights on winning a chunk of what promises to be a whopping market. Todd Bradley, a senior executive at HP, predicted this week that annual sales of tablet computers could hit $40 billion within a few years. But the firm that HP and its rivals would love to beat is Apple, which had sold 3m of its impressive iPads by June, only three months after it came to the market.

Apple’s success has triggered a frenzy of innovation. Soon consumers will be faced with a bewildering array of tablet devices, from Samsung’s Galaxy Tab to Dell’s Streak, with many different screen sizes, different operating systems and various online libraries of software applications, or apps, that can be run on them. Amazon is rumoured to be developing a tablet device that will use Google’s popular Android operating system.

The biggest challenge for firms touting tablets will be to make their devices stand out from the crowd. That is where RIM reckons it has an edge. Although the word “Play” figures in its tablet’s title, the gadget is mainly about work. The company plans to capitalise on the popularity of its BlackBerry smartphone among corporate road-warriors to promote the PlayBook as a must-have business tool. At RIM’s developer jamboree in San Francisco this week, there was much talk of “advanced security features”, “out-of-the-box enterprise support” and other phrases that make the heads of corporate IT departments salivate. The PlayBook also boasts features such as a built-in high-definition camera for video conferencing on the go.

The next addiction?



A pad of multimedia

RIM is understandably keen to defend its turf against the threat posed by iPhones and iPads, which being stylish and easy to use are starting to make inroads into businesses. But RIM is also hoping the PlayBook’s features will help it appeal to a broader audience. The device has an impressive new operating system developed by QNX, a firm which RIM bought earlier this year, and it boasts powerful multimedia capabilities. John Jackson of CCS Insight, a research firm, reckons the PlayBook is likely to cost much less than Apple’s iPad, the cheapest version of which sells for $499 in America.

In spite of all this, RIM’s new baby is unlikely to become a bestseller because it suffers from at least two handicaps. The first is that at launch it will have only Wi-Fi connectivity built in. Users wanting to connect via a mobile service will have to link their tablets to a BlackBerry device and connect through that. This will make the PlayBook less appealing to people who are not already RIM customers.

The second handicap is more serious. Simply put, consumers will have relatively little to play with on their PlayBooks. Developers have been working overtime to churn out apps for the iPad and for the growing number of tablets that will use Android. Apple’s tablet can also tap into the several hundred thousand apps already available for the popular iPhone too. So the PlayBook’s apps library—with the exception of its business-related offerings—is likely to look anaemic alongside those of its main competitors.

There may be another hitch too. Soon after the PlayBook hits the shelves, Apple may well be ready to announce a new set of iPads that will have even more impressive features than their predecessors and almost certainly will be cheaper too. Having seized tablet-computing’s crown, Steve Jobs, Apple’s determined boss, isn’t likely to give it up any time soon.

Business

The global lorry market

Crash repairs After a disastrous year, lorry makers are moving up a gear Sep 30th 2010

LIKE a small furry animal in the fast lane of a motorway, the lorry industry suffered a severe pounding in 2009. A decline in worldwide heavy-lorry sales of some 50% was a harsh reminder that this is a business that grows with the sale and transport of goods and then suffers disproportionately when recession strikes. But at the industry’s biggest trade show in Hanover in September the truckers put their boots back on the throttle.

Daimler, the world’s biggest lorry maker, said that sales from January to August were up by 33% over the previous year and that orders had leapt by 65%. It expects to make a profit of €1 billion ($1.4 billion) compared with a similar loss in 2009. MAN, another German firm, reckons that it will sell some 120,000 vehicles in 2010, three times what it sold last year. Sweden’s Volvo also reported a 62% increase in sales in August compared with 2009. Daimler is now confidently predicting that lorry sales will grow by more than half by 2015 to some 3m vehicles. But such was the severity of the crash the industry suffered in 2009 that global sales will still be only two-thirds of what they were in 2006.

The manufacturers have some cause to sound their horns in celebration. Sales in Europe, which were expected to recover slowly, are growing again and could expand by 5-10% this year. Eastern Europe should bounce back and Russia holds plenty of promise. Anecdotal evidence suggests that sales of new and used vehicles to the Middle East are booming.

Latin America is the big hope. A fast-growing economy in Brazil, the biggest market in the region by far and with lots of infrastructure investment, is now a vital place to sell. Brazilians will buy around 140,000 lorries this year, helped by cheap government loans. Scania, a Swedish firm controlled by Volkswagen, says the country’s total lorry sales grew by more than half in the first eight months of the year and its own sales rebounded by 126%.

Although developing markets are important, India and China are largely still off the satnav. India is dominated by home-grown firms—Tata has some 60% of the market. And joint ventures with China have turned into numerous breakdowns, though MAN’s recent acquisition of a 25% stake in Sinotruck may at last give a Western producer a significant foothold. But the rugged and cheap lorries that the Chinese want resemble those sold 40 years ago in many other countries and are far less profitable than the high-tech vehicles pounding the roads in Europe and America.

Fortunately for Western producers, the failings of Chinese lorries serve as a useful barrier to entry in other markets. Brazil’s government, for instance, has offered incentives to renew old and polluting lorry fleets, and the country’s truckers want vehicles just like those sold in Europe and America. The Western firms have another advantage. Daimler, like many of its rivals, earns 25% of its revenues from profitable service operations, and hopes to boost this to 50% by 2030. A Chinese manufacture might sell a Brazilian a lorry, but what will happen when it breaks down?

European firms reckon they provide a “system”. As Colin Gibson of HSBC points out, making

Let those truckers roll



lorries is like the capital-goods industry, which relies heavily on aftersales service for profits. This is not like carmaking and it is one reason why Fiat is demerging its car business from its lorry, tractor and machinery arms. Only Daimler remains attached to a car company

Recent rumours suggested that Daimler might be interested in buying Iveco, Fiat’s lorry business. But this is merely the latest of many whispers in a business where overcapacity makes it ripe for consolidation. A tie up between Scania, MAN and Volkwagen is also often mooted. Yet no lorry maker so far seems ready to make that sort of move.

Business

Innovation in Asia

Trading places China is about to overtake Japan in patent applications Sep 30th 2010 | TOKYO

ONLY five years ago, most of the expensive bits and pieces inside a typical Apple iPod came from Japan. Today an autopsy of the iPad reveals that nearly all the important components come from South Korea and Taiwan. In such a short time Japan’s dominance of Asia’s technology industry has been eroded by its neighbours.

Between 2006 and 2009, the number of patent applications in America, Europe and South Korea largely held steady. But filings in Japan sank while those in China soared (see chart). If the pattern holds, more patents may be filed in China this year than in Japan for the first time, putting China in striking distance of America. It is an astonishing reversal. As recently as 2000, Japanese patent filings were four times greater than China’s.

Patents are a crude but useful measure of innovation. The change shows that Chinese inventors are developing a stake in intellectual-property protection, which is welcome. And because national patents protect the technologies of foreign firms too, the trend reflects how global companies are ploughing into China as a market and a manufacturing base. Even Japanese firms have increased their patent filings in China but decreased them at home.

Moreover, Chinese firms are forging into foreign markets. In 2008-09 Japanese geeks filed for 11% fewer “international patents” under the Patent Co-operation Treaty, while Chinese nerds filed 18% more, according to a recent report by the World Intellectual Property Organisation (WIPO). That said, the Japanese can take some solace from a far better success rate in having patents granted and in their patents being more frequently cited by other patents.

The economic crisis caused many firms to cut R&D spending. In 2008-09 many Japanese companies, including Sony, Sharp, Toyota and Toshiba, slashed their research budgets by 10-20%. However, Chinese firms such as Huawei and ZTE, which both make telecoms equipment, increased their R&D spending by 30-50%. China’s domestic research-spending is now poised to surpass Japan’s in purchasing-power terms.

An example of Japan’s R&D lethargy is Hitachi, its third-largest company with some $100 billion in sales. Hitachi habitually invests 4% of sales in R&D, explains its boss, Hiroaki Nakanishi. Yet this budgetary straitjacket is oblivious to market demands and it risks missing opportunities. Nevertheless, Mr Nakanishi says that he is satisfied with the approach. By comparison, Samsung, South Korea’s biggest conglomerate, plans to spend almost twice as much on research in absolute terms this year. Last year Samsung’s profits exceeded those of all nine of Japan’s big electronics firms combined.

Much of China’s push for patents comes from government policy. The country’s firms pay foreign companies more than $10 billion in licensing and royalties annually, and that amount has been growing at 20% a year. Home-grown technologies are a way to avoid such costs and compel foreigners to license Chinese technology. It also enables Chinese firms to improve the terms of their licensing arrangements with foreign companies.



One of the most pronounced changes in the nature of innovation is the dramatic internationalisation of R&D, says Sacha Wunsch-Vincent, an economist at WIPO. In 1990 less than a tenth of international patent applications had a foreign co-inventor; today a quarter do. However, Japan remains woefully insular: only 4% of Japanese applications include a foreign co-inventor (for American filings, the figure is nearly 40%).

Japan still has the largest number of patents in force, at 1.9m in 2008, compared with 14m for America and a mere 134,000 for China. However, the countries where the greatest number of foreign patents are legally based are Barbados, Luxembourg, Liechtenstein and Ireland, notes the OECD. These patents mostly belong to Western firms seeking to reduce the tax they pay on licensing revenue. It is one innovation that OECD governments would like to make obsolete.

Business

Airbus v Boeing

Plane poker Airbus plays the new-engine card Sep 30th 2010

THE big aircraft get the big headlines as both Airbus and Boeing grapple with costly delays to their giant widebody jets, the A380 and the 787 Dreamliner. But the real poker game involves the humbler single-aisle Boeing 737 and Airbus A320 jets. With 120-180 seats, these aeroplanes are the workhorses of the sky, accounting for about four out of every five jets that the two manufacturers sell. This week Airbus raised the stakes when its executives agreed on an A320 upgrade.

The official launch still awaits approval by the board of EADS, the parent company of Airbus. But John Leahy, the head of sales at Airbus, says he is looking forward to selling the A320 NEO (which stands for “new engine option”) from the middle of this month. Tom Enders, Airbus’s CEO, says that the last remaining niggle was whether the company could spare enough senior engineers for the project without hurting other new planes in the works.

Boeing is considering how it will respond. Both companies face the same set of problems. For two decades they have enjoyed a duopoly in this part of the market, roughly splitting sales between them. Both have an interest in prolonging the life of their mainstream aircraft to extract maximum profit from them. But airlines, faced with high fuel costs and tighter margins, want better fuel economy. Meanwhile, competitors such as Bombardier in Canada, Embraer in Brazil and Russian and Chinese manufacturers are coming up with aircraft that could fly away with some of the market for single-aisle planes.

Boeing and Airbus could stick with their existing products, steadily squeezing out improvements. Or they could do something more ambitious. Neither is in a rush to commit $10 billion or more to produce a completely new aircraft because both are financially strapped from the delays to their bigger planes. There is also a feeling that some of the newer technologies, such as making fuselages lighter by building them out of carbon-composites instead of aluminium, may not yet be cost-effective for smaller aircraft.

Which leaves engines as the best way to improve fuel economy. The Airbus A320 NEO will be a premium version offered with a choice of two engines boasting new technology. One is the geared turbofan (GTF), a new type of jet engine from Pratt & Whitney, part of America’s United Technologies group. This engine uses a gearbox to allow the fan at the front and the turbine at the back to run at different, but optimal speeds. This, it is claimed, results in fuel savings of up to a fifth. The other engine is the Leap X, from CFM International, a joint venture between America’s General Electric and France’s Safran. It uses composites to reduce the weight of the engine.

Despite demands from airlines for better fuel consumption, the market for the existing narrow-body jets is booming again as airline profits recover and fleets age. Boeing is considering raising the 737 production rate from 37 aircraft a month to 40. Airbus is doing the same. Like Airbus, Boeing has a big backlog of single-aisle orders. Mike Bair, in charge of developing Boeing’s 737 business, says a new aircraft ordered today might not be delivered until 2015.

Mr Bair is not bothered by Airbus’s move. He reckons Boeing has squeezed 8% better fuel consumption out of its 737s in the past decade and more will be possible. And contrary to some reports, he says the low-slung wings on the 737 do not prevent it being fitted with the larger GTF engines. All it requires are some minor changes to the front undercarriage. But he does not think



it is worthwhile to re-engine the aircraft because the savings would be tiny compared with the extra costs of having two different engines on a fleet of aircraft.

Boeing is still considering all its options on the 737—even making a new aircraft. It will decide by the end of the year. But, adds Mr Bair, the decision “could be to take no decision”. Airbus, with its new engines, has in effect pushed the possible launch of an all-new A320-type aircraft out beyond 2025, according to Mr Leahy. By playing its hand close Boeing just might launch an all-new plane five years or so before that. Then again, who is bluffing whom, in a game with billion-dollar stakes?

Business

Schumpeter

Money and power Beware the lure of the businessman-politician Sep 30th 2010

MEG WHITMAN is one of the few bosses who deserves most of the garlands laid at her feet. From the moment she saw the business plan for eBay she knew the online auctioneer could be big. Ms Whitman turned a start-up with 30 employees into a 15,000-person colossus. She also created a perfect platform for would-be entrepreneurs: eBay has probably given birth to more businesses than any organisation in American history.

Ms Whitman is now engaged in an even riskier venture—running for the governorship of California. Business has not only provided her with the wherewithal to take on her opponent, Jerry Brown, a professional politician who is the son of a professional politician: so far she has sunk $119m of her $1.3 billion fortune into the race. It also provides the rationale of her campaign. She says she wants to take a scythe to California’s business-hobbling regulations. She also promises that she will apply her successful business skills to running the state.

Ms Whitman is hardly alone in her dream. In California, Carly Fiorina, a former boss of Hewlett-Packard, is running for the Senate as a Republican. Dozens of other Republican candidates from Dino Rossi in Washington state to Carl Paladino in New York state are brandishing their business credentials. Mitt Romney, Ms Whitman’s mentor in both business and politics, is a leading Republican candidate for the presidency in 2012 (and perhaps the only man who stands between the Republicans and a Sarah Palin-induced meltdown).

This enthusiasm for drafting in businesspeople is not confined to the Republican Party. Barack Obama is likely to replace Larry Summers with a prominent boss as director of his National Economic Council. Nor is it peculiar to the United States. David Cameron, Britain’s prime minister, has asked Lord Browne, BP’s former boss, to inject a business ethos into the government machine, and Sir Philip Green, the owner of Topshop, to lead a review of government spending. The Indian government has asked Nandan Nilekani, one of the founders of Infosys, to help redesign the country’s ramshackle state apparatus.

What explains this enthusiasm for turning to businesspeople to solve political problems? You might have thought that people would have tired of it after George Bush’s two administrations or Silvio Berlusconi’s three. Mr Bush, a Harvard MBA, appointed four former chief executives to his first cabinet; Mr Berlusconi has done more than any man alive to blur the distinction between the



public and the private sector. You might also have thought the economic crisis had increased hostility to highly paid businesspeople. But in America attitudes to business have changed little since the crisis—49% think positively of big business and 95% of small business—while attitudes to government have continued to curdle: a Pew poll shows that the proportion of people who trust government has declined from 42% in 2000 to 22% today. The Republicans, like other right-leaning parties, calculate that they can gain advantage by arguing that government is smothering the rest of the economy under its ever-growing weight and that injecting a dose of business discipline will make things more efficient as well as cheaper. “Silicon Valley is 130 miles from Sacramento,” Ms Whitman likes to say, “but it might as well be a million miles away given how it operates.”

How likely are these bosses-turned-politicians to keep their promises? There are a few successes. Michael Bloomberg has been such a hit as mayor that normally irascible New Yorkers have elected him to a third term. Businesspeople do have more experience of squeezing efficiency gains from the internet than professional politicians and they have less of a vested interest in expanding the supply of government.

But there is little evidence to support the common belief that businesspeople possess management skills that can easily be imported into the public sector. On the contrary, government and business are built on very different principles. For all the fashionable talk about empowering employees, bosses are ultimately the masters of their own domains. There are no civil-service style regulations to protect employees from the wrath of an angry CEO: when he or she says jump, you jump. Company bosses can usually escape from the pressure of public opinion and the glare of publicity that defines political life. Even those who are drafted into politics rather than forced to stand for election, find they are in a far more confusing world than the one they are familiar with.

The politics of disastrous management

A striking number of businesspeople prove to be failures as politicians. Paul O’Neill was one of Alcoa’s most successful bosses. But, as Mr Bush’s first treasury secretary, he was rapidly reduced to a laughing-stock. Ross Perot turned Electronic Data Systems into a giant. But his two runs for the presidency left most Americans with the impression that his tray table is not in the fully upright and locked position. Donald Rumsfeld was a successful boss of two big companies. But his name is synonymous with one of the worst-managed wars in American history.

Bringing businesspeople into politics can also produce corruption and cronyism. Russia’s oligarchs flit between government and business. Mr Berlusconi has built conflict of interest into the heart of Italian life. Dick Cheney, a former boss of Halliburton, an oil-and-gas company, made sure his secretive energy task-force relied heavily on his buddies from the energy industry.

This is not to imply that politicians are paragons of either virtue or competence. But the most important thing in politics is structure, not personnel. The best way to inject the virtues of business into public life is not to draft in a few ex-bosses—even outstanding ones like Ms Whitman—but to introduce as much choice and competition as possible into the public sector.

Economist.com/blogs/schumpeter

Business



Correction: Melbourne Business School Sep 30th 2010

MBA graduates from Melbourne Business School earn on average $76,000, not $72,000 as we suggested (”A pecking order for MBAs”, 18th September 2010). We apologise for the mistake, which arose from our misinterpretation of data submitted by the school. A corrected ranking can be found at whichmba.com

Business

Business in India

A bumpier but freer road Despite all the mess and chaos of India, the country’s business is booming. This will change the world Sep 30th 2010 | DELHI

AN INDIAN boss gestures from the lofty window of his steel-and-glass office. Ten years ago, says Pramod Bhasin, “you couldn’t even get a cup of coffee around here.” Now the area bristles with office blocks. Gurgaon, near Delhi, has swiftly become a global hub for outsourcing. Its recent rural past is not forgotten, however. Villagers still herd goats along its streets; pigs snuffle in the rubbish.

Mr Bhasin, who heads a firm called Genpact, speaks of outsourcing as a dentist might of flossing. Car firms should concentrate on making better cars, he says; most other tasks should be outsourced. Personnel departments, for example, need a few people to handle employees’ gripes face-to-face, but form-filling and data entry can be handled more efficiently by specialists. “I’ve got 10,000 people doing this,” he says. “They’re good at it.”

Genpact began as an internal unit of General Electric before being spun out, better to serve a wider set of customers, in 2005. It helps other organisations do dull things more quickly and cheaply. For example, by analysing the way American hospitals carried out mundane tasks, such as bed-changing and deciding where to put doctors’ offices, it was able to point out more efficient ways of using people and equipment. As a result, doctors perform 25% more operations each day. Demand is brisk: Mr Bhasin predicts that his sales could grow from $1.2 billion to $10 billion in the next ten years.

Such vast ambitions are no longer unusual in India. Firms now worth $5 billion expect soon to be worth $30 billion, observes Vijay Govindarajan, of the Tuck School of Business at Dartmouth College. The country is in a “global sweet spot”, says Nandan Nilekani, a former software mogul who heads a government project, launched on September 29th, to give every Indian an identity number.

India’s GDP is expected to grow by 8.5% this year, and could grow even faster. Chetan Ahya and Tanvee Gupta of Morgan Stanley, an investment bank, predict that India’s growth will start to outpace China’s within three to five years. China will rumble along at 8% rather than double digits; India will rack up successive years of 9-10%. For the next 20-25 years, India will grow faster than any other large country, they expect. Other

long-range forecasters paint a similar picture.

Several factors weigh in India’s favour. The first is demography. Indians are young (see chart 1). “An ageing world needs workers; a young country has workers,” says Mr Nilekani. Previous Asian booms have been powered by a surge in the working-age population. Now it is India’s turn. The proportion of Indians aged under 15 or over 64 has declined from 69% in 1995 to 56% this year, says the UN. India’s working-age population will increase by 136m by 2020; China’s will grow by a mere 23m, says Morgan Stanley (see chart 2).

To be sure, many Indians are poorly educated. There will certainly not be jobs in business-process outsourcing for all. India, unusually for Asia, has not yet made much of a fist of labour-intensive manufacturing for export. But its workforce will stay young and keep growing, and it includes millions of English-speakers.

India’s second advantage is that the economic reforms of the early 1990s have unleashed an explosion of pent-up commercial energy. Tariff ramparts have been torn down (see chart 3). The “licence raj”—a system under which it seemed that a businessman could not pick his teeth without a permit—has been swept aside. Private firms have been forced to compete with the world’s best. Many have discovered that they can. Exports have shot up.

Indian firms are increasingly global and sometimes world-class. Arcelor Mittal, based in Luxembourg, is the world’s largest steel firm. Tata Motors, best known for making cars that cost only $2,000, also owns Jaguar and Land Rover, two luxury brands. Bharti Airtel, a mobile-phone firm with 140m subscribers in India, is rapidly expanding into Africa, too.

China’s growth has been largely state-directed. India’s, by contrast, is driven by 45m entrepreneurs, says Amit Mitra, the secretary-general of the Federation of Indian Chambers of Commerce and Industry, a business lobby. He gushes about the energy of India’s vast informal sector, and its ability to solve problems. Mr Mitra recalls meeting the owner of an informal suit-cutting business who used, as a kind of collateral, the fact that his brother held a government job. The brother went to the same office every day. So the moneylender could always find him, and that made the suit-cutter creditworthy.

In Dharavi, a Mumbai slum with perhaps 1m inhabitants, many alleys are too narrow to turn a wheelbarrow around. Yet every other doorway seems to lead to a small business. Bhaskar Chaudhary’s tiny factory works day and night turning out back pockets, which are whisked to a bigger factory, sewn onto jeans and exported to the Gulf. Business is good. Four years ago Mr Chaudhary had only one (Chinese-made) embroidering machine. Now he has three. He is still only 21 years old.

Indian firms export a lot of services, but their primary focus is on the needs of domestic consumers. Indian shoppers demand goods that are cheap, rather than fancy. Indian “frugal innovators” oblige. Tata Chemicals makes a filter that requires no power and can give a family of five safe drinking water for a month for 30 rupees ($0.65). Researchers at the Indian Institute of Technology and the Indian Institute of Science produced a prototype for a $35 laptop in July. A

firm called Ayas Shilpa makes suspension bridges for a tenth of the price of conventional ones. In a country where countless villages are connected to the outside world only by perilous rope bridges across raging rivers, this is a colossal boon.

Indian firms are devising new business models as well as products. HCL Technologies, a software firm, helps clients improve their IT systems on the understanding that if they reap no benefits, they pay nothing. If they do gain, HCL takes a share. “It puts our skin in the game,” says Vineet Nayar, the firm’s chief executive.

India is the last frontier, says Moon B. Shin, the Korean boss of LG Electronics’ Indian subsidiary. By which he means: India has the largest number of people who have not yet bought many electronic goods. LG’s annual sales in India are about $3 billion. But what really excites Mr Shin is that they rose by 30% just in the first seven months of this year.

LG started manufacturing in India in the late 1990s. It is now the country’s most popular maker of all manner of gizmos. To succeed, it has kept its prices ultra-low and adapted its products to Indian tastes. Since many Indians are vegetarian, it offers a fridge with less freezer space and more drawers for vegetables. Since Indians like their televisions loud, LG affixes powerful speakers. The firm also sells voice-activated washing machines for middle-class families with illiterate maids. Its products are designed to cope with fluctuating power, and its packaging is extra-tough to cope with India’s terrible roads.

An elephant can stumble

If India keeps growing as fast as it is now, it will change the world. Optimists predict that it will be the next China, only friendlier and more democratic. Pessimists retort that such forecasts are over-spiced. They point out that India has a lot of catching up to do. China’s economy is four times bigger, so that even if India starts to grow faster, it will not overtake China for a long, long time. And they add that Indian businesses face several bottlenecks on the uneven road to growth.

The most obvious of these bottlenecks is lousy infrastructure. Indian roads are awful. Potholes gape; traffic lights don’t work. Rural roads are largely unpaved; in cities traffic often snarls to a halt. Cyrus Guzder, who runs a distribution business, complains that long-distance trucks average only about 20kph (12mph). Crossing the border between two Indian states can be more troublesome than crossing an international boundary. Between Kolkata and Mumbai (a distance of 2,000km), a truck must negotiate a couple of dozen checkpoints. Delays and shakedowns by grasping officials add 30% to the cost of road freight, estimates Mr Guzder.

“We have to have our own power backup, water-treatment plants and transport for employees,” grumbles Mr Nayar of HCL. As if on cue, the power goes off in his office. Big companies lay on fleets of cars and buses to ferry staff to work. Computer servers need costly extra layers of backup.

India’s economy will grow fivefold in the next 20 years, predicts McKinsey, a consultancy. The urban population will double from the 2001 census figure of 290m to perhaps 590m by 2030. McKinsey reckons that merely to keep pace, the country must spend $1.2 trillion on urban infrastructure, or at eight times today’s rate. Per person, China’s capital spending on cities is roughly seven times greater than India’s.

The other worrying bottleneck is a shortage of skills. The workforce may be young and growing, but 40% are illiterate and another 40% failed to complete school. The Boston Consulting Group sees a shortfall of 200,000 engineers, 400,000 other graduates and 150,000 vocationally trained workers in the coming years. Meanwhile, there are 62m surplus workers in agriculture, most of them barely skilled.

India’s best universities—the Indian Institutes of Technology—are world class, but there are only

16 of them. Many universities turn out graduates who are good at exams but unaccustomed to thinking about real-world problems. Employers train them for months, at great expense. Then they are ruthlessly poached by rivals.

Public schools are a mess. Supplies disappear. Teachers do not turn up, and even the worst are unsackable: as civil servants, their jobs are constitutionally protected. India’s adult literacy rate is only 66%; China’s is 93%. Nearly half of children under five are malnourished, which makes it hard for their brains to develop properly. A government scheme to deliver cheap grain to the poor is a national disgrace: two-thirds of the grain is stolen or adulterated.

The shortage of skills is wonderful for those who have them. Their wages are surging. The technologically minded young are getting cocky, their elders grumble. They expect stimulation as well as pay. “They are willing to walk away from a bad or boring job,” marvels Chaitanya Kalbag of Business Today, a magazine that recently published a cover story on “Brats at Work”.

The lack of skilled workers makes it harder to bring infrastructure up to the mark. Builders, electricians and plumbers are scarce. Cock-ups on building sites, such as lifts being installed upside down, are plentiful. The run-up to the Commonwealth games in Delhi, which begin on October 3rd, has been a reminder that India does some things very badly.

Instability is another huge worry. About 200 of India’s 588 districts are affected by a Maoist insurgency called the Naxalite movement. The rebels hide in India’s great forests, which are also where much of the country’s mineral wealth is buried. So mining and logging firms are seriously affected. Some of these also provoke violence, by evicting the poor to make way for their operations.

The home minister tried to assure investors in September that the insurgency would be quelled and that India was a safe place to park their money. He may be right about the second point: most businesses can avoid Naxalite-held areas. The biggest risk for banks in Mumbai and software firms in Bangalore is not that rebels will burst through their front doors but that a government sensitive to the anger of the poor will take populist steps to assuage it.

Populism is already a big problem. Some politicians woo voters by demonising business. Tata Motors dropped a plan for a factory in West Bengal after Mamata Banerjee, an opposition MP who is now the national railways minister, whipped up a campaign against the compulsory acquisition of land. The government often handles such transactions badly, so locals’ fears were not absurd. But the area missed out on much-needed jobs. Ms Banerjee is expected to lead her party to victory in the next state elections.

Rahul Gandhi, a possible future prime minister, plays populist chords when it suits him. Construction of a new road between Delhi and the Taj Mahal has been delayed because some of the farmers whose land is to be paved over demanded as much compensation per square metre as landowners in the pricey Delhi suburbs. After a mob of farmers killed and gouged out the eyes of a policeman, Mr Gandhi rushed to the area and expressed sympathy—for the farmers.

Corruption is another concern. India’s technocratic prime minister, Manmohan Singh, is widely admired, but some of his colleagues are crooks, thugs, rabble-rousers or all three. Corruption is debilitating. Many businesspeople think it is getting worse. In the old days ministers asked for bribes. Now they demand shares in firms to which they are about to award contracts, Indian bosses complain. Pratyush Sinha, who retired as head of India’s anti-corruption watchdog in September, reckons 30% of his compatriots are “utterly corrupt”.

That is uncharitable. Firms in sectors that do not depend on the government—software, cars, soap powder and so on—are mostly clean and professional, insists another senior official. The “messy stuff” mainly occurs in transactions that involve land, public contracts or natural resources. Yet the rot in these areas is so bad that it threatens to undermine the moral legitimacy of capitalism itself, frets this official.

India also faces challenges from abroad. Its success has inspired both a backlash and copycats. The governor of Ohio recently made headlines in India by banning state agencies from offshoring any of their work. Some American firms are shifting their call centres to the Philippines, where workers are as cheap as Indians but culturally closer to America.

The potholed road to prosperity

The Indian government will tackle the country’s infrastructure problems more slowly and ineptly than it should. But it will tackle them. It planned to spend $500 billion between 2007 and 2012. That pace will accelerate, not least because the state is getting better at inducing private investors to stump up some of the capital.

The skills shortage, too, is being addressed. Even illiterate parents now see the value of education. Rather than pulling their children out of school to work in the fields, they are increasingly urging them to study, in the hope of landing a job in a call centre. Where public schools are no good, cheap private ones have sprung up. Remarkably, in rural areas more than 20% of Indian students, most of them poor, attend private schools. The literacy rate is rising fast. Among 15-24-year-olds, it is over 80%, though girls do worse than boys.

Several reforms that will benefit business are inching towards enactment. A proposed national sales tax would replace the confusing patchwork of state and local levies. A proposed land law would simplify and speed up sales of land for infrastructure, factories and so forth. And maybe one day Wal-Mart will be allowed to open retail stores in India.

Some investors complain that India’s sprawling democracy is unpredictable. Understanding the relationship between the central government and the states is hard enough. Working out what fractious parties, pressure groups and powerbrokers are up to is virtually impossible.

Even when the government has made a decision, it is subject to challenge in court or by public opinion. Sometimes it is hard to tell who is in charge. “Don’t tell the Indians I said this, but I’m more comfortable in China than India,” says a prominent Western banker. “It’s much easier to deal with the well-understood ‘org chart’ of China Inc than the freewheeling chaos of India.”

Both China and India have taken off since their governments allowed people and companies more economic freedom. China went first, so it has a big head start. But as Morgan Stanley’s economists point out, India’s growth since the reforms of the early 1990s bears a striking resemblance to China’s since its grand opening in the late 1970s (see chart 4).

And India’s democracy may confer long-term benefits. It is not just that Indians can say what they please without having tanks rolled over them. It is also that India can change governments without a revolution. In the long run, that may offer a better guarantee of the stability that

Busy present, exciting future



businesses crave.

Briefings2

The euro zone's trouble spots

The bottomless bail-out Ireland counts the rising cost of rescuing its banks Sep 30th 2010

BILL HICKS, a chain-smoking comedian, loved to ridicule the “eternal-life fantasy” of the non-smokers in his audience. “Non-smokers die every day,” he jeered. “And you know what doctors say: ‘If only you smoked we’d have the technology to help you. It’s you people dying from nothing that are screwed.’”

This twisted logic seems now to apply to one of Europe’s most troubled economies. Ireland looks like an abstemious jogger that has suffered a heart attack. The yield on its ten-year government bonds neared 7% on September 29th, a record spread of 4.7 percentage points above those of Germany. Ireland has tried hard to fix its problems. Public-sector wages have been slashed and new taxes raised. The economy is already flexible. As its troubled banks eat up ever more cash, it now seems short of options to return it to health.

Contrast that with Greece’s flabby economy. It acted belatedly to address its troubles, and only then as a condition of a €110 billion ($145 billion) bail-out by the European Union and the IMF. But at least it can now tell a story of how the country’s ambitious reforms will bring it redemption. Greece is on target to cut its deficit to 8% of GDP this year. Spain too can point to a shrinking budget deficit and less stressed banks. Portugal, however, is slipping back: its budget deficit is likely to be bigger than last year, when it was 9.3% of GDP. The opposition is refusing to back the minority government’s 2011 budget (it wants spending cuts, not more taxes), making bond markets nervous.

For now, though, Ireland holds their attention, thanks to growing clarity about the scale of banks’ property-related losses and the amount of public money needed to rescue them. In March Ireland’s central bank said that the country’s three biggest banks must raise €28.4 billion of equity to meet a new requirement of 8% core Tier-1 capital by the end of the year. It said Anglo Irish Bank, a hugely reckless property lender that had been nationalised in January 2009, would alone need €18.3 billion. The reckoning took account of the likely losses from transferring the banks’ worst loans at a discount to NAMA, Ireland’s “bad bank”.

The Irish government injected €8.3 billion of capital into Anglo in the form of a “promissory note”, essentially an IOU. In August the value of the promissory note was bumped up to €18.9 billion, only a bit more than had been indicated in March but enough to



make markets fret that bank-rescue costs were still rising (see chart).

On September 30th the bill did indeed increase. The central bank determined that Anglo needed another €6.4 billion in capital, to take account of bigger losses on NAMA assets. It doubled the cost of recapitalising Irish Nationwide Building Society (INBS), a small but troubled state-owned lender, to €5.4 billion. Ireland’s finance ministry said Allied Irish Banks might find only half of the €10.4 billion extra capital it needs by selling assets abroad. The rest will be raised by a rights issue, underwritten by the National Pension Reserve Fund (NPRF), a pot of money set aside to fund future welfare costs. At least Bank of Ireland, the country’s biggest lender, has enough capital to meet its new requirement.

Ireland’s government had hoped to keep this year’s budget deficit to around 12% of GDP. But the extra cost of fresh capital for Anglo and INBS will raise that to 32% of GDP, increasing public debt to 98.6% of GDP. On plausible assumptions Ireland’s gross debt may exceed 115% of GDP before it stabilises. Even that relies on a sustained economic recovery which is far from assured. Figures published on September 23rd showed that Ireland’s GDP fell by 1.2% in the second quarter. Recent data are more encouraging, says Gillian Edgeworth at UniCredit. But there is no sign yet of a convincing pickup in tax revenues.

The government plans a further €3 billion of measures to cut the deficit when it announces its 2011 budget later this year. Some are calling for more drastic action, though that would stiffen the headwinds blowing against a fragile economy. An alternative would be to force some bank losses onto creditors. The blanket guarantee on all bank debt and deposits made by the Irish government in September 2008 has now expired (though a separate scheme for new debt issues is being extended until the end of the year). That creates some limited scope to share the banks’ losses. Ireland’s finance minister, Brian Lenihan, ruled out imposing losses on senior creditors, but said he expected subordinated debtholders to take a hit. One option would be to buy back Anglo’s €2.4 billion of such debt at a heavy discount to its face value. Such a trick has been used to boost Anglo’s capital before.

Ireland hopes that ending the uncertainty about the cost of bank rescues will drive a wedge between itself and the euro zone’s other troubled countries. Being bracketed together does not just scare away risk-averse lenders. Investors seduced by Greece’s 11% yields may wish to hedge their bets by selling the bonds of other euro-zone countries with weak public finances and poor growth prospects.

There is speculation that, if bond yields rise further, Ireland and Portugal might soon be forced to borrow from the European Financial Stability Facility (EFSF), the €440 billion fund established in June for struggling euro-zone countries. That is unlikely. Ireland has already raised enough money to finance this year’s borrowing requirement (it will spread the cost of bank bail-outs over several years) and has a big cash buffer besides. Portugal, too, is not anything like as desperate for cash as Greece was in the spring. But if Ireland were eventually forced to borrow from the EFSF, the fund might find it hard to impose conditions harsher than the ones it has volunteered for already. You cannot ask a non-smoker to give up cigarettes.




Spain's banks

Two cheers, three tiers Funding conditions have improved but are far from normal Sep 30th 2010 | MADRID

IS IT safe to be a Spanish bank again? Things are certainly looking up compared with the crisis in the summer. Funding markets have edged open following the stress tests in July. There are fewer jitters over the state of Spain’s public finances. But normal it ain’t.

The biggest improvement has been the end of a liquidity freeze, especially in short-term repurchase (“repo”) markets. Spanish banks lend more than they gather in deposits, creating a funding gap that must be filled by wholesale markets (see chart). For a few weeks in the summer foreign lenders did not want to lend to them, even using Spanish government bonds as collateral. Banks’ reliance on the European Central Bank hit a record in July, but has since fallen back. It helped greatly that Spain’s biggest banks joined international repo-clearing services. Rather than lending directly to borrowers, all the trades are cleared through a central platform, which reduces counterparty risk. The larger banks can also act as intermediaries for smaller peers.

Access to longer-term funding has improved, too. Spanish lenders have raised some €22 billion ($28 billion) in covered bonds and senior debt since the end of July, according to Analistas Financieros Internacionales (AFI), a consultancy. But look closely at the list of issuers and the market divides into three tiers. At the top are the likes of Santander, BBVA and La Caixa, a savings bank, which have raised money easily, albeit expensively. Next comes a collection of large savings banks, or cajas, and medium-sized banks paying even higher spreads. The bottom layer is mostly made up of savings banks that are either too small or too weak to tap longer-term funds. That may not matter much this year but Spanish banks face significant refinancing needs in 2011 and 2012.

The ongoing deposit war is another point of stress. Overall deposit growth is flat, so banks are trying to claw share from the beleaguered cajas by offering rates as high as 4%. “Banks realised they have become too dependent on wholesale funding,” says Iñigo Vega at Iberian Equities. Higher funding costs are squeezing net interest margins, which fell by 6.4% in the first half of the year for the banks and by nearly a quarter for cajas.

Credit is contracting. Savings banks receiving state funds are closing 10-30% of their branches, which will cost money in the short run. Unemployment is at 20%, and bad-loan charges are rising. Analysts reckon that banks still have €323 billion of exposure to property developers, which for some is close to four times their core capital. Moody’s, a ratings agency, cut Spain’s credit rating on September 30th. A sticky summer will be followed by a long winter.


AIA lists again

Déjà blue AIG starts yet another attempt to sell its Asian life-insurance operations Sep 30th 2010 | KUALA LUMPUR

THE old saying that life insurance is sold, not bought, has never been truer than for AIA, AIG’s Asian life-insurance operations, which is embarking on its third attempt to sell itself this year. A listing in Hong Kong was approved on September 21st, meetings with big institutional investors began on the 27th and the public offering is expected to occur on October 29th.

Getting the deal done will be something of an achievement given how inept the American insurer and its government handlers have been so far in dealing with the dispersal of its Asian operations. A first attempt to list AIA was pulled in March in favour of an outright sale to Prudential, a British insurer. That deal collapsed in June because Prudential had trouble raising the money to pay.

A similar path has been followed for the sale of AIG’s Taiwanese life-insurance operations. A deal that was announced last October was finally abandoned last month when the buyer’s murky financing and potential ties to the Chinese mainland fell foul of Taiwan’s regulators. The botched deals have created uncertainty among employees and potential customers, a particularly toxic condition given that stability and confidence are two must-haves for insurance companies.

To ensure the AIA listing does go through this time, extraordinary steps have been taken. AIG has hired 11 investment banks as “bookrunners” and four others as “global co-ordinators” to head the sale. Putting all the big investment banks on the payroll reduces the likelihood that any facet of the deal will be criticised by analysts. But the banks’ overlapping client coverage means that this will do little to increase demand for the shares. Worse still, to generate the amount of commissions needed to satisfy such a large pool of banks, the offering size may be stretched and the price diminished.

Such convoluted steps belie the underlying strength of what is being sold. As aig tries to recoup money for the taxpayer—a road map to private ownership was being finalised this week—it can call on a remarkable collection of assets in Asia. Two of its Japanese life-insurance units are reportedly about to be sold to Prudential Financial, an American firm. But AIA is the crown jewel. It is the leading life insurer in Hong Kong, Singapore, Thailand, the Philippines, Macau and Brunei; the largest foreign-owned life insurer in China; and among the top three life insurers in Indonesia. In Malaysia it is said that when a baby arrives so does an AIA agent to sell products tied to financing education.

All of these operations are wholly owned, a position that under current regulations would be difficult if not impossible to replicate in Malaysia, Thailand, Indonesia and China. No other insurer has a similar scope. Asia’s rising prosperity creates a remarkable opportunity for companies that sell investments through a sales force.

The scale of that opportunity goes a long way to explaining why even during a period of uncertain ownership and churning management, AIA continues to grow. The prospectus is expected to predict that operating profits will exceed $2 billion this fiscal year, a record. Revenues are thought to be up by 14%, a powerful performance even if some rivals, notably the Chinese life insurers, are growing twice as fast. Prudential, through its own substantial Asian operations, was aware enough of AIA’s potential to launch its unaffordable bid. A proprietary position in a high-growth market should not be this hard a sell.




Buttonwood

The last great hope Emerging markets may be the next bubble Sep 30th 2010

THE internet allowed people to pay lower prices for books but also encouraged them to pay stratospheric prices for shares in lossmaking dotcom companies. During the subprime boom Americans believed the illusion that they could get rich by buying each other’s houses.

Those dreams may have been shattered. But hope springs eternal. There is still one great hope left for investors: emerging markets. Fund managers have been making the case for emerging markets on a regular basis over the past 20 years. Developing countries offer higher economic-growth rates, have younger, more dynamic populations and are under-represented in the global stockmarket. Buying a stake in emerging markets is like buying a stake in the future.

Goldman Sachs, for example, reckons that the total capitalisation of emerging markets will rise from $14 trillion today to $80 trillion by 2030, increasing from 31% of the global total to 55% in the process. Even allowing for new equity issuance, that will still translate into an annualised return of 9.3%, Goldman estimates, compared with just 4% for developed markets. It seems like a no-brainer.

But experience should teach investors to be suspicious of no-brainer decisions. The same arguments were advanced in the early 1990s, after all. But between 1991 and 2000 emerging markets delivered a total return of just 38% and developed markets returned 171%. Outperformance came only in the decade just gone, with emerging markets almost quadrupling investors’ capital since the end of 2000.

A caveat also needs to be applied to the growth case. Elroy Dimson, Paul Marsh and Mike Staunton of the London Business School examined their database of 17 national stockmarkets since 1900. Using a variety of tests, they found virtually no correlation between an individual country’s GDP growth rate per head and the returns to investors.

What is the explanation for this rather counter-intuitive result? One answer is that a stockmarket is not a perfect facsimile of an economy. Many companies are unquoted. Those businesses that have floated on the market may be mature, or slower-growing, or simply overweight in one sector. In 1900 Wall Street was dominated by railroad stocks, for example.

A second answer is that growth countries may behave like growth stocks. A period of strong



performance leads to overvaluation, from which subsequent returns are inevitably disappointing.

Has that stage arrived? The old rule of thumb was that emerging markets were pricey when they traded at a higher multiple of profits than their developed counterparts, as they did in 1999 and 2007 just before sharp falls in prices. At the moment they trade at a modest discount.

But emerging markets are prone to boom-and-bust cycles. They have suffered three 25%-plus losses in the past 20 calendar years, and five years in which annual returns have exceeded 50%. International investors have probably been behind much of the volatility, pushing the markets this way and that as they switch between enthusiasm and risk aversion.

It is quite possible that another boom is on its way. Bubbles, as described by Charles Kindleberger, a financial historian, usually involve an initial displacement, followed by rapid credit creation and then a phase of euphoria.

The displacement may have been the financial crisis of 2007-08 which undermined the solvency of the developed world. As governments propped up their banks, their debts soared. On average emerging-market governments now have much lower debt-to-GDP ratios than their developed peers. Economic power seems to have made a decisive shift.

The crisis was followed by the slashing of interest rates in the developed world. These have had a limited effect in reviving lending in Western economies. But they have encouraged Western investors to buy higher-yielding assets, like emerging-market equities. Emerging-market equity funds have already received inflows of $45 billion this year, according to EPFR Global, a research group. And low rates will also boost credit creation in those developing countries that import American monetary policy via managed exchange rates.

Euphoria will follow as cheap money drives up asset prices—this may have already happened in parts of the Asian property market. Investors probably have no option but to ride the wave, if only because the outlook for developed markets looks so flat. There is, at least, more solidity to emerging markets than there was to dotcom stocks.

Economist.com/blogs/buttonwood



The battle for Stuyvesant Town

The housing rubble Hedge funds are losing their fight for New York’s largest apartment complex Sep 30th 2010 | NEW YORK

IT IS an iconic property. It is an iconic disaster. Stuyvesant Town-Peter Cooper Village is a sprawling series of brick apartment buildings with 11,000 rental units that line New York’s East River. Residents of “Stuy Town”, as it is called, number around 25,000. Most are middle-class. The property, which opened in 1947 as a place to house veterans and their families, has seen people fight several wars to control it.

In 2006 investors competed to buy Stuy Town as aggressively as New Yorkers cheer for the Yankees. Tishman Speyer, a property firm, and BlackRock, a fund manager, were the victors. They paid $5.4 billion for Stuy Town, the highest price ever for a single property. But soon afterwards the commercial- and residential-property markets faltered. The new owners’ plan to boost cashflow by hiking rents ran aground after a court ruled that they weren’t allowed to. Rents on the majority of apartments are controlled; politicians flocked to defend the occupants. Tishman and BlackRock defaulted on their debt payments in January, relinquishing the once-prized property to creditors.

That set off another battle. Winthrop Realty, a real-estate investment trust, and Pershing Square Capital Management, a hedge fund led by William Ackman, jumped in to try to wrestle control of the property. They bought $300m of mezzanine-level debt on the complex for around $45m. Their plan was to force the property into a bankruptcy that would leave them controlling the equity. Once in charge, they would convert Stuy Town into a collection of affordable co-ops.

Senior bondholders, who are owed around $3 billion, objected: they wanted to foreclose on the property and sell it off in order to recoup their money. Legal arguments focused on an unwieldy inter-creditor agreement, which Mr Ackman’s group optimistically claimed gave him the right to oppose foreclosure. On September 29th an appeals-court judge sided with the senior creditors, paving the way for a foreclosure sale on October 4th. Mr Ackman, not one to go quietly, has promised to appeal and, if he wins, seek damages. But victory for Mr Ackman is “beyond a long shot”, says Mark Edelstein of Morrison & Foerster, a law firm.

Will other owners be luckier with Stuy Town? That will partly depend on the price they pay for it. The property is worth around $1.8 billion now, according to Fitch, a ratings agency. But people will be willing to pay more, given the property’s unique location and size, says Malay Bansal of NewOak Capital, an asset-management firm. Much will depend on how confident any bidder feels about being able to navigate a strong tenants’ association and New York City government officials, who have been watching the proceedings closely. Both groups want to see Stuy Town remain affordable for middle-class families, which will limit the profits any buyer can expect from the property in the near term. The new owner must also plan to pay back around $200m to tenants, after a court found that Tishman and BlackRock raised rents on occupants illegally.

That makes it extremely unlikely that an auction will realise enough to pay off the senior creditors and leave some over for Mr Ackman and his fellow investors. Still, Stuy Town is not the only opportunity out there. At the end of August there was more than $190 billion-worth of distressed property in America, according to Real Capital Analytics, a research firm.





Venture capital

Angels or demons? Allegations of collusion roil the start-up business Sep 30th 2010 | SAN FRANCISCO

“I WAS at Bin 38 and all I got was this lousy valuation”, read the message on Dave McClure’s T-shirt at a conference in San Francisco this week. The boss of 500 Start-ups, a fund that provides seed capital to entrepreneurs, Mr McClure had the shirt designed to ridicule an accusation that he and several other financiers have been colluding.

The charge was made by Michael Arrington, the founder of a blog called TechCrunch (which was sold to AOL this week). His claim has turned a spotlight onto “super angels”, who run funds that invest in deals considered too small to be of interest to traditional venture-capital firms. In a blog post Mr Arrington said he recently gatecrashed a meeting at Bin 38, a San Francisco wine bar, at which he claimed a bunch of super angels were gathered “Godfather-style” to discuss things like how to counteract rising valuations of young firms and how to keep big venture funds out of deals.

“Angelgate”, as it has been dubbed, sparked a furore in the start-up world. In an expletive-laden response on his own blog, Mr McClure called Mr Arrington’s claim of conspiracy “bullshit” and said the angels’ meeting focused on issues like how to boost access to start-up capital and how to get non-tech firms more interested in buying tech businesses.

It is hardly unusual for investors in Silicon Valley to compare notes. And Mr Arrington has yet to provide hard evidence of collusive behaviour. But the episode has exposed divisions in angels’ ranks. Ron Conway, a well-known investor in tiny firms, has privately castigated some of his fellow super angels for having overinflated egos and for appearing too keen to make a fast buck.

All this matters because their clout has been growing. “Angelgate is a bit of a validation of super angels’ influence,” says David Hsu of the Wharton School. And competition is certainly getting stiffer. Established firms have rediscovered their appetite for seed funding: Greylock Partners, a well-known venture firm, this week said it had launched a $20m seed fund. That will make heavenly returns even harder to come by.



Precious metals

Silver lining Gold's poor relation is on a winning streak Sep 30th 2010

AT THE first Olympic games of the modern era in 1896, winners were awarded silver medals. Since then the metal has had to get used to second-class status. But for some time now silver prices have been outpacing those of gold (see chart), its flashier neighbour on the periodic table. On September 29th silver exceeded $22 an ounce, a price not seen since 1980 when the Hunt brothers, a pair of Texan oil barons, unwisely attempted to corner the market. Then silver spiked as high as $50 an ounce before the strategy unravelled, sending the price crashing and the Hunts back to the oil business.

The explanation for the steady rise of silver this time round is less dramatic. But high prices have a better chance of enduring. For investors, silver and gold have much of the same allure. The combination of a weak dollar, low interest rates and economic uncertainty that has convinced some to buy gold and pushed its price up to around $1,300 an ounce has also encouraged them to put their money into other likely-looking stores of value. Silver not only offers investors diversity but it is also supported by real industrial demand.

Whereas around 25-30% of gold is bought by investors, only about a tenth of global silver production goes the same way. Roughly half the world’s silver goes to industrial users (the balance is accounted for by jewellery and other silverware), although their identity has undergone a huge shift over the past decade.

Old-fashioned film for cameras required mountains of silver. According to Merrill Lynch, an investment bank, photographic demand for silver has fallen by more than 60% in the past decade. Even in 2004, when the popularity of digital cameras was already well established, the photographic industry consumed 5,600 tonnes of silver, a fifth of total production. That compares with just 9% in 2009.

New uses for the metal plugged the gap left by film. Silver is widely used in electronics, whether in buttons for TVs, in membrane switches in computer keyboards or as a coating for CDs and DVDs. But the great hope for silver is the solar-power industry. Photovoltaic cells, the technology used in 70% of solar panels, contain silver. Although other technologies that do not use silver are on the rise, heavy government subsidies are forecast to help keep the solar industry growing.

Demand for silver is likely to keep rising in developing countries in particular: China, which used to export the metal, now imports it. The same cannot be said for supply. As Michael Lewis of Deutsche Bank points out, three-quarters of the world’s supply comes as a by-product from copper, lead and zinc mines. So ramping up production is difficult. Total supplies of the metal in 2009, at 27,650 tonnes, were barely higher than in 2004. Athletes of the future may not feel quite so bad about taking home a silver medal.



Accounting's new era

Beancounter there, done that The world’s two big accounting bodies search for new leaders Sep 30th 2010 | NEW YORK

ROBERT HERZ (pictured left) has had a more interesting career than any accountant deserves. He began his tenure as chairman of America’s Financial Accounting Standards Board (FASB) in 2002, dealing almost immediately with the fallout from the Enron and WorldCom scandals, which had been abetted by accountants. He was due to end it on October 1st, a sudden departure for undefined personal reasons, after a crisis also partly pinned on the profession.

Mr Herz leaves behind a project of convergence with the international standards used by most countries outside America and set down by the International Accounting Standards Board (IASB). That body’s head, Sir David Tweedie (pictured right), is also set to leave office, in June 2011. Despite the departures of Sir David and Mr Herz, big accounting firms and their clients still expect convergence of standards to top the agenda of their successors (a mid-2011 deadline will slip).

The most controversial issue in that process is how to report financial assets: whether at fair-market value or amortised cost. Mr Herz firmly backed fair value, arguing that doing otherwise made financial trickery easier. Opponents think that revaluing seldom-traded assets during market meltdowns makes banking crises more likely and more severe. Some of those opponents were members of Congress who hauled Mr Herz in to testify last year, leading to a partial climbdown on fair value. But in its most recent proposals fasb dug in its heels, calling for most of them to be given at fair value. IASB has taken a two-category approach, saying that loans and loan-like equivalents held to maturity may be marked at amortised cost, whereas frequently traded instruments should be marked to market.

Mr Herz’s empty seat at FASB will be filled by an insider, FASB’s technical director. His replacement as acting chair, Leslie Seidman, is already a board member. That hints at continuity. But an expansion of the board from five members to seven in 2011 could be significant. Mr Herz broke a 2-2 tie to vote for the reporting-standards proposal that leant heavily towards fair value. That proposal is now subject to public consultation, and the comments coming in are skewed towards IASB’s approach, not FASB’s. The “big four” accounting firms (PricewaterhouseCoopers, Ernst & Young, KPMG and Deloitte), not to mention companies of all types with international reach, are on IASB’s side. Many think, therefore, that Mr Herz’s departure may allow for a consensus-seeker to emerge as his replacement.

Sun sets on standard-setters



At IASB, meanwhile, Ian Mackintosh is whispered to have the inside track to replace Sir David. Although he heads Britain’s Accounting Standards Board, he is a New Zealander (continental Europeans do not want another Brit like Sir David). An announcement is expected this year. Diplomatic skills will be at a premium in both positions. The new IASB chair will have many countries to please. The new head of FASB may have to oversee a delicate climbdown from full fair value. Tougher still, America’s new chief standards-setter must continue to nudge the world’s biggest financial market away from home-grown standards towards worldwide ones.


Economics focus

Cutting edge Does fiscal austerity boost short-term growth? A new IMF paper thinks not Sep 30th 2010

MOST people, among them the tens of thousands of workers who rallied in Brussels on September 29th, believe that fiscal austerity leads to a shrinking economy, at least in the short run. Jean-Claude Trichet, president of the European Central Bank, disagrees. In June he said that “the idea that austerity measures could trigger stagnation is incorrect.” Arguing that a credible fiscal-consolidation plan would restore confidence, he said: “I firmly believe that in the current circumstances, confidence-inspiring policies will foster and not hamper economic recovery.”

With rich-world budget deficits averaging about 9% of GDP in 2009—up from only 1% in 2007—and their average public-debt-to-GDP ratio expected to hit 100% by the end of this year, austerity is a bullet that few rich countries will be able to dodge. But is it right to claim, as Mr Trichet and other devotees of “expansionary fiscal consolidations” do, that belt-tightening can actually aid growth in the short term? The intellectual backing for these claims comes from a study by two Harvard economists, Alberto Alesina and Silvia Ardagna, which studied past fiscal adjustments in rich countries*. They found that, more often than not, fiscal adjustments that relied on spending cuts boosted growth, even in the very short run. But a new study by economists at the IMF reckons that the Harvard study was seriously flawed**.

Austerity can have some short-term benefits. Imagine, for example, that consumer demand is depressed in part because people fear the prospect of a wrenching fiscal adjustment. Devising a credible austerity package could lead people to regard their economic future with less trepidation. This increased optimism may encourage people to spend more freely even in the short run. But are such benefits large enough to ensure that the net effect of fiscal consolidation is to boost growth? The IMF’s conclusion is that they are not.

In particular the fund criticises the way Mr Alesina and Ms Ardagna identified periods of deficit-cutting. The Harvard economists defined major fiscal adjustments as episodes during which the cyclically adjusted primary fiscal balance (CAPB) improved by at least 1.5% of GDP. The IMF argues that movements in the CAPB can give a misleading impression about changes in a country’s fiscal stance. For instance, Ireland implemented sharp spending cuts amounting to 4.5% of GDP in 2009. But a collapse in house prices meant that its primary deficit actually worsened. The method used in the Harvard study would not count this as a case of fiscal tightening. By the same token, in Japan in 1998 the government made a one-time capital transfer amounting to 4.8% of GDP to the railways, worsening its budget balance for that year alone. The CAPB improved sharply in 1999 without the government needing to implement any austerity measures, yet the Harvard study would count this as a fiscal adjustment. The fund argues that omitting cases like the Irish one (which was associated with a decline in growth) and mistakenly counting instances like Japan’s in 1999 (when growth did not decline) reduces the Harvard study’s ability to pick up the growth-retarding effects of actual fiscal contractions.

The fund espouses a different method of identifying cases of belt-tightening. It argues that any year when the government implemented deficit-reduction measures of a certain scale ought to count as a fiscal adjustment, even if other shocks may have meant that the eventual change in the deficit was not as large as intended. The fund’s economists return to its records of countries’ fiscal policies to identify years when the government raised taxes or cut spending in order to tame the deficit. In other words, it looks at intent and action rather than outcomes.



Austerity costed

Using this method, the IMF reckons that on average a rich country attempted a fiscal contraction of more than 1.5% of GDP about once a decade. (There were also many smaller consolidations; see left-hand chart.) It finds that the typical such episode is clearly contractionary: a fiscal consolidation equivalent to 1% of GDP leads on average to a 0.5% decline in GDP after two years, and to an increase of 0.3 percentage points in the unemployment rate. Spending cuts do less damage than tax rises. This is mainly because they seem to be associated with bigger declines in interest rates. The fund’s economists reckon that this may be because central banks view spending cuts as a stronger signal of a commitment to fiscal prudence and so are more willing to provide some monetary stimulus to soften the blow.

Indeed, declines in interest rates, which also weakened countries’ exchange rates, help explain why GDP did not decline even more sharply. The short-term policy interest rate fell by an average of about 20 basis points for a fiscal consolidation worth 1% of GDP. A rise in net exports due to a real depreciation also helped cushion the blow, although not enough to overcome falls in domestic consumption and investment (see right-hand chart).

At the moment, however, there is less scope for these mitigating factors. Interest rates in most rich countries cannot fall much further. And a country cutting its deficit now would not be doing so alone (which would reduce the impact on exports). Simulations carried out by the fund show that slashing spending in an environment where interest rates have no more room to fall doubles the contractionary effect of such cuts compared with a situation where the central bank still has scope to cut rates. In such a situation, GDP can be expected to decline by 1%, rather than the historic average of 0.5%. If, in addition, everyone else is cutting, the effect of a fiscal contraction is further magnified. Most people believe that fiscal consolidations are helpful in the long run. Expecting them to be painless looks like wishful thinking.

* “Large Changes in Fiscal Policy: Taxes Versus Spending”, by Alberto Alesina and Silvia Ardagna. NBER Working Paper No. 15438, revised January 2010

** “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation”. Chapter 3 of the IMF’s October 2010

“World Economic Outlook”


Mimicking black holes

Dr Hawking's bright idea A long-predicted phenomenon has turned up in an unexpected place Sep 30th 2010

IN 1974 Stephen Hawking, pictured, had a startling theoretical insight about black holes—those voracious eaters of matter and energy from whose gravitational clutches not even light can escape. He predicted that black holes should not actually be black. Instead, because of the quirks of quantum mechanics, they should glow ever so faintly, like smouldering embers in a dying fire. The implications were huge. By emitting this so-called Hawking radiation, a black hole would gradually lose energy and mass. If it failed to replenish itself it would eventually evaporate completely, like a puddle of water on a hot summer’s day.

Unfortunately for physicists, Dr Hawking also predicted that the typical temperature at which a black hole radiates should be about a billionth of that of the background radiation left over from the Big Bang itself. Proving his theory by observing actual Hawking radiation from a black hole in outer space has therefore remained a practical impossibility.

In a paper just accepted by Physical Review Letters, however, a team of researchers led by Daniele Faccio from the University of Insubria, in Italy, report that they have observed Hawking radiation in the laboratory. They managed this trick not by creating an Earth-gobbling black hole on a benchtop but by firing pulses of laser light into a block of glass. This created a region from which light could not escape (analogous to a black hole) and also its polar opposite, a region which light could not enter. When the team focused a sensitive camera on to the block, they saw the faint glow of Hawking radiation.

Black and light

If a dying star is massive enough, it can collapse to form a region of infinite density, called a singularity. The gravity of such an object is so strong that nothing, not even light itself, can break free if it strays too close. Once something has passed through the so-called event horizon that surrounds this region, it is doomed to a one-way trip.

Dr Hawking’s insight came from considering what happens in the empty space just outside the event horizon. According to quantum mechanics, empty space is anything but empty. Rather, it is a roiling, seething cauldron of evanescent particles. For brief periods of time, these particles pop into existence from pure nothingness, leaving behind holes in the nothingness—or antiparticles, as physicists label them. A short time later, particle and hole recombine, and the nothingness resumes.

If, however, the pair appears on the edge of an event horizon, either particle or hole may wander across the horizon, never to return. Deprived of its partner, the particle (or the hole) has no “choice” but to become real. These particles, the bulk of which are photons (the particles of light), make up Hawking radiation—and because photons and antiphotons are identical, the holes contribute equally. The energy that goes into these now-real photons has to come from somewhere; that somewhere is the black hole itself, which thus gradually shrinks. By linking the



disparate fields of gravitational science, quantum mechanics and thermodynamics, Hawking radiation has become a crucial concept in theoretical physics over the past quarter of a century.

In 1981, that concept was extended. William Unruh of the University of British Columbia pointed out that black holes are actually extreme examples of a broader class of physical systems that can form event horizons. Consider a river approaching a waterfall. As the water nears the edge, the current moves faster and faster. In theory, it can move so fast that ripples on the surface are no longer able to escape back upstream. In effect, an event horizon has formed in the river, preventing waves from making their way out. Since then, other researchers have come up with other quotidian examples of event horizons.

Dr Faccio and his team were able to create their version because, as the laser pulse moves through the glass block, it changes the glass’s refractive index (the speed at which light travels through a material). Light in the vicinity of the pulse is slowed more and more when the refractive index changes as the pulse passes by.

To see how the pulse can act like a black hole, imagine that it is sent chasing after a slower, weaker pulse. It will gradually catch up with this slow pulse, reducing the speed of light in the slow pulse’s vicinity. That will slow the slow pulse down still more until eventually it is slowed so much that it is stuck. Essentially, the leading edge of the chasing pulse sucks it in, acting like the event horizon of a black hole.

Now imagine that the chasing pulse is itself being chased, but again by a much weaker pulse. As this third pulse approaches the tail of the second one it will also slow down (because the speed of light in the glass it is passing through has been reduced by the second pulse’s passage). The closer it gets, the slower it travels, and it can never quite catch up. The trailing edge of the second pulse, therefore, also acts as an event horizon. This time, though, it stops things getting in rather than stopping them getting out. It resembles the opposite of a black hole—a white hole, if you like.

In the actual experiment, there were no leading and trailing pulses. Instead, their role was played by evanescent photons continually popping into existence around the strong pulse. As the pulse passed through the glass, its event horizons should have swept some of these photons up, producing Hawking radiation from the partners they left behind.

Sure enough, when Dr Faccio and his team focused a suitable camera on the block and fired 3,600 pulses from their laser, they recorded a faint glow at precisely the range of frequencies which the theory of Hawking radiation predicts. After carefully considering and rejecting other possible sources for this light, they conclude that they have indeed observed Hawking radiation for the first time.

Because of its tabletop nature, other groups will certainly attempt to replicate and extend Dr Faccio’s experiment. Although such studies cannot prove that real black holes radiate and evaporate, they lend strong support to the ideas that went into Dr Hawking’s line of reasoning. Unless a tiny black hole turns up in the collisions of a powerful particle accelerator, that may be the best physicists can hope for. It may even be enough to convince Sweden’s Royal Academy of Science to give Dr Hawking the Nobel prize that many think he deserves, but which a lack of experimental evidence has hitherto caused it to withhold.

Science and Technology

Extending lifespan

Thanks, Mum! An obscure group of animals may reveal the secret of elongating life Sep 30th 2010

THE one sure way to prolong an animal’s life is, paradoxically, to starve it. “Caloric restriction”, as it is known in the trade, works for everything from threadworms to mammals (people included, as far as can be ascertained without the luxury of controlled experiments). So it is no surprise that it also works for a group of small creatures known as rotifers. If that were the only result of Shugo Watabe’s experiments on the critters, at the University of Tokyo, it would scarcely be worth reporting. What makes this news is that the offspring of the rotifers in question also lived longer than normal. And that—the inheritance of an acquired characteristic—is quite startling.

Rotifers are unusual in that they often reproduce by parthenogenesis (some species, indeed, can reproduce only in this way). A parthenogenetic population is, by definition, all female and the result, give or take the odd mutation, is that a rotifer’s daughters are genetically identical to her. That makes rotifers convenient subjects for studies of the controversial idea that characteristics acquired during an individual’s life can be passed down the generations in ways that are independent of mutations in the DNA.

Dr Watabe and his colleagues first looked at whether caloric restriction does, indeed, work its magic on rotifers. It does. Without it, as they report in Functional Ecology, their animals lived for an average of 8.8 days. With it they lived for 13.5 days. The intriguing result came when they did the same thing with the rotifers’ offspring. The daughters of those rotifers which had been fed as much as they could eat lived for 9.5 days if treated likewise (not significantly different from their mothers) and 14.4 if put on short commons. Those born of calorie-restricted mothers lived for 12.7 and 16.8 days respectively. Something, then, is being passed on that is having an effect down the generations.

That something seems to be related to an enzyme called catalase. This enzyme degrades hydrogen peroxide, a highly reactive chemical that creates cellular damage of the sort associated with ageing. Dr Watabe found that the offspring of calorie-restricted mothers have more catalase than those of mothers who were fed without restriction.

The researchers also detected higher levels of the enzyme in the eggs of calorie-restricted mothers, so it could be that their offspring are simply endowed with the stuff. A more intriguing possibility, though, is that the relevant genes are affected by epigenesis, a process in which



chemicals attached to the DNA control its activity. Epigenetic modifications are often retained when cells divide, and can sometimes be passed on to offspring.

If inherited epigenetic changes were causing daughter rotifers to produce more catalase, it would raise the question of whether a similar thing happens in other species and, if so, whether it might be induced artificially, without all the tedious business of a lifetime’s starvation. That would certainly be worth looking at. The search for an elixir of life has taken people to some strange places. Few, though, are stranger than rotifers.


Personal urban transport

The bubble car is back Cheap, small and simple—an idea from the 1950s bubbles up again Sep 30th 2010

MANY car designers are convinced that a radical change in automobile technology is going to be needed for the crowded megacities of the future. By 2030 more than 60% of the world’s population is expected to be living in cities, up from 50% now, and more of them will be able to afford cars. The need to reduce emissions, an acute scarcity of land for roads and parking, and the prospect of laws restricting conventional cars all point to the idea that different and smaller types of vehicle will be in demand. With that in mind, some of those designers are coming up with things that look a lot like a vehicle that was familiar more than 50 years ago. Welcome to the return of the bubble car.

Bubble cars were built to provide cheap personal transport. Most were two-seaters with just three wheels. They became particularly popular when fuel prices shot up in 1956, during the Suez crisis. One of the first was the Italian-made Iso Isetta. Germany was a prolific builder, too. Messerschmitt and Heinkel, forbidden to ply their former trade of building military aircraft, turned to bubble cars as a peacetime alternative. BMW, meanwhile, re-engineered the Isetta to use an engine from one of its motorcycles.

Rising incomes, falling fuel prices and changing fashions did for the original bubble cars, but the idea seems ripe for revival and three new versions, known as EN-Vs (for Electric Networked-Vehicles), are enthralling the crowds at the Expo 2010 in Shanghai. They can be driven normally or operated autonomously, with their occupants doing other things while the cars automatically avoid bumping into one another. They can also be summoned from their parking places using a mobile phone. And instead of being powered by smoky little petrol engines, they are driven electrically. What is most intriguing, however, is that they balance on just two wheels.

The three EN-Vs, each with a different body shape, were built by a partnership between General Motors (GM), an American company, and Shanghai Automotive Industry Corporation, one of China’s biggest carmakers. The two-wheeled balancing system the cars use was developed by Segway, a firm which makes personal-transport devices used by policemen, postmen and people who need to scoot around large corporate campuses (and whose owner, Jimi Heselden, was killed on September 27th when he rode one of the firm’s devices over a cliff).

A balancing act

Riding a Segway personal transporter means gripping a set of handlebars while standing on a platform positioned between two wheels. The platform is kept in what Segway describes as a “dynamically stabilised” state. This is achieved by fitting each wheel with an electric motor that can rotate either clockwise or anticlockwise, as appropriate. A computer controls the resultant balancing act, using a series of motion sensors and gyroscopes. The upshot is that if the rider leans forward he travels forward, whereas if he leans backward the machine will stop and then go into reverse.

Down these mean streets

An EN-V is somewhat like a giant Segway, but without the handlebars. The platform, which contains the batteries and is mounted on a sliding mechanism, forms the chassis of the vehicle. It moves forwards when the vehicle is parked, so that it tips on to a pair of “landing wheels” at the front. That makes it easier to get in and out, for access is from the front via a large, transparent door—a traditional means of ingress for bubble cars. When the EN-V powers up, the platform shifts its centre of mass back to the centre of the vehicle. The drive wheels then rotate as necessary, to achieve both balance and propulsion.

The advantage of having only two wheels is that the car can be shrunk into a small package. At around 1.5 metres (59 inches) long by 1.4 metres wide, an EN-V is less than half the size of a MINI. Two wheels also allow greater manoeuvrability—an EN-V really can turn on a dime. With a top speed of 40kph (25mph) and a range of just 40km, its performance is limited. But average traffic speeds in many cities are already below 40kph and the EN-V’s range is well within the typical daily mileage of most urban drivers, says Chris Borroni-Bird, GM’s director of advanced vehicle concepts.

According to Dr Borroni-Bird, modern cars are over-engineered because they are designed for use between cities, not just within cities. In low-speed urban environments, he argues, lighter engineering can be used without compromising safety. In the case of the EN-Vs, that philosophy translates into bodies that are made from carbon-fibre composites and doors that are composed of polycarbonate plastics.

Automated driving, moreover, takes the EN-Vs to a new level of sophistication. The satellite-based global-positioning system provides each vehicle with its location on the Earth’s surface, to within a few centimetres. Other sensors establish its position on the road and in relation to the rest of the traffic. These sensors include infra-red detectors, which can recognise people and animals from their body heat (and which are already available in some cars); short-range ultrasonic scanners to detect nearby objects when parking; long-range radars to check the road farther ahead; and optical systems that are trained to recognise certain objects, such as cars, motorcycles, traffic signs and road markings.

Some of the tricks used by EN-Vs come from systems developed by researchers at Carnegie Mellon University, who used a modified GM Chevrolet Tahoe to win the 2007 Urban Challenge. This was an event staged by America’s Defence Advanced Research Projects Agency to find vehicles that could operate autonomously alongside other traffic in a city and perform complex manoeuvres while doing so.

The other thing that EN-Vs can do is talk to each other. So if, for instance, one EN-V detects another by radar, it can check what that other is intending to do and agree on how to pass it safely. Such communication also allows for “platooning”, with one or more EN-Vs tagging along automatically behind a leader. That is a way of providing extra seating for a family outing, say, or of carrying luggage that will not fit in the leading vehicle.

Day-to-day automated driving of this sort is, Dr Borroni-Bird admits, far into the future and may well require new infrastructure on the roads. But in the near term he believes it is possible to take steps towards it. The automated valet-parking feature on the EN-Vs could, for instance, be used off public roads at places like shopping centres. Drivers would pull up at a designated entrance, get out, and leave their vehicles to trundle off and park snugly by themselves in a high-capacity car park. A phone call at the end of a shopping expedition would summon the car back.

I’m forever blowing bubbles

Nor is the EN-V the only bubble car on the drawing board. Gordon Murray, who designed racing cars for McLaren, and also its 370kph road car, is developing two tiny four-wheel cars, one with a 660cc engine and the other with an electric motor whose batteries give it a range of about 160km. These cars can carry three people, with the driver sitting in the middle and passengers



behind. The single door hinges forwards and upwards, so such cars can be parked facing the pavement and close together—indeed, three of them can sit abreast in a standard parking place.

Mr Murray’s idea is not just to produce vehicles that have a low impact on the environment but also to use a green (and cheap) manufacturing system to build them. By doing away with big, heavy metal presses and assembling the vehicles from a simplified tubular chassis, he thinks the cost of production could be cut to about a fifth of that in a typical car factory. He is hoping to license both the design of the cars and their production process to other carmakers.

Renault, which is launching a range of electric cars, is also sticking to four wheels for its smallest design, the Twizy. This will be seen at the Paris Motor Show, which opens on October 2nd, and is due to go on sale in 2012. It will have a top speed of 75kph and a range, with a full battery, of just under 100km. Inside, the driver and a single passenger sit in tandem, as they would on a motorcycle. Outside, the body is made almost entirely of clear plastic—the ultimate bubble car, perhaps.


The Crimean war

A holy war of an unusual kind A war in which two Christian countries fighting a third claimed Islam as their ally Sep 30th 2010

Crimea: The Last Crusade. By Orlando Figes. Allen Lane; 575 pages; £30. To be published in America by Metropolitan in April as “The Crimean War: A History”; $35. Buy from Amazon.co.uk, Amazon.com

MODERN mechanised warfare, with soldiers and civilians alike struck down in huge numbers by industrial killing machines, is often said to have started in the fields of Flanders in 1914. But it can also be argued that it had its ghastly birth 60 years earlier, on the north coast of the Black Sea. For its protagonists—the leading European powers of the day—the Crimean war was certainly the most significant conflict of the second half of the 19th century. If deaths from disease are included, it cost at least 750,000 lives, two-thirds of them Russian, and it triggered big social and cultural changes in all the countries affected.

Its defining event, the year-long assault on the Russian fortress of Sebastopol (depicted above), was conducted with high-tech efficiency: the besiegers fired up to 75,000 artillery rounds a day in an early version of “shock and awe”. And the human consequences of war were relayed to the public at home with speed and unsparing honesty by journalists such as William Russell of the Times, who blazed a trail for generations of war reporters. When the Russians finally abandoned Sebastopol, they left about 3,000 wounded whose condition Russell described in horrific detail: injuries infested with maggots, broken limbs protruding through raw flesh.

Yet for all its modernity, the fighting was also a “holy war” for each belligerent power. Leaders used religious rhetoric and ordinary soldiers and sailors said their prayers as they tried to make sense of what they were doing. That, presumably, is the point Orlando Figes, a historian at Birkbeck College in London, is making with his British subtitle, “The Last Crusade”. His book reveals the strange mixture of meanings the war had for its combatants. He puts the conflict into its broader context: the determination of Britain (and with some reservations, France) to stem Russian expansion and to bolster Islam in its fight with eastern Christianity.

No, that last point is not a mistake. The great historical paradox of the Crimean war—and of the longer-term Russo-Turkish conflict of which it was one episode—is that Anglican England and Roman Catholic France were aligned with Islam’s sultan-caliph against the tsars who saw themselves as the world’s last truly Christian emperors. Above all, the western Christian powers



were determined to avoid any reversal of the Muslim conquest of Istanbul: “The Russians shall not have Constantinople” chorused an English music-hall song.

How did the various players in this strange religious game explain themselves to their own pious subjects? For the theocracies of Russia and Turkey, and their God-fearing soldiers, things were fairly straightforward: they were fighting, respectively, for Christianity and Islam.

It was harder, you might think, for the Church of England and the Catholic establishment in France to explain their support of the caliphate. In fact, they found it easy enough to construct the necessary arguments. First, British and French clerics demonised Russian Orthodoxy as a semi-pagan creed. Second, they maintained that in some peculiar way the Ottoman empire was more friendly to its Christian subjects than the tsar was. (The Ottomans tolerated Protestant missionaries, so long as the evangelisers limited their search for souls to Orthodox Christians.)

In the spring of 1854, as the Crimean fighting began in earnest, an Anglican cleric declared that Russian Orthodoxy was as “impure, demoralising, and intolerant as popery itself”. What could be more natural, then, than to team up with Islam and popery to cleanse that terrible impurity? A French newspaper, meanwhile, gave warning that the Russians represented a special menace to all Catholics because “they hope to convert us to their heresy”.

As Mr Figes recalls, the tactical friendship between Western Christians and Ottoman Muslims had its limits. To be sure, British envoys to the Holy Land probably found more in common with lordly Ottoman administrators than with the exuberant faith of Orthodox Christian peasant-pilgrims. But not all Muslim Turks were overjoyed at being embraced, and hailed as Christian-friendly, by Western powers. When in 1856 the sultan yielded to Western pressure and granted Christians some equality, there was a backlash from the Islamic establishment across the empire.

It is a complex tale, told vividly by Mr Figes. Perhaps it should serve as a healthy cold shower for any modern civilisational warrior who sets out to present the course of history as a simple tug-of-war between Christianity and Islam.

Books and Arts

Innovation and technology

Well, what a good idea! The wellsprings of innovation and the irresistible force of technology Sep 30th 2010

Where Good Ideas Come From: The Natural History of Innovation. By Steven Johnson. Riverhead; 326 pages; $26.95. Allen Lane; £20. Buy from Amazon.com, Amazon.co.uk

What Technology Wants. By Kevin Kelly. Viking; 416 pages; $27.95. Buy from Amazon.com

WHERE do good ideas come from? That is the question posed by Steven Johnson, a writer known for the agility with which he makes interdisciplinary analogies, in his latest book. His “natural history of innovation” provides a taxonomy of seven ways in which new ideas can sprout from old ones. But this is no management text: for each of his seven patterns of innovation, Mr Johnson provides wide-ranging examples from technology, the natural world and culture.

The first of the patterns is “the adjacent possible”: the innovations that build logically on previous breakthroughs. In technology, this results in the common phenomenon of several people inventing the same thing at the same time, because it seemed the obvious next step. Similarly, life itself emerged as a cascade of increasing complexity, and the forking paths of evolution allow one innovation to lead to another, such as the semi-lunate carpal bone that made velociraptors more dexterous predators, but subsequently led to the evolution of winged, flying birds. Cultural and social life is also an exploration of the adjacent possible, as one unexpected door opens and then leads to others.

In a similar vein Mr Johnson explores the “liquid networks” that foster innovation, whether online, in coffeehouses or in ecosystems, and the “slow hunch” whereby an idea develops slowly and often wrongly, before suddenly becoming the right answer to something. He also examines the benefits of serendipity and error, which can each lead to beneficial insights; the notion of “exaptation”, in which an innovation in one field unexpectedly upends another (Gutenberg’s press combined ink, paper, movable type and, crucially, the machinery of the wine-press); and “platforms”, from operating systems to coral reefs, which provide fertile environments for new developments.

Readers of Mr Johnson’s previous books will note the recurrence of several of his favourite themes, such as the similarity between the structure of a city and that of the brain. This book is in many ways a grand synthesis of his previous works. Patterns of innovation, Mr Johnson suggests, are fractal: “they reappear in recognisable form as you zoom in and out, from molecule to neuron to pixel to sidewalk.” Only in the final paragraph does he provide some suggestions about how to apply these ideas in one’s own life.

Kevin Kelly’s book is even more ambitious. It is a sweeping theory of technology that presents it not as a series of inventions by humans, but as a living force with its own needs and tendencies. It might sound facile to ask what technology “wants”, but Mr Kelly, who was founding editor of Wired magazine, makes a case for the desire of the “technium”, as he dubs the ecosystem of



technologies, to grow in complexity and colonise new areas, just like life itself. He argues that just as water “wants” to flow downhill and life tends to fill available ecological niches, technology similarly “wants” to expand and evolve. We have no choice but to embrace it, he says, because we are already symbiotic with it; technology underpins civilisation.

Mr Kelly is not alone in his belief that technology is an unstoppable force of nature. A similar position was taken by Ted Kaczynski, better known as the Unabomber. In a chapter entitled “The Unabomber Was Right” Mr Kelly looks in detail at Mr Kaczynski’s writings to explain how they start from very similar views about the nature of technology, but arrive at very different conclusions.

The Unabomber was a terrorist who targeted scientists in an effort to derail runaway technological development. Mr Kelly, by contrast, is optimistic that by understanding the nature of technology, mankind is in a better position to benefit from its development and to make sensible choices about which technologies to adopt. “By aligning ourselves with the imperative of the technium, we can be more prepared to steer it where we can and more aware of where we are going,” he writes. “By following what technology wants, we can be more ready to capture its full gifts.”

It is daring of Mr Kelly to invite such a direct comparison of his theories to the ramblings of a madman. Though some parts of his argument are more convincing than others, and he veers towards New Age-speak at times, his book is consistently provocative and intriguing: for instance, when he visits an Amish community to find out how their technology choices are made (they turn out to be surprising enthusiasts for genetically modified maize). And although he is an optimist, Mr Kelly has a clear-eyed view of the drawbacks of technology and the difficulty of striking the right balance, at both a personal and societal level, in its adoption.

Books and Arts


God, science and knowledge

Knowing it all A counterblast to Stephen Hawking Sep 30th 2010

The End of Discovery: Are We Approaching the Boundaries of the Knowable? By Russell Stannard. OUP; 228 pages; $24.95 and £14.99. Buy from Amazon.com, Amazon.co.uk

REPORTS of the death of science have been greatly exaggerated—at least, that has proved to be the case so far. A British physicist, Lord Kelvin, is supposed to have said in 1900, “there is nothing new to be discovered in physics now, all that remains is more and more precise measurement.” But then along came general relativity and quantum mechanics that proved him wrong. A bestselling book titled “The End of Science” by John Horgan, an American science journalist, was published in 1996, but there are no signs of the stuff abating. In “The End of Discovery”, Russell Stannard once again predicts its demise.

Mr Stannard bases his argument on three ideas. The first is that the human brain—which evolved to survive on the savannah rather than to grapple with the mysteries of string theory—may be inadequate for the task of progressing with science to the point where it explains everything. The second is that it may prove technically impossible to test all the ideas created by human minds. Finally, it may be that the end point so desired by scientists—the explanation of everything—does not actually exist.

Rehearsing the arguments, Mr Stannard examines the problem of consciousness, asks whether it makes sense to demand an explanation of what caused the Big Bang that created the universe, and questions the source of the laws of nature and the status of mathematics. He asks big questions. Why is the universe such that conscious life could evolve in it, and has it done so elsewhere? What is the nature of dark matter and dark energy? Does it make sense to talk about free will in a universe that appears deterministic? What is time?

Although he does not mention religion, Mr Stannard’s tome is carefully timed as a counterblast to the book by Stephen Hawking and Leonard Mlodinow that rejects the need for the existence of God. Mr Stannard—a retired professor of physics at the Open University, as well as the author of a series of children’s books on quantum theory—is a believer. His book is a call for scientists to exercise humility when faced with the awe of the mystery of existence.

Unfortunately the evidence he marshals is far from compelling. The lists of scientific mysteries stand as much as a testament to the discipline itself as to its inadequacy to deal with them: science has helped to elucidate where the difficulties lie and, so far, it has also been science that has addressed them. Mr Stannard argues that mankind is living at a special time when it can contemplate the failure of its most successful attempt yet to understand the universe, but this is as unsatisfactory as arguing there is something special about the universe that allows mankind to exist.

Moreover, Mr Stannard—an accomplished writer—has let his standards slip. The book is rushed and lumpy, reminiscent of lectures by a man who skims over the central thesis to concentrate on his pet interests. Attacking the hubris of the most vocal atheists is understandable. Sadly, Mr Stannard hasn’t made a good job of it.

Books and Arts


The life of Roald Dahl

Fantastic Mr Dahl As mutinous as his magical children's books Sep 30th 2010

Storyteller: The Authorized Biography of Roald Dahl. By

Full of quirks and secrets

Donald Sturrock. Simon & Schuster; 672 pages; $30. Harper; £25. Buy from Amazon.com, Amazon.co.uk

“ARE you Sarah with the big tits?” This secret code, used to identify caviar smugglers when he wanted the stuff cheap for his dinner, was typical Roald Dahl: silly and a bit vulgar, like his amazing children’s books. A new biography by Donald Sturrock paints a sympathetic picture of the author that is also attentive to his many flaws.

Dahl was a consummate storyteller. As Mr Sturrock explains, he had no compunctions about rewriting history and using “a liberal measure of embroidery”. “Shot Down Over Libya”, his first published work, an account of his plane crash in the second world war, would have been more accurately titled “Veered Off Course Over Desert Before Disastrous Emergency Landing”. But the former made a better story.

His witty and often macabre tales won him critical acclaim and he was a successful short-story writer. But it was later in his magical children’s books that his brilliance was most apparent, probably because the “grandiose, mercurial, capricious” man remained childlike in so many ways. He had a child’s lack of sentimentality and took a child’s delight in the foul and the scatological. His books espoused a “madcap violent morality” that children adored.

He had a naughty schoolboy’s gleeful disregard for rules. When an editor bossily instructed him, as he was writing “Charlie and the Chocolate Factory”, that ignoring the rules that govern the world of children’s books “does cause unnecessary difficulties”, Dahl continued happily to flout most of them. As he pointed out about another work, “The Witches”, it was “a book for children and I don’t give a bugger what grown-ups think about it”. His imagination fizzed away like a bottle of the Big Friendly Giant’s frobscottle, sending whizzpoppers of delight through his young readers.

But his insistent dismissal of what adults thought of his books also reflected the fact that he could be a cantankerous brute who over the years fell out with many of the people close to him. He could be a bully. He bullied his publishers and agents to squeeze more money out of them. He bullied his film-star wife, Patricia Neal, back to health after her stroke. Some of his crabby belligerence may have been prompted by the ill-health and awful accidents that dogged his wife and children.

Mr Sturrock has an eye for the sort of detail that Dahl would have enjoyed: the great aunts sitting drunk on the veranda, “methodically picking maggots out of raspberries with a pin” could squat happily alongside Aunts Sponge and Spiker in “James and the Giant Peach”. And Dahl would no doubt have been delighted that at the end of Mr Sturrock’s satisfying and sparky tale, the reader has an overwhelming desire to rush off and read the first of Dahl’s books he can lay his hands on.

Books and Arts



Practical architecture

Making life easier An exhibition in New York provides simple, stylish ideas for improved living Sep 30th 2010

IT ONCE was thought that social problems could be solved with smart urban design. The devastation of world wars and the rise of cities led to a demand for grand-scale visions. But history has not been kind to the Utopian schemes of Walter Gropius, Le Corbusier and other great architects. When it turned out that low-income families do not thrive in isolated towers of flats, architects stopped being viewed as the masterminds of a better future.

Yet architects can still have a powerful social impact, as is made plain by an inspiring show, “Small Scale, Big Change”, which opens at New York’s Museum of Modern Art on October 3rd (and runs until January 3rd). It is just that their solutions these days need to be practical and local, free of grand theories and manifestos.

The exhibition has 11 projects that have been built or are under construction in nine countries. They vary from a beautiful two-storey school in Rudrapur, Bangladesh, made from moulded earth, to a cable-car system in Caracas, Venezuela, that links people living in crowded barrios to the rest of the city. The projects are managed and financed in various ways, some with help from local governments, others from private donors or backed by an NGO.

What they share is not only a desire to help a badly served community but also a sense of where architecture fits in. Few of the architects have famous names. Their projects, demonstrated with models, pictures and films, are not glamorous, but they are thoughtfully designed, often in collaboration with local groups, and aesthetically stylish. Many are made with local materials and labour. One or two are especially arresting, such as the colourful concrete housing complex for fishermen in Tyre, Lebanon (shown above).

Andres Lepik, the exhibition’s curator, conceived the idea last year when the recession and housing crisis drove home the need for more socially engaged architecture. The demand for new precedent-setting ideas is great: unplanned cities are growing faster than planned ones and more than half the world’s population lives in an urban setting. But Mr Lepik says he was disappointed with the Venice Architecture Biennale in 2008 because it examined the problems facing contemporary architecture without proposing models or solutions. For his own show, his aim was



“to start with the solutions”.

The result is a rousing display of ingenuity. A new primary school in Burkina Faso was built from mud bricks made by newly trained villagers. An architectural school affiliated with a university in Alabama is tackling the problem of affordable housing by designing a house that can be built for $20,000. And three architects in Paris have researched an inexpensive way to improve and renovate existing modern housing developments while residents stay in their apartments. In each case, the architect’s approach is like that of a microlender: strategic, modest and mindful of the immeasurable dividends to come.

Books and Arts

The full Bronzino

Power and glory in paint Bronzino’s chilly sitters defrost a little when brought together in one show Sep 30th 2010 | FLORENCE

WHETHER provoked by his red hair or ruddy cheeks, the nickname Bronzino has stuck to Agnolo di Cosimo, an Italian Renaissance painter (1503-72). Though he started out as the son of a butcher, Bronzino became court artist to Cosimo de’ Medici, Duke of Florence. In addition he was an esteemed poet, with a sideline in witty, mischievous verse. Now the first ever large exhibition of his paintings has just opened in Florence, the city where he spent most of his life.

Although Bronzino painted many religious subjects and allegories, it was portraits that brought him acclaim. A glance at almost any one of them explains his popularity with the rich and powerful, actual or aspiring. The detailed attention to sumptuous clothing and jewels, the precious objects near to hand, the architecture that serves as background, even the dogs advertise the subject’s importance. Posture and facial expressions suggest that these people are beyond caring what anyone else thinks of them personally. What matters is status not character.

This message, and the technical precision with which it is conveyed, brought Bronzino fame in his lifetime. He made his subjects the icons they wished to be—a familiar enough process in today’s celebrity-mad world. This may be one of the reasons why, after centuries of neglect, Bronzino is now having a renaissance of his own. Earlier this year, the first big exhibition of his drawings was held at New York’s Metropolitan Museum of Art (its superb catalogue, which includes paintings, is well worth having). And now his paintings are on show at Florence’s Fondazione Palazzo Strozzi until January 23rd 2011.

The exhibition is broadly chronological. It starts with works by, or in collaboration with, Jacopo da Pontormo, to whom Bronzino was apprenticed in his early teens. It ends with paintings by Alessandro Allori, his own prized pupil. In between hang some 70 Bronzinos. Here chronology is soon replaced by such themes as his relations with the Medici and his engagement in other arts (manuscripts of his poetry are on show). All the works are handsomely displayed against deep blue walls. Explanatory labels take the form of open books. A child’s version of each features amusing rhymes and graphics referring to the painting. Sculptures and tapestries add to the overall feeling of splendour.

James Bradburne, the director-general of the Strozzi and the supervisor of its shows, has a gift for making the process of looking at art both enjoyable and educational. That is one reason why the Uffizzi decided to make an unprecedented loan of 27 of its Bronzinos. Another is that the two buildings are only minutes apart so the artwork suffered little transport trauma or environmental stress. The organisers usefully provide an attractive map of the nearby churches and chapels that have works by Bronzino (but visitors need not bother with the show’s rather feeble catalogue).

This is a show that could happen only in Florence, where Bronzino is being proudly proclaimed as one of the greatest Italian artists of the 16th century. That is quite an assertion since Titian, Tintoretto and Veronese were all then at work in Venice. But it is not necessary for Bronzino to

A small defrosted Medici



have been among the geniuses of his time to make this show worth visiting.

When viewed singly in art museums the chilly aloofness of a Bronzino portrait holds the viewer’s gaze, conveying power, ferocity, indifference and invulnerability. They are gripping paintings but not engaging ones. Looking at the 37 portraits brought together at the Strozzi, the individuality of the sitters begins to emerge.

Status remains a constant. But other qualities make themselves felt. The child in “Portrait of a Young Girl with a Book” is elaborately decked out but it is sorrow that makes her seem past caring what others think. A portrait of Cosimo I is shown together with various portraits of his children, including Bia, his illegitimate daughter who died when she was six, and 18-month-old Giovanni (smiling merrily on this page). In between, the walls are hung with tapestries woven to Bronzino’s designs. The mood created is luxurious and intimate. The Duke of Florence is still a fiercely ambitious ruler, but now he also appears an engaged, family man. Some artists are diminished by one-person shows; Bronzino has gained and so have we.

Books and Arts

William Coblentz William Coblentz, Californian power broker, died on September 13th, aged 88 Sep 30th 2010

SOME people believe that a lot of public business is done not in the bright light of the democratic arena but out of sight, perhaps even in dark recesses. Some people are right, as Bill Coblentz could have attested. For over 50 years he played a backroom part in the politics, business and cultural life of California, and often his influence extended well beyond the golden state.

Not that Mr Coblentz was at all sinister, or even secretive. He was an extrovert, unable to contain a good joke he had just heard and unwilling to treat bigwigs any less directly than anyone else. When Norton Simon, an industrialist and art collector, complained that another Californian tycoon, Ed Carter, was a sixth Jewish but would not admit it, Mr Coblentz replied, “Norton, you’re 100% and you won’t, so what are you complaining about?”

Mr Coblentz was primarily a land-use lawyer, whose firm was involved in many of San Francisco’s large civic projects, but his influence owed less to his legal abilities than to his skill at winning people’s confidence, his humour and his readiness to listen. These qualities helped him guide disputatious clients to the middle ground, even though, in politics at least, that was not his natural territory: he was a lifelong Democrat of the old school.

Since the law was never a passion, whereas convictions were rooted in his being, politics would seem to have been a natural career for him. He got an early taste of the international variety when, soon after the war, the CIA recruited him to help counter communism by promoting European unity. Working under General “Wild Bill” Donovan, who had run the CIA’s wartime predecessor, Mr Coblentz met such luminaries as Konrad Adenauer, Winston Churchill, Robert Schuman and Paul-Henri Spaak. By the early 1950s he was back home, working for California’s attorney-general, Pat Brown. In time, Brown became governor and Mr Coblentz became his special counsel, but he never ran for public office nor accepted offers to become a judge.

Principles on parade

He did, however, become a regent of the University of California, serving for 16 years, two as chairman. Here his principles came to the fore. His opposition to racial discrimination led him to seek the university’s disposal of its South African investments. It also contributed to his part in the regents’ decision to take a celebrated affirmative-action case to the Supreme Court. It involved Allan Bakke, who believed he had been refused admission to a University of California



medical school because he was white. Lower courts had ruled in his favour, and the Supreme Court eventually agreed that he should be given a place.

It was Mr Coblentz’s belief in almost unfettered free speech that led him to support the right of Eldridge Cleaver, “minister of information” in the revolutionary Black Panther Party, to teach at Berkeley, so long as he was not “preaching his gospel” in the classroom. The same applied to Angela Davis, a communist, and Herbert Marcuse, a hero of the “new left”, at San Diego. Ronald Reagan, by then the state governor, was horrified: “If Eldridge Cleaver is allowed to teach our children, they may come home one night and slit our throats.” Mr Coblentz was unmoved. “I don’t like you,” he told Cleaver, “but I’ll stand up for you.”

Not surprisingly, it was among Democrats that Mr Coblentz was most influential, advising national politicians like Al Gore, John Kerry and Barack Obama, as well as Californians like Dianne Feinstein and Barbara Boxer. They valued him for the soundness of his advice, no doubt, but also for his connections. Some of these came through his involvement in cultural and philanthropic ventures. Others arose from service on boards as diverse as those of Pacific Bell, California’s huge telephone company, the NAACP Legal Defence and Educational Fund and McClatchy, a Sacramento-based newspaper chain that now extends across America.

Mr Coblentz did not mix only with Democrats, though. He was a member of the Bohemian Club in San Francisco, whose annual encampment in a redwood grove upstate drew many of the country’s prominent Republicans, and cohorts of business grandees too. Among the 30-odd members of Mr Coblentz’s club-within-the-club were George Bush senior, Donald Rumsfeld and William Buckley, along with Tom Clausen and Walter Cronkite.

Another Republican, Catherine Hearst, sought Mr Coblentz’s help when her daughter Patty was arrested for bank robbery 18 months after being kidnapped by the Symbionese Liberation Army. And like the Hearsts, the Gettys also went to Mr Coblentz for help with errant children.

Sometimes the young came of their own accord. One such, Bill Graham, was a penniless rock-concert promoter whose San Francisco auditorium the locals wanted to close, saying it lowered the tone of the neighbourhood. Mr Coblentz had the building opposite watched, and was able to show it was a brothel frequented by policemen. Graham won his permit and, in lieu of payment, introduced Jefferson Airplane to Mr Coblentz. As a result, he came to act for the Airplane and also the Grateful Dead, It’s a Beautiful Day and Santana.

“Don’t do that,” he would say when the rockers smoked pot in his office. A behind-the-scenes man he may have been, but he hated smoke-filled rooms.

Obituary



Overview Sep 30th 2010

In America, house-price inflation as measured by the S&P/Case-Shiller indices slowed in July. The 20-city index rose by 3.2% in the year to that month, having increased by 4.2% in the year to June. The ten-city index also slowed, rising by 4.1% in the year to July after 5% in June. On a seasonally adjusted basis, the ten-city index was unchanged in July, while the broader index fell by 0.1%.

British GDP growth in the year to the second quarter was revised up by a tenth of a percentage point to 1.7%. The quarter-on-quarter growth rate of 1.2% in the three months to June, which was not revised, was the fastest in nine years.

In Germany, the Ifo index of business sentiment edged up to 106.8 in September from 106.7 a month earlier. Businesses reported greater satisfaction with current conditions but were less optimistic about the future than they had been in August.

Japanese industrial output grew by 15.4% in the year to August.

Industrial production in Chile rose by 6.9% in the 12 months to August.

Argentina’s imports surged by 63% in the year to August. Exports rose by 46% in the same period. August’s trade surplus was $1.05 billion, 3.6% lower than a year earlier.

Industrial growth in Singapore slowed to 8.1% in the year to August, from 9.9% in July. Inflation quickened to 3.3% in August from 3.1% a month earlier.




Output, prices and jobs Sep 30th 2010




The Economist commodity-price index Sep 30th 2010




HIV/AIDS Sep 30th 2010

The latest dispatch from the war on AIDS brings good news. At 5¼m, the number of people in poor and middle-income countries who were being treated for HIV infection at the end of 2009 was up by 30% from the end of 2008. According to the World Health Organisation, eight countries achieved coverage of 80% or better and 21 others covered more than half of those in need. Though the new figure still represents only about a third of those who could benefit, the rate of increase is impressive. The news is doubly welcome, too, because it is now agreed that treatment, which has the effect of making people less infective, is an important way of stopping the spread of HIV as well as desirable in its own right.


Trade, exchange rates, budget balances and interest rates Sep 30th 2010




Markets Sep 30th 2010






Junk bonds Sep 30th 2010

The issuance of junk bonds, high-yield debt offered by companies with poor credit ratings, has rebounded over the past year, according to figures from Dealogic, a financial-information provider. That is a sign that investors have recovered their risk appetite after the credit crunch and are seeking higher returns, given the low yields available from cash and most government bonds. In turn, companies now find the cost of finance in the junk-bond market attractive once again; the spread (excess interest rate) over government bonds has fallen sharply. As the chart shows, issuance and spreads tend to be negatively correlated. However, issuance has not recovered the heights, nor spreads the lows, of early 2007.


Documents

The.Economist.-.2010-10-02.=ECO PDF TEAM=down02.putclub.com/virtual/backup/update/Download/kaoyan/The_Economist_20101002.pdfAt least 13 African refugees fleeing to Yemen drowned in