No title

STARING INTO THE ABYSS: A SPECIAL REPORT ON THE FUTURE OF EUROPE

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Thomas Gideon

Desmond King

Executive Vice President, Timberlands Weyerhaeuser Company

President, Chevron Technology Ventures Chevron

5

9 The world this week

Asia 47 China and Tibet

13 14 14 16 18 On the cover Silvio Berlusconi' s terrifying Legacy: Leader, page 13. Italy-and a continent-in crisis, pages 30-34. Our special report argues that Europe is heading towards compromise and decline, after page 56. Nicolas Sarkozy, austerity-Lover, page 59. Greece in torment, page 58. Those pesky European voters, Charlemagne, page 62

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Letters On population growth, the Nobel peace prize, Edward Lear, Chinese texts, business in India, weather and economics blondes, mind-reading' Briefing 30 Berlusconi's departure Addio Silvio 32 Europe's debt crisis Rushing for the exits 34 Italy's economy That sinking feeling

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Volume 401 Number 8759 First published in September1843 to take part in "a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing our progress. "

Editorial offices in London and also: Atlanta, Beijing, Berlin, Brussels, Cairo, Chicago, Hon g Kong, Johannesburg, Los Angeles, MexlCo C1ty, Moscow, New Delhi, New York, Paris, San Francisco, Sao Paulo, Singapore, Tokyo, Washington DC

Leaders Italy and the euro zone That's all, folks America's deficit Large it up Airline alliances Open the skies The Middle East Confronting Iran Elected mayors Big cities, small plans

41 42

United States The politics of the South Hunting for votes Ohio's referendum Kasich gets a black eye The supercommittee Hints of a deal or a false dawn? Christmas trees Atax too far Philadelphia's mayor Michael, more Herman Cain Anonymous no longer Water in Texas The thirsty road ahead California's pensions Not so retiring Lexington The elusive progressive majority

The Americas 45 Security in Colombia Top dog down 46 Cuban business A risky venture 46 Human rights in Mexico Friendly fire

48 49

49 50

52

No mercy Imran Khan Second coming Afghanistan and the Tali ban Collateral damage Asia-Pacific trade Dreams and realities South-East Asian summitry The happening place Banyan One dam thing after another

Middle East and Africa 53 Iran and Israel War of nerves 54 Libya and its allies All too friendly 54 Chad, Mali and Niger Just deserts 55 Egypt's military Leaders Not doing well 55 Africa's amputees Taking part 56 Nigerian politics Groping forwards Special report: Europe and its currency Staring into the abyss After page 56 Europe 57 Germany's economy Acase of the sniffles 58 Greece Tomorrow and tomorrow 58 News in ex-Yugoslavia Broadcasting to the Balkans 59 France's public finances The belt-tightenerin-chief 59 Azerbaijan How to spend it 60 Nagorno-Karabakh Conflict on ice 62 Charlemagne Europe against the people?

Iran Its nuclear ambitions must be stopped: butisrael bombing it is not the right answer, leader, page 16. A game-changing report by the UN's nuclear watchdog could be the prelude to an Israeli strike on Iran, page 53

The battle for the South The presidenttries to shore up his fragileelectoralgainsin a region that is getting ever more Republican, page 35. An alternative strategy forth e Democrats: Lexington page 42

Britain's elected mayors The plans to unleash more Boris Johnsons point in the right direction, but are too timid: leader, page 18. The country's few elected mayors have, by and large, worked well. But that doesn't mean other cities willvoteforthem, page63

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Contents continues overleaf

6 Contents

The Economist November 12th 2011

63

64 65 65 South Korea's economy To outsiders, the country's heroic ascent is a template for success. But now it has almost caught up with the developed world it must change its approach , pages 79-81. China's state-owned enterprises are on the march, page 71

66

International 67 International marriage Herr and Madame, Senor and Mrs

71 72

73 73 74 Airline alliances Regulators have been too soft on the big transatlantic carriers. It is time to toughen up: leader, page 14. Three alliances cover most of the world-where do they go next? Page 76

Britain Reforming Local government The mayors show UncontroLLed borders Waving them in London 2012 Fun and games Cheap toys Buy early, buy often Bagehot Why Britain has centrist politics

74 76 76 78

Business State capitalism in China Of emperors and kings Big ships Economies of scale made steel Diamonds Anglo buys De Beers The Oppenheimers Swapping gems fo r cash Sexual harassment Nasty, but rarer The Olympus scandal Big trouble in Tokyo Airline aLLiances The airmiles-high clubs Dynegy Avery odd bankruptcy Schumpeter Why firms go green

Briefing 79 South Korea's economy What do you do when you reach the top?

Dino dining Even in their heyday, dinosaurs were not quite as dominant as popular myth makes them out to be, page93

Finance and economics 83 The euro crisis and emerging markets Bringing it all back home 84 Buttonwood The EU shoots the messenger 86 Too big to fail Fright simulator

86 Networking and pay Women do worse 88 Rice The impact ofThailand's floods 88 Private equity Fee high so dumb 90 Economics focus The world's currentaccount surplus

93 94

94 96 96

Science and technology What ate dinosaurs? Old crocs Astronomy Throwing money into space What dinosaurs ate The belly of the beast Asteroid 2005-YU55 Acosmic near-miss The Rorschach test Afew blots in the copybook

Books and arts 97 The cold war George Kennan, a life 98 Russia and the West Slip and slide 98 Jim Thompson America's way of war 99 Jeffrey Sachs Turning his eye on home 99 Leonardo in London Deciphe ring the da Vinci code 100 American art From Walmartto wall art 108 Economic and financial indicators Statistics on 42 economies, plus a closer look at global business confidence

Blair's brain Our obituary of Philip Gould , architect of New Labour, page 110 Principal commercial offices: 25 St James's Street, London SW1A1H G Tel: 020 7830 7000 Boulevard des Tranchees 16 1206 Geneva, Switzerland Tel: 41 22 566 2470 750 3rd Avenue, 5th Floor, New Yo rk, NY10017 Tel: 1212 541 osoo 60/FCent ral Plaza 18 Harbour Road, Wa nchai, Hong Kon g Tel: 85 2 2585 3888 Other commerdal offices: Chicago, Dubai, Frankfurt, Los An geles, Paris, San Francisco and Si nga pore

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9

Politics

Silvio Berlusconi said he would resign as Italy's prime minister, once the country's parliament passes a series of austerity measures demanded by the European Union. Mr Berlusconi called for fresh elections, but it looked likely that a new government would be formed, perhaps led by Mario Monti, a former European commissioner. The political uncertainty saw yields on Italian bonds spiral yet higher, leading to concern that the country may struggle to refinance its huge debt pile. Lucas Papademos, a former vice-president of the European Central Bank, was named Greek prime minister. His appointment at the head of a government of national unity came after four days of wrangling over who should succeed George Papandreou. Gas began to flow through the controversial Nord Stream gas pipeline, which connects Russia to Germany under the Baltic Sea. Dmitry Medvedev, Russia's president, travelled to Germany to attend the formal opening. France's prime minister, Franc,: a is Fill on, announced a new set of austerity measures to ensure that the country remains on track to meet its deficit-reduction targets. In unusually tough language, Mr Fill on said France had been overspending for 30 years, and that "bankruptcy" was "no longer an abstract word." The two men vying to be Spain's next prime minister took part in their only televised debate before the gen-

eral election on November 2oth. Alfredo Perez Rubalcaba of the ruling Socialists went on the attack against Mariano Rajoy, leader of the opposition People's Party, but failed to land a blow. Mr Rajoy looks set for a clear election victory. One by one The Colombian army killed Alfonso Cano, the leader of the FARC guerrillas. Mr Cano had led the group since its founder died of a heart attack in 2008. Otto Perez Molina, a former general, won Guatemala's presidential election. Mr Perez has promised a crackdown on gang violence. In Nicaragua Daniel Ortega, helped by a strong economy, was re-elected as president. A spate of violence broke out after Mr Ortega's victory, in which at least four people were killed. The Institute for Justice and Democracy in Haiti, an American pressure group, announced that it would seek hundreds of millions of dollars in compensation from the UN for cholera victims in Haiti. The disease was probably brought to the country by Nepalese peacekeepers. The group says it will file a lawsuit if the UN does not respond. In case you weren't sure The International Atomic Energy Agency, the uN's nuclear watchdog, published its latest report on Iran's nuclear programme. It stopped short of saying conclusively that Iran was developing nuclear weapons but raised serious concerns about the military dimensions of the country's nuclear activities. The UN said that more than 3,500 people have died since March in Syria's uprising. Despite a proposed peace deal drafted by the Arab League, at least 6o people have been killed in the past week. The government announced that it had released political prisoners as a first step to implementing the deal, but opposition figures said that thousands more remain in jail.

Phil Bryant as their new govern or, to replace the termlimited Haley Barbour. Jefferson County in Alabama moved to file for bankruptcy protection with around $4 billion in debts. It is the biggest municipal bankruptcy to date in America, substantially larger than Orange County's insolvency in 1994. In Liberia's presidential runoff Ellen Johnson Sirleaf, the incumbent, was poised to be declared the winner. The election was marred by vialence and turnout low after William Tubman, her opponent, urged his supporters to boycott the poll over allegations of electoral fraud. In South Africa the ruling African National Congress sacked Julius Malema as head of its youth wing and banned him from the party for five years. Mr Malema is a contraversial figure who rouses his supporters with incendiary speeches and is an outspoken critic o[Jacob Zuma, the president. Balm Haram, an Islamist sect, killed scores of people in a series of attacks mostly in the town of Damaturu in Nigeria's north-east. Balm Haram gunmen also shot a police inspector. The group told a newspaper that it was behind the attacks and that it plans to hit further government targets. Halting the conservative tide? There were several elections in America on state and local issues. Voters in Ohio overturned a law that restricted the right of public-sector workers to bargain collectively. The law was passed in the state legislature in March, as newly elected Republican governors in the Midwest and elsewhere tried to curtail the power of public unions. In Mississippi an attempt to define a fetus as a person was decisively rejected at the ballot box. The "personhood amendment" would have in effect outlawed abortion in the state. Mississippians also elected

Rick Perry made another gaffe at the Republican presidential debates, when, after hesitating for 53 seconds, he could not remember the name of the third government agency he insisted he would shut down upon entering office. The other candidates shouted out their suggestions. Finally facing justice

A court in India convicted 31 people for their part in the massacre of 33 Muslims in 2002. The victims were trapped by a mob in a burning house in Gujarat state during some of the worst rioting since Indian independence. Japan released the captain and crew of a Chinese fishing boat, three days after they were arrested for entering Japanese coastal waters. A similar case last year in disputed waters sparked a diplomatic confrontation, but China called this incident a "regular fishery case" and accepted Tokyo's handling of it. In New Zealand a ceremony was held to deconsecrate Christchurch cathedral. The building was badly damaged by an earthquake in February that killed 182 people. The ceremony paves the way for the building to be partially demolished, and for a new cathedral to be built.

~~

10 The world this week

The Economist November 12th 2011

nuses, as part of its efforts to strengthen its capital position.

Business Italy Ten-year govern ment-bond yields,% 7.5 7.0 6.5 6.0 5.5

27 28 31 1 2 3 4 7 8 9

Oct

Nov 2011

Source: Thomson Reuters

Italy's borrowing costs in the bond market surged to reach levels that are generally considered to be unsustainable, as market confidence evaporated in Italy's ability to meet its debt obligations. The decision by LCH.Clearnet, a clearing house, to raise the amount of collateral it requires to insure against losses on Italian bond trades caused yet more investor anxiety. Italy's yields could have been even higher, except for another reported round of bond-buying by the European Central Bank. In a frenetic first week for Mario Draghi as president of the ECB, the central bank also took the surprise decision on November 3rd to cut its main interest rate from LS% to 1.25%. That giant sucking sound Mark Carney, the recently appointed chairman of the G2o's Financial Stability Board, warned of the dangers from a "severe retreat" in global market liquidity, which would feed through into the real economy. Mr Carney pointed to the threat from the de leveraging efforts at European banks as they work towards higher core-capital requirements, which, he said, could have a negative impact on cross-border financing. Societe Generate booked a write-down of €333m ($450m) on its exposure to Greek debt, representing a 6o% cut in the value of the bonds. This followed a similar move by BNP Pari bas, its larger rival. The French bank also proposed scrapping its annual shareholder dividend for the first time since privatisation in 1987 and said it would reduce bo-

A federal judge ordered Raj Rajaratnarn to pay $92.8m to settle civil charges related to his conviction for insider trading. The penalty is a record for a civil charge, according to the Securities and Exchange Commission, amounting to three times the profit that Mr Rajaratnam made from trading shares in which he had obtained illegal tip-offs.

Freight expectations Maersk's quarterly net profit fell by 78%. Although the Danish shipping line transported more containers, this was not enough to offset the impact from declining freight rates caused by an excess of capacity. Many shippers have expanded their operations in anticipation of a global boom.

The parent company of British Airways reached an agreement to buy British Midland (brni) from Germany's Lufthansa. Bmi is the secondbiggest carrier at Heathrow, controlling around 10% of the runway slots. A merged airline would give BA more than so% of the slots at the airport, though it would probably need to sell off a number of these to satisfy regulators.

China's annual inflation rate fell sharply in October, to 5.5% from September's 6.1%. The news was viewed as evidence that measures taken by the central bank to tame rising prices are working. Food prices, a politically sensitive topic in China, rose by 1L9%in October, compared with13-4% in September. Other data showed a slowing of Chinese industrial production, leading some to suggest that the government will soon refocus on policies that promote growth rather than rein in inflation.

Toyota reported a 32% decline in operating profit between July and September, compared with the same quarter a year earlier. The carmaker cited the adverse effects on its business from a strong yen and the flooding in Thailand, where it builds some parts and vehicles, the latest Japanese company to do so.

Groupon's initial public offering was a success. In the biggest stockmarket debut by an American internet company since Go ogle in 2004, Groupon's stock closed 31% above the IP o price of $20 a share on the first day of trading, giving it a market value below that of Yahoo! Other internet companies are lining

up to go public; it emerged this week that Yelp is also considering a flotation. Adobe announced that it would not release future upgrades for its Flash player on mobile devices. The late Steve Jobs was a strong critic of the reliability of Flash technology, banning it from Apple's wireless gadgets. PPR, a French luxury-goods group that owns some of the world's best-known fashion houses, including Gucci, and Yves Saint Laurent, confirmed that it was buying Brioni, an upmarket Italian menswear firm. Brioni started dressing film stars in the 1950s. Its suits have more recently been worn by Vladimir Putin and Daniel Craig playing James Bond.

The rings of change The GSM Association, a group of worldwide mobile-phone operators, announced that Africa is the fastest-growing mobile-phone market in the world, and the second-biggest after Asia. The number of African subscribers has grown by 20% each year for the past five years and is expected to reach 735m by the end of 2012. Other economic data and news can be found on pages 108-109

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13

That's all, foll<s For the euro to survive, Italy must not fail. That will require leadership and courage ALTHOUGH it came after ./"\..scandal, scheming and a truly dismal record as prime minister, Silvio Berlusconi's resignation pledge was no more cathartic than any other of the remedies that the euro zone has so far concocted. The gesture was too little because Mr Berlusconi is so distrusted, after a total of eight and a half disastrous years in charge, that even now some fear he will find a way to hang on to office or stand again. It was too late because, by the time he promised to resign, Italy's bonds were consumed by panic. At one point yields gapped up towards 7.5%-a level that would eventually pitch Italy into insolvency and long before that triggers a run on its banks. When the world's third-largest bond market begins to buckle, catastrophe looms. At stake is not just the Italian economy but Spain, Portugal, Ireland, the euro, the European Union's single market, the global banking system, the world economy, and pretty much anything else you can think of. Greece is important because it sets precedents for the euro-over such things as debt write-downs and rescues (see page 30). Italy matters much more because it is so vast. It is clear now that Italy will be the crucible which tests the euro to destruction-or survival. Only a few weeks ago, that test still seemed avoidable. Now it is at hand. If the euro zone wants its currency to survive, it must stem the panic and make Italy's vaudeville politics credible. Both acts are still within Europe's compass. But with each lurch of the euro zone towards contagion, with each bungled change of government, and with each reluctant intervention in the financial markets, the task becomes harder and more costly. As the grim scene unfolds, you can almost feel the euro's chances draining away.

Presto panico The urgent task is to stanch the financial panic-if only to give politicians a chance to show that, now they understand the stakes, they can do better. This panic took hold on November 9th when, against the background of rising Italian bond yields, LCH Clearnet, a clearing house, raised its margin calls-meaning that anyone dealing in Italian bonds now needs to set more capital aside against possible defaults. That extra capital raised the cost of dealing in Italian government debt, causing a wave of selling as investors quit the market (see page 32). Nothing can now prevent a debt crisis in Italy. Borrowing costs are set to remain well above their levels before the crisis. The finance industry will not soon reverse its extra margin call and even if it did, investors are not about to treat Italian debt as "risk free". Ratings agencies will surely downgrade the country. If its debt is left to spiral down, Italy will be shut out of the bond markets. Its banks will become vulnerable, as their depositors and lenders conclude that they and the Italian state are likely to become insolvent. Contagion will spread across the euro zone. The end will come soon enough. But Italy is not yet insolvent. Although the rescue plan set out by the euro zone last month is in tatters, the European Cen-

tral Bank could still gain time by pledging to buy Italy's debt in unlimited quantities and to protect European banks, as The Economist has argued. The signs this week were that the ECB had stepped in to ease Italian yields. But it has not yet made that vital public pledge to do whatever it takes, without limit, to create a proper firewall and stop the panic. The truth is that the risks of the euro splintering really have mounted. Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, acknowledged at the recent G20 summit for the first time that they might abandon Greece to its fate-a devastating shift from leaders who had always insisted that the euro would survive intact at any price. There is chatter that they are contemplating a new club of core euro countries that can live within the rules, and jettisoning the rest. Such talk will make it harder for the ECB to convince markets that the euro is here to stay. But it may just put the fear of God into Europe's politicians-indeed, that may be the idea. Ultimately, politicians are the only people who can put this right. If the ECB creates a breathing space, then politicians must use it to convince the world that the euro zone's democracies have the capacity to deal with their debts and reform their economies-as set out in this issue's special report on the future of Europe (printed early this week, before Mr Berlusconi's news). If the politicians fail, so eventually will the euro.

The man who screwed an entire currency While the fate of the euro was resting on Mr Berlusconi's follically enhanced head, the chances of success were slim. He liked to portray himself as a pro-business liberal reformer but under him Italy has utterly failed to abandon a model that used lira devaluations to offset inflation and stagnant or falling productivity. Between 2001 and 2010 Italy's unit-wage costs soared and its economy grew by less than any other country in the world, except Haiti and Zimbabwe. The Economist has long argued that Mr Berlusconi was unfit to govern, but even we have been shocked by how, as the euro crisis drew closer to Italy, he partied and politicked, brushing off the need for reform. Without Mr Berlusconi, Italy stands a chance. Its stock of debt, though high, is stable. It suffered no housing boom or associated banking bust. Italians are good savers and government tax receipts not too dependent on finance or property. Before interest payments, Italy is even running a fiscal surplus. Much of the talk in Rome is now of finding a technocrat to run a new government committed to reform-Mario Monti, say, who was a respected European commissioner. Such a caretaker government will have a part to play over the coming months. But reform needs to be sustained for years, and that requires democratic legitimacy more than anything else. So any technocratic caretaker should prepare for urgent elections that could produce a government for reform. For the euro to survive, Italy must succeed. For Italy to succeed, its squabbling politicians must find unaccustomed reserves of unity and courage. That depends on ordinary Italians being willing to make sacrifices, the ECB backing Italy, and France and Germany standing resolutely behind the euro. It is a dauntingly long list of things to go right. •

The Economist November

14 Leaders

12th 2011

America's defidt

Large it up America's politicians look like missing a golden opportunity to restore the country's finances

ON GRESS guards its privileges jealously, so when it C agrees to delegate much o its power, even temporarily, the moment should not be squandered. That is why so much depends on its Joint Select Com-

short-term stimulus the economy still needs). To get to such a big figure two things must happen, one unwelcome to the Democrats, one hated by Republicans. First the Democrats would have to put entitlements, the legally mandated programmes of Social Security (pensions), Medicare (health care for the elderly) and Medicaid (health care for the poor), on the table. Pension reform might very well be pos-

mittee, a group of six Democrats

sible; there is widespread agreement that the pensionable age

and six Republicans drawn equally from the House of Representatives and the Senate, which has been charged with hacking away at America's swollen deficit. By November 23rd, this "supercommittee" is supposed to come up with a plan to save at least $1.2 trillion-1.5 trillion over the next ten years. Exceptionally, any plan it agrees on will not be subject to amendment, only to a straight up-or-down vote, and it will need only a simple majority in the Senate, not the usual6o votes out of 100. And as a final incentive, if the package fails to get through, harsher and more immediate cuts will automatically be imposed, in ways that politicians of both stripes would hate. In short, if there was ever an incentive for Barack Obama's party and its Republican opponents to do what they should have done a long time ago, it is this. Few outsiders know what is going on inside the supercommittee, but even a minimum deal is by no means assured (see page 38). And in fact $1.5 trillion is not nearly enough. America's predicted deficits over the next decade come to as much as $12 trillion, to be piled on top of an existing net national debt of around $10 trillion. A $1.5 trillion deal would see the debt burden go on rising, even if the economy resumes a normal rate of growth, so yet another deal would have to be reached later on. Hence the argument for "going big" now-concocting a deficitreduction package of $3 trillion or ideally $4 trillion, big enough to convince investors that America's long-term problem is being tackled (and thus also leaving more room for the

needs to rise and that benefits will have to be means-tested. But the far bigger problem is health entitlements, and the Democrats, having only just conducted an enormous healthcare reform in the teeth of Republican opposition, are deeply reluctant to do anything that might reopen that deal. The other problem is taxes. No rational person believes that serious deficit reduction can be accomplished without any rise in tax revenues. The Republicans objection to tax rises is well known, but may not be absolute. The idea of raising tax rates is clearly going to remain anathema. But the tax code is such a morass of loopholes, breaks for the politically favoured and economic engineering on the part of bureaucrats, that comprehensive tax reform could allow for lower rates and yet increase tax receipts at the same time.

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Go big, and go hard

Mr Obama and the House Speaker, John Boehner, discussed just such a grand bargain back in July, before the anti-tax wing of the Republican Party took fright. Divided government actually favours the taking of painful decisions more than the unified kind does, because both parties are required to sign on, and no one can take political advantage. In recent years, many of America's hardest decisions-including welfare reform and previous rounds of budget cuts-have been taken at times when the presidency and Congress were in different hands. It would be wonderful if that happened again. •

Airline alliances

Open the skies Regulators have been too soft on the big transatlantic carriers North Atlantic air alliances Seat capacity, April-Oct 2011 · %

~~~

VEN that flying people around the world is the ultiG mate globalised industry, there

is oddly little competition in the airlines business. Passengers who are prepared to change Other planes once or twice to get to 15.5 their destinations have lots of choice, but on transatlantic routes between hubs there are often only one or two carriers to choose from. This lack of competition is partly the result of collusion sanctioned by regulators. On transatlantic routes members within each of the world's three big alliances-Star, oneworld

and SkyTeam-share costs and agree on prices. They are spreading their tentacles around the world (see page 76). The expected purchase by BA (a oneworld member) of a smaller rival, bmi, from Lufthansa (a Star member), may boost oneworld's position by adding bmi's Heathrow slots to oneworld's already dominant position in transatlantic flights. America's Department of Transportation (DoT), which has some antitrust powers, has not only given its blessing to the rise of alliances, but actually requires airlines to collude fully within each of their groupings, and to share costs and agree on prices. The DoT's apparently perverse position was prompted by studies which found that, for passengers taking connecting flights with two airlines that are only loosely allied, each carri- ~~

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The Economist November 12th 2011

16 Leaders ~

er has an incentive to ramp up the price on its leg of the journey, even if this results in lower overall demand for such flights. By forcing the carriers to pool their operations and offer a common price for the full journey, such incentives disappear, and the ticket costs less as a result. The DOT is now requiring collusion on some transpacific, as well as transatlantic, flights. America's main antitrust regulator, the Department of Justice (DOJ), is rightly sceptical of the notion that collusion benefits consumers. It objected to the creation and expansion of the three transatlantic cartels, only to be ignored by the DOT, which it cannot overrule on such matters. Earlier this year an unofficial study by two of the DoJ's economists crunched the most recent data available, and reached the opposite, and more plausible, conclusion: that fewer competitors means higher fares, as one would expect. The proponents of consumer-friendly cartels still find that the data support their theory. But if such drastically opposing conclusions can be drawn simply by shuffling the figures a different way, it is surely best to believe the outcome that most accords with common sense. A pity, then, that the DOT shows no sign of doing so. The European Commission, the Eu's regulator, has been a bit tougher on the airlines than have the American authorities: before approving oneworld's transatlantic venture, it made its members surrender slots at Heathrow, some of which were snapped up by Delta, a SkyTeam member. But it seems curiously reluctant to make progress on its investigation of the Star and SkyTeam cartels, perhaps for fear of opening a row with the United States. The 2007 "open skies" agreement between

Europe and America has done some good: for instance, it has allowed BA to go head-to-head with Air France, flying from Paris to New York and Washington, DC (although it recently suspended the Washington route), and Aer Lingus to compete with Iberia between Madrid and Washington. But the blessing America has given the three cartels has more than undone this good work. BA's struggle to establish itself in Paris shows that it is hard for a competitor, even a powerful one, to achieve critical mass in a hub dominated by a rival alliance. And theremaining independents flying across the pond-such as Virgin and Aer Lin gus-are looking vulnerable. Sit back, relax and enjoy the competition Blessing the cartels across the Atlantic and Pacific was a mistake, and should be reversed. Since the DOT seems unlikely to do that, Congress should hand its remaining antitrust powers to the more pro-competition DOJ. Regulators should also be actively seeking ways to make the three alliances compete with each other more vigorously, and to help the remaining independents survive, for instance by freeing up more slots. Britain's Competition Commission has rightly undone the dominant position that BAA, the country's main airport operator, inherited when it was privatised. It has shown how regulators can, if they choose, take vigorous action to shake up uncompetitive bits of the aviation business. Letting the airlines join together in global alliances brings a number of benefits to passengers: frequent-flyer points, smoother transfers and so on. But travellers should be asking themselves: at what cost? •

Conflict in the Middle East

Nuclear Iran, anxious Israel The world needs to be much tougher on Iran, but an Israeli attack would still be a disaster

HE debate about timelines is T almost over. This week's report on Iran's nuclear programme by the UN'S watchdog, the International Atomic Energy Agency (IAEA), is its most alarming yet. Although no "smoking gun" proves beyond doubt that Iran is developing nuclear weapons, the evidence gathered in a 12-page annex is hard to interpret in any other way. Concerted efforts by Western intelligence agencies and the Israelis to sabotage the Iranian programme have been less effective than was previously believed. Iran has already begun moving part of its uranium-enrichment capacity to Fordow, a facility buried deep within a mountain near Qom. Intelligence sources estimate that if Iran opted to "break out" from the Nuclear Non-Proliferation Treaty (NPT), it could have at least one workable weapon within a year and a few more about six months after that. Iran's leaders may not choose that path. But what happens next depends less on Iran's technical or industrial capabilities than on politics. For the time being at least, ambiguity almost certainly serves Iran's purposes better than a confrontation. But in Israel, talk of a pre-emptive attack against Iran's nuclear facilities is increasing. Publicly, Israel has stuck to its well-worn line that no option should be ruled out. But well-placed leaks suggest that the

prime minister, Binyamin Netanyahu, and his defence minister, Ehud Barak, are exploring the possibility of a pre-emptive attack on Iran's nuclear facilities. Their cabinet colleagues seem less persuaded and Israel's powerful military and intelligence establishment is against a strike. Polls show that Israelis are split on the issue. But Mr Netanyahu is determined not to go down in history as the prime minister who allowed Israel to become threatened by a hostile, regional nuclear power. Rising fear, rising danger The Israelis' anxiety is understandable. They fear a theocratic regime that embraces the Shia tradition of martyrdom may not be deterred by a nuclear balance of terror. For a country as small as Israel, even a small-scale nuclear attack could be an existential threat. Two of Mr Netanyahu's predecessors took action, against Iraq in 1981 and Syria in 2007, to prevent just such a threat; and it worked. The opportunity to attack Iran is now, before it is too late-or so the argument goes in many Israeli households. Yet the arguments against an attack are still overwhelming, even for Israel. A sustained bombing campaign would take weeks and set off a firestorm in the Middle East, with Iran counter-attacking Israel through its proxies. It would do nothing to help regime change in Tehran. The economic consequences could be catastrophic. And to what end? A successful campaign would still only delay Iran, not stop it. The technical

~~

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The Economist November 12th 2011

18 Leaders ~

difficulties for Israel's armed forces of carrying out such a broad mission over such a long time are immense. Indeed, the suspicion is that Mr N etanyahu would be betting that what Israel started, America would feel forced to finish. Baracl< Obama should make it very clear to Mr Netanyahu that he would not do that. At the same time, he should pursue two courses: pushing sanctions, on the one hand, and preparing for a nuclear-armed Iran on the other. So far, attempts to impose punitive sanctions have fallen short. Russia and China (Iran's biggest trading partner) have refused to support efforts at the UN Security Council to beef up the sanctions regime, for instance by limiting Iran's imports of refined petroleum or targeting the activities of its central bank. Yet the West should not give up the effort: there is a (slim) possibility that, as the prospect of an Iranian bomb and an Israeli strike draw near, Russia and China might shift their positions.

Iflran does not halt its nuclear programme, its rulers should expect their country to be treated as an international pariah. That means not just pushing for more serious sanctions, but also stepping up the covert campaign to disrupt Iran's nuclear facilities. It also means preparing for the day when Iran deploys nuclear weapons. To that end, America must demonstrate to its allies who feel threatened by Iran-not just Israel, but Turkey, Egypt, Saudi Arabia and the Gulf states too-that its commitment to extending nuclear deterrence to them is as firm as it was to Europe at the height of the cold war. America must also be willing to make available to its allies advanced ballistic missile defences. Iran must be made to understand that owning nuclear weapons is a curse for it rather than a blessing. And Israel must be persuaded that striking Iran would be far more dangerous than living with its nuclear ambitions. •

Elected mayors

Big cities, small plans Britain's plans for elected mayors point in the right direction, but are too timid

ANCHESTER'S town hall is a Victorian neo-Gothic temple to local government, packed with murals commemorating episodes from the city's history. As the capital of Britain's long-gone cotton trade, the city is particularly well-endo wed with 19th-century civic grandeur; but all over the country, the juxtaposition of the splendour of the old buildings with the impotence of modern councils speaks eloquently of the decline of local government in Britain. Now the Conservative-Liberal Democrat government wants to shift power to locally elected mayors. The aim is a worthy one, and the only thing wrong with the plans is that they do not go nearly far enough. For more than a century governments have sucked power away from Britain's cities. These days most mayors have little more than a gold chain to show for their offices, and local government is kept on a short financial leash by Whitehall, which provides most of the money that it spends, thus undermining its power and its responsibility. The previous Labour government went some way towards reversing that trend by encouraging a few cities, including London, to vote for mayors. Now the current government wants to do more. Next year voters in as many as 11 others will be asked whether they want to join the club (see page 63). If city-dwellers plump for elected mayors, they will have large fiefs. A mayor of Leeds, for example, would hold sway over more people than the mayor of Washington, DC, does. The government argues that mayors will strengthen local democracy because they are more accountable to voters than are appointed council leaders. The new mayors will be able to knock heads together, and their ability to attract media attention will help to foster civic pride. But there is opposition. First, some worry that populism will lead to the election of hard-right mayors. Second, councils fear a further diminution of their powers. And, third, some ar-

M

gue that urban strongmen will not sit easily with other government efforts to devolve power both to smaller neighbourhoods and to larger regions: the government wants to bring in elected police commissioners, for example, most of whom will oversee territories bigger than cities. But concern about the outcome of an election is not a good reason to avoid one. If elected mayors enhance local democracy, it doesn't much matter if local councils are undermined. And if instead of creating elected police commissioners, the government gave the mayors oversight over the police, the problem of overlapping fiefs would not arise. No representation without taxation This points to the real flaw in the plans: they are not bold enough. The government seems to have no intention of giving mayors powers over serious matters such as policing. Rather, it envisages them largely as urban boosters who will entice business and provide a counterweight to local busybodies who want nothing built in their backyards. Thus, mayors are to have powers to cut business rates but not raise them. London's increasingly powerful mayoral office, currently occupied by Boris Johnson, provides a better model. Mayors should be given considerable control not just over policing but also over planning and transport. On education, mayors can support the free schools the government has empowered people to set up: in America, mayors have turned out to be some of the strongest advocates for charter schools. And the law should be changed to allow mayors to appoint cabinet members from beyond the ranks of elected council officials. In the long term financial power must shift too. Local government needs to have the power to raise more cash, as well as to spend it. As soon as people realise mayors are spending their money, they will take a keen interest in what they do. The government's willingness to experiment with localism is welcome, but its timidity may doom the experiment. If citydwellers believe that mayors will be costly figureheads, they are likely to vote against them. A chance to reshape Britain for the better will be lost, perhaps for many years. •

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Counting people SIR- Your coverage of global population growth missed one key point ("Now we are seven billion", October 22nd). While it is true that the world's average family size has fallen dramatically in the past 40 years, a relatively small group of countries, including places like Afghanistan and Niger, con tinue to have between four and seven children on average and rapid population growth. These countries also happen to be poor, low on the Human Development Index, often treat women badly, and in some cases, like Somalia, are failed states spawning international terrorists. You asserted "family planning appears to do little direedy to control the size of families." This is incorrect. Couples in virtually all societies have frequent sex, and therefore access to family planning is necessary to separate sex from childbearing. Most experts say that family planning has been critical in reducing family size in, for

example, Iran and Bangladesh. You even mentioned in your briefing" A tale of three islands" that Bangladesh's total fertility rate has "halved in 20 years". If foreign aid agencies invested heavily in voluntary family planning and girls' education, then desperately poor countries with rapid population growth could escape from poverty and avoid becoming failed states. MARTHA CAMPBELL MALCOLM POTIS

University of California, Berkeley SIR- You counselled us not to worry about the world's expan ding population. But we must. Population growth occurs mainly in poorer countries, you said, where low personal consumption has small environmental impact. However, living standards in such countries are rising fast, and migrants to rich nations quickly adopt the lifestyles of their destinations. Globally, the average individual impact is set to keep rising, even in the unlikely case that rich coun-

tries substantially reduce theirs. You also said that fertility is declining, suggesting that the world population will peak in a few decades. But that decline cannot be assured; you have written before that fertility in rich countries may be rising again. We don't know whether a peak will occur soon without policy influence, or how high it will be. Our impact on the global ecosystem is already unsustainable. To address the environmental damage that is already occurring, much of it effectively irreversible, we need to achieve a population peak as low and as soon as possible. SIR ADRIAN STOTI

Hertford, Hertfordshire SIR- Is China's one-child policy really "a demographic disaster" as you say? When the policy was put in place some 30 years ago the official justification was that population growth interfered with economic development. They have proven that this is true, a

fact not yet recognised in the West. Now they are talking of relaxing the policy because it is widely accepted by the urban Chinese whose lifestyles have vastly improved because of it. ALBERT A. BARTLETI

Professor emeritus of physics University of Colorado, Boulder A prize for peace SIR -Your article about Liberia's president and Nobelpeace-prize winner, Ellen Johnson Sirleaf, ("A Swedish October surprise", October 15th) will have come as a surprise to many of your readers, particularly in Norway. Since 1901 the Nobel peace prize has been awarded by the Norwegian Nobel committee, not by any Swedish one. The other Nobel prizes are awarded by Swedish committees. I was surprised you got this wrong after so many years of getting it right. GEIR LUNDESTAD

Secretary Norwegian Nobel committee

Oslo

~~

The Economist November 12th 2011

~ Allatsea

song" and "no end of Stilton cheese", the]umblies return as heroes-after 20 years. Let us hope that Angela Merkel, Nicolas Sarkozy and the Greek government rescue Europe more speedily. PATRICK MACDONALD

Edinburgh Early scribblings

-Your cover dated October 29th, which depicted Europe's leaders trying to leave a sinking ship, reminded me of Edward Lear's The]umblies: SIR

They went to sea in a Sieve, they did, In a Sieve they went to sea: In spite of all their friends could say, On a winter's morn, on a stormy day, In a Sieve they went to sea!

Sadly, as Lear relates: The water it soon came in, it did, The water it soon came in.

However, with the help of a "pinky paper", a "moony

SIR- Your article on malaria mentioned Chinese texts from 2700BC ("Not swatted yet", October 22nd). There are no Chinese texts from that time. The earliest surviving Chinese writings, inscribed bronzes and oracle bones from the Shang dynasty, date from about1600BC. (Consequently the frequently mentioned "s,ooo years of Chinese history" is actually 3,700 years.) You were presumably referring to the Huang Di nei jing su wen which has a few passages describing symptoms of a disease now known to be malaria. This text is traditionally attributed to the mythical Yellow Emperor, who in later historicisation has been arbi-

Letters 21

trarily assigned to years around 2700BC. While the text is not precisely datable, the best contemporary scholarship says that the materials that formed it began to be assembled in the last couple of centuries BC. It probably came together aroundlOOAD, although the earliest surviving edition dates to the eighth century AD. MARK EDWARD LEWIS

Kwoh-ting Li professor of Chinese culture Stanford University Stanford, California

India have failed to provide growth that is inclusive for all. Just like neighbouring China, there is a growing disparity between the haves and havenots, all thanks to our booming economy. There is also growing labour-union tension. Until India Inc and the government show some concern towards employees and citizens, we cannot really enjoy the fruits borne out of the growing economy. KARANTH RAMAKRISHNA

Bangalore SIR- Although it is undoubt-

Taming the Indian tiger SIR- The cover of your special report on business in India aptly depicted the sad state of affairs in my country (October 22nd). The rich are getting richer and the poor are getting poorer, and the hapless middle class is squeezed in between. You painted a rosy picture of Indian corporatism without portraying the plight of those Indians who are still living on less than a dollar per day. Developing economies like

edly true that Indian firms and professionals are doing quite well internationally, when it comes to managing a diverse workforce and working in different countries and cuitures, things are not as positive as you described. Handling a diverse workforce within India is something totally different from working in the countries and cultures of Europe. From my own experience I know that many Dutch businesses complain that Indians do not understand the

Drlv one.

~~

22 Letters

~

The Economist November 12th 2011

local culture. Most Indian businesses still refuse to train their staff properly. Their implicit assumption, that if you can make money in India you can make money anywhere, is nonsense. Much of their success is simply based on cost advantages. But as salaries are rising fast in India, this won't last. BERT VAN HIJFTE C. Consultancy Amsterdam SIR- I wonder what has

changed over the past 31 months since you published an upbeat article about Indian entrepreneurs ("The more the merrier", March 14th 2009). As a serial entrepreneur in the process of setting up my third venture, I think you made some valid observations. Yes, it is difficult to raise money as a start-up, especially if the business is capital hungry, and state regulations can sometimes be stifling, time consuming and expensive to comply with. But Indian entrepreneurs remain uncaged. It was incorrect to base

your conclusions about the Indian entrepreneurial scene on the recruitment results for business schools. Many prominent executives at Infosys, Bharti, Adani Group and Deccan have never even studied at business school SACHIN KULKARNI Managing partner Innovatous Mumbai The great British weather SIR- Having read

your article on economics and religion ("Holy relevance", October 29th), I'd like to propose the weather as an historical indicator of a nation's work ethic and prosperity. If Britain enjoyed warm temperatures and 300 days of sun a year, would its people so easily accept enclosing themselves in a workshop, factory or office for eight or so hours every weekday, even if it led to increased prosperity? Isn't life too short not to be enjoyed? If the Greeks woke up four days out of five to find the sun was nowhere to be seen, with

rain and wind more than probable, would they still opt for leisurely lunches on patios, noontime naps and short working days? One may as well stay inside and work, there's little else to do. How would these two countries' economic destinies be different today had they gone through history with the other's weather patterns? SARO AGNERIAN Montreal Women at the top SIR- Was it necessary to refer to IBM's new chief executive as "the blonde, straight-talking Ms Rometty" ("Steady as she goes", October 29th)? Would you have mentioned hair colour if the new boss of IBM was a man? Or was it simply an attempt to dispel that old myth that blondes aren't very clever? Or that they have more fun? I would like to think it was the latter rather than a traditional, old-school perspective that seeks to define a woman by her appearance, even when it

is irrelevant to the situation and borders on sexist. NICOLA SCHULER London Fooling yourself SIR- The real problem with mind-reading technology ("The terrible truth", October 29th) is that we could no ionger deceive ourselves. RICHARD SPALDING Preston

-Lying is at the heart of civilisation, and of the human species. Telling fibs without being detected and detecting those told by others is key to our intelligence. And honestly, the truth is the most malleable of concepts. RANKO BON Motovun, Croatia • SIR

Letters are welcome and should be addressed to the Editor at The Economi st, 25 StJames's Street, London SW1A 1HG E-mail: [email protected] Fax: 020 7839 4092 More letters are available at: Economist.comfletters

The world faces two major energy challenges over the next forty years. The first is to meet rapidly rising demand for energy particularly in d veloping countries - by increasing supply. The second is to realis this goal hile also achieving substantial reductions in carbon emissions. Failure to meet the first objective wiU constrain economic growth. Failure to meetthe second will exacerbate climate change. • How can countries increase energy supply while also reducing missions? • How can gov rnm n and busin sses speed up th commercialisation of new energy technologies? • How should governments plan for and invest in their energy futures?

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24

Executive Focus

D' Con ulting

..1:1"'1 Gr up

Attracting Chinese Investment into the UK Investor Relationship Manager China The UK has set out major plans to strengthen tts infrastructure. provtding opportunities for significant investment. PA Consulting Group is looking for the nght candtdate to support this development. Working in Ch na. the successful candidate will map the tnvestor landscape, build and strengthen relationships with key potential1nvestors: identify opportuntties, and facilitate Introductions. The cand1date Will work closely with sovereign wealth funds. banks. key min1stnes and adv1sers. and wtll need to manage relahonsh1ps With these networks while working closely w1 th contacts 1n the UK

~6~ ~

We are looking for an individual who has an established network with the relevant investors: experience of working in China; and is a fluent Mandarin speaker. The successful candidate will have strong commercial expenence, excellent client management skills; and a proven track record in influenctng key dec1s1on makers 1n a bustness envtronment. For further information about this position. please visit the Expenenced Hire· section of the PA Webs11e www.paconsulting.comfcareers and search for Relationsh p Manager' In the keyword search

Consortium of the CGIAR Centres

Chief Executive Officer (CEO) Consortium of the CGIAR Centres SRI Executive Search has been retained by the Board of the CGJAR Consortium in the appointment of a CHIEF EXECUTIVE OFFICER. The role of CEO to the CGIAR Consortium is one of the most prestigious, exciting and important positions in Agricultu ral Development globally. As CEO of the CGLAR Consortium you will be passionate to create and leave a posi ti ve legacy ror agricultural development. The Consortium is a contractual joint ven ture, recently establ ished as an in ternational organisation, set up among the 15 International Agricultural Research Centres with a vision of assisting developing countries wi th issues related to hunger, poverty and environmental degradation.

The llF is seeking and outstanding professional with an international profile as

SENIOR EcoNOMIST EUROPE DEPARTMENT The responsibilities ol the position include: 1) conducting in-debt macroeconomic research, analysis and forecasts on selected countries in Central and Eastern Europe and the eurozone periphery based on country visits, membership contacts and published statistical and information sources;

The funders include developing and industriali zed coun try governments, fo undations, and intern ational and regional organizati ons. The total system expenditure overseen by the Consortium was $650 million in 20 10

2) writing concise and focused country research notes and contributions to regional and global research on macroeconomic developments, economic policies, financial market developments and the outlook on the assigned countries;

The Consortium of CGlAR Centres is now seekjn g an exceptional person to be appoin ted as the Chief Executive Officer. This role will report to the Chairman of the CGIAR Consortium Board.

3) conducting missions to the assigned countries for meetings with government officials, local businessmen and foreign investors;

As the ideal candidate, you wil l be committed to fulfil the Consortium vision and to help lead the CGIAR reform process. You must have an outstandi ng track record of leadership, strategic decision making ability, proven management skill s, a lrack record in change management at an Executi ve level and have an understanding of the international agricultural research and development sector. You will preferably have a science degree or background or have worked in a science related sector.

4) maintenance of country databases of historical time series and forecasts for assigned countries , including maintaining and checking the database for consistency, constructing external financing and debt models and public finan ces and government debt models and projections;

You will have demonstrated capabil ity to conceptuaJise, plan, engage and inspire the senior team throughout the man y CGIAR partnerships and the Board of the Consortium, of wh ich the CEO is a non-voti ng member. This role is based in the Consortium Office in Montpell ier, France. The Consortium of the CGIAR Centres is committed to diversity in terms of gender, national ity, culture and ed ucational background. Appl ications fro m women are strong ly encouraged. The Co nsortium of the CGIAR Centres offers a competiti ve reward package/attractive conditions of employmen t co mmensurate with the position. Screening will commence: November 25 th, 20 11

Expressions of interest together with a full CV and supporting statemenl, highlighting your experience and skills against the requirements of the role should be directed in confidence to Ms. Auree de Carbon, Director, SRI Executive Search www.sri-executive.com Dublin, Ireland/Courbevoie, Paris, France; adecarbon @sri-executive.com or +33147881406.

5) supervision and guidance on the compilation by the department's research assistance ol high-frequency indicators, including the maintenance of a real-time monthly database. Applicants should have a Masters or PhD in International Economics and at least seven years or more of professional experience in conducting or managing macroeconomic analysis and research, preferably focused on emerging Europe or the eurozone . Exceptional analytical and English writing skills are essential , along with extensive experience in econometrics and database management. Knowledge of the languages of Eastern Europe, Greek, Portuguese or Spanish will be given preference. The successful candidate will need to demonstrate outstanding communication skills, be able to work under pressure with at times overlapping priorities and be able to travel frequently to the region .

To apply, please send cover letter, with salary requirements, and resume in Microsoft Word format to [email protected]. For more information, please go to our website, htt :/lwww.iif.com/about/iif obs/

The Economist November 12th 2011

25

Executive Focus KPIJ9

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· A hrst degree 1n economiCS. law. accounting, fi nee, busin dm1rnstr tlOn or ny her relevara cilsclpl• from a~ 1nstll\l!)()ll.

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• Underst nding c:A global 10ancial mane ; local & domestJc macro-economiC policy gl J SWF governance & regu tory frameworlcs (SWF Ac1. Santiago Princples and F MFP 1i r rv:;y Code).

t banking; • of ors 1n the local and int •

the ubject of your mail nd send your curr t curriculum vit {prep red M'~ao oft Word document. lied with yow full n ) 10 us recruitm g.lcpmg.com not I I r th n 30 November 2011. All poslllon w!U be located n Nig Ia. Th tion I t ed ma~nly igeri ns wirh1n and outside the country. The CIO and CRO posrtions re open to N1 ri n nd n~ · rian pplican Women strongly encOU'aged to apply few any of the position on offer.

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The Economist November 12th 2011

26

Executive Focus A unique opportunity to serve the people who serve the world. The United Nations Joint Staff Pension Fund, with its offices in New York and in Geneva, is seeking a

Chief Executive Officer LEVEL OF ASSISTANT SECRETARY-GENERAL NEW YORK CLOSING : 16 DECEMBER 2011

Re ponsible for adrmni t ttng i maturing defin d benefit pension plan for more than 180,000 particlpan , retirees and beneficiaries working and residmg in 190 countries worldw1de, and making paymen m15 d1fferent currencie . The funct1ons include: • establishing policy for the Fund, overseeing the Pension Fund's operations and managing staff of over 200, • organizmg, servicing and participating inmeetmgs of the United Nation Joint St Pension Board and multiple committees and r pr senting the Pension Board in me ling of committe of the UN General Assembly and other pertinent bodies. The successful cand1date would have an advanced university degree in a relevant field with at least tift en years in the exercise of re pon ibility in executiv or manag rial positions of a n tional or international pens1on fund or social security system. It is e peeled that the successful candidate will take up duties on 1 January 2013.

rr

For fur her information on th P nsion Fund pleas vis1t our w bsite at www.unjspf.org. For more information on thi po 1t1on and to pply, pi ase go to 'current vacancies' at www.who.inUemployment. Applications are only ace pted throu h this w bsite.

MANAGER OF EVENTS AND VISITS Salary expectation £30k-£40k We are a high profile global consultancy headquartered in London, undertaking events and visits in numerous countries across the world. We work with blue chip corporates, high profile individuals and senior dignitaries to deliver exceptional service to our clients. We are currently seeking an outstanding individual to join our organisation as the Manager of Events and Visits. The successful candidate will demonstrate:

• Extensive experience working with high profile clients, speakers and dignitaries to coordinate and deliver exceptional events for clients. • A history of negotiating terms and the timing of participation in events with clients and agents. • The ability to research and compile background information on the client and/or event. • Specific working knowledge of the demands of successfully co-ordinating events internationally, particularly in the United States of America. • Excellent understanding of national and international protocols for senior dignitaries and high profile individuals. • Significant experience coordinating the travel, hotel accommodation, and logistics for speaker, staff and security as necessary with vendors and hospitality organisations. • Continuous success in managing the flow of actual events or visits to ensure the highest standards of delivery and client satisfaction. • A track record of delivering results in fast-paced, complex and uncertain environments. • The ability to work independently, think strategically and translate strategies into delivery plans with particular emphasis on attention to detail. • Flexibility and resilience to work extended hours through multiple time zones. • Appreciation and understanding of cultural expectations and differences between various clients. • Impeccable integrity with a high level of tact and discretion. The role will likely involve extensive international travel. Applicants should send their CV by 5 December 2011 to the following email address (anonymous domain due to confidentiality):

[email protected] We strongly welcome early applications. Only shortlisted candidates will be contacted.

Commonwealth Foundation

Director, Commonwealth Foundation The Commonwealth Foundation, an intergovernmental body that seeks to strengthen civil society, is seeking a new Director to lead and develop this important Commonwealth institution during a pivotal period in its history. Based in London and leading a diverse team of around 20, this is an exciting opportunity to help build better links between civil society and member governments. The successful candidate will need to have experience of working at a senior level in an international context, and be a strategic leader with excellent financial management skills. Basic salary will be £82,222 p.a., with excellent benefits and allowances. Applications close on 7 December 2011, and interviews will be 16/17 January 2012. Please see www.commonwealthfoundation.com (About Us) for more details.

Dartmouth H A NO VER

E W HAM P S HIRE

Dartmouth seeks an individual of bold vision , recognized stature, and compelling public presence to serve as the director of the Dickey Center for International Understanding.

•••

In line with a tradition of more than 200 years of alumni who have assumed key roles in foreign affa1rs and students and faculty who have been at the vanguard of study and research abroad, the director will oversee the extens1ve portfolio of programs at the Center and • Advance Dartmouth's longstanding commitment to global engagement by drawmg upon strengths in he Arts and Sctences Dartmouth Medical School the Thayer School of Engmeenng and the Tuck School of Busmess • lncuba e mnovahve research programs and new mtemallonal in1tiattves • Stimulate discuss1on and collaboration on cntical global 1ssues on campus and with stakeholders around the world

For information: W'.'M.dartmouth.edu/-dickeysearch Dartmouth IS an equal opportumtyla trmatJVe actiOfJ employer has a trong comm1tmen t to drverstly and m that splm encourages eppi1Ca/Jons from women and mmonttes

The Economist November 12th 2011

27

Executive Focus

Th European Comm1ssion's Jo1nt Research Centre (JRC) 1s o refer nee centre ol sc1enc ond !ethnology for the European Union Operot1ng 1n Belg1um, Germany. Italy, Spo1n ond the etherlands, Wlth o heodcounl of over 2,700, the JRC 1S currently seeking o Direc1or of the Institute for Environment and Sustainobility (IES). In th1s challenging position, you will manage spec1ohsed research ond serv1ce provis1on to EU policymakers, whilst provid1ng strategic leadership to the lnsl1tute, including the deployment of Slgn•ficont human ond finonool resources Th Institute is based in Italy W1th on impress1ve sc1enllfic background ond deep knowledge of nvlfonmentol and sustoinabihty 1ssues, you will be able to gel the most from the h1ghly focused research teams a1 IES At the some hme, you should be nowledgeoble regordmg the EU Institutions, sk1lled m negotiating and making presen tations, and capable of contributtng to lh brood r management of the JRC Finally, it IS reqwed that you ore

o member of o European Union M mber Stole, w1th flu ncy 1n on official EU language ond o good command of o 5eeond EU language A full job desc ri ption with tho deto1led eligibility and selection criteria as well os application dela1ls con be found in Official Journal C 32 4 A of 9 November 201 1 or on the EUROPA website: http·//ec.europo eu/dgslhuman-resources/wor 1ng_sen•or_ mgt_en .htm

If you wont to apply, you must register via the website: https://et.europo eu/dgs/humon-resources/ seniormonogementvoconctes/CV_Encodext For more information on the JRC/ IES, please v1sit http://ec europa eu/dgs/jrc/index.dm The closing dote for applications is 7 December 2011 O nline registro 'on will not be possible after 12.00 noon Brussels time

.JRC EUROPEAH COM ISSION

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Project Leaders and Consultants

Operational excellence for results that matter

London/Overseas I Salary dep on experience

UNOPS mission is to expand the capacity of the UN system and its partners to implement peacebuilding, humanitarian and development operations that matter for people in need. Working in some of the world's most challenging environments, UNOPS provides project management, procurement & supply chain management, financial management and human resources services. Our partners include the UN system, international financial institutions, intergovernmental organizations, governments, non-governmental organizations, foundations and the private sector. To lead our growing operations in Africa, UNOPS is currently seeking highly qualified individuals for the following positions:

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multiple countries in Africa in 2012, UNOPS will recruit in both French-speaking and Englishspeaking African countries. For a detailed job description and other available vacancies at UNOPS please visit: www.unops.org

The Economist November 12th 2011

Our cit n 1 an exc p •onal, h1gh pro· e globalgov rnmen adv1sory ftrm Th y war h heads o s ate and go ernments around he world, part1cularly n eme•g1ng markets, to provtde pertise and adv1ce on key issues By leverag1ng the•r global networ of lead1ng pol1cy ma ers, former m1n1sters, h ds of st te, sector eJIPerts and top-tier advisors, hey are ble to offer upport across numerous areas of government ind dmg good governance, publtc sector reform, econom1c and soc1al development, swell as political reform and democratisation lhey are currently 5 ing outs andtng 1ndiv•dua s to JOin he organ1sa tan as PrOJect Leaders and Consultants Whatever your bac ground. a dnv for excellence and strong pass•on for pubhc policy and d elopmen IS a must. often honed •n sen1or governmen ro es or top management consul anoes You wtll eed to demonstrate he abil•ty o • Manage h•ghly comple adv1sory proJects. delivenng results 1n fast-paced, high demand and uncertarn env1ronme ts • D velop r lahonsh1ps and provide advice to clien gov rnm nts at he mas nior I vets • For Project Leaders, gu1de, mot vate and lead clients and world dass professionals To apply. please email your CV quoting MPEC13204193 to davidangel uk.michaelpage.com

Michael Pag EXECUTIVE

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© 2011 Citibank, N.A. Citi, Citi with Arc Design, Thank You and Citi Thank You are registered service marks of Citigroup Inc.

Head to Head Should governments try to wean the world off fossil fuels by subsidising renewable energy? Or do subsidies waste too much money and create unwelcome externalities? Invited guests take up opposing positions in our online debate, and we ask you to join in

The maths behind the madness With Greece flirting with default, Italy's bond yields rising fast and America's government bonds Losing their AAA status, everyone needs a view on where debt burdens are heading. Use our interactive chart to make basic economic assumptions and create projections of the future

Imraninfull Judge only by Imran Khan's Latest book and it seems remarkable that Pakistan's famous cricketer and philanthropist is not already his country's dominant political figure. But the party that he founded 15 years ago remains short of organisation and Leaders, and has not prospered

Economist.comjdebates

Economist.comjdebtdynamics

Economist.comjnode/21536961

United States: The bloom is fading The aggression of the protesters in Oakland and Washington risks turning the public againstthe Occupy Wall Street movement

Asia: SEA changes It has been a year of polite revolutions in South-East Asia, with no currency crisis and very Little bloodshed

Economist.comjnode/21536946

Economist.comjnode/21536960

United States: Debt, guilt and good fortune Disparities in state current-account balances are no big deal in America, unlike in Europe

Asia: Online news in India Indian newspapers are making tentative forays into the online wilderness

Economist.comjnode/21536998

Economist.comfnode/21531288

Europe: Warsaw's pacts Polish politics are being shaken up as parliament reconvenes after October's general election

Business: Back on After the successful flotation of Groupon, an online coupon service, all eyes are on Zynga, the maker of popular online social games

Economist.comjnode/21537016

Economist.comjnode/21536855

Europe: Apicture of discontentment Ani nteractive graphic illustrates some of the problems thatthe European economy faces

Business education: Joining the big league President Sarkozy's plans to create a French Ivy League are an exercise in academic vanity

Economist.comjeuroguide2011

Economist.comjnode/21536685

Technology: Difference Engine Rules governing how Americans buy and watch TV shows are aboutto change Economist.comfnode/21536970

Technology: Location, location, location GPS technology can now spot poor training Economist.comfnode/21530611

Culture: The artwork of Maurizio Cattelan The Guggenheim in New York hosts a grand, subversive retrospective for an unusual artist Economist.comfnode/21536969

Culture: The Not-So-Secret Metaphor Wayne Wang has directed a somewhat insulting film adaptation of a bestseller Economist.comjnode/21536861

Links to all these stories can be found at Economist.comf node/ 2153 7905

Addio, Silvio

Also in this section 32 Europe'sdebtcrisis 34 Italy's economy

ROME

Market panic has erupted as Silvio Berlusconi prepares to step down from government. We assess the impact of his going-first, on Italy's politics

AS IN many an opera, the wounded hero .1"'\.took an unconscionable time to die. But on November 8th Silvio Berlusconi, who had been haemorrhaging support for months, went to see Italy's president, Giorgio Napolitano, and promised to resign. The final knife-thrust was the loss of his majority in the Chamber of Deputies, the lower house of parliament, in a crucial vote on the re-submitted 2010 public accounts. Even if elections are held soon, Mr Berlusconi says he will not be running. He now feels "liberated". So does Italy. Mr Berlusconi has governed it for eight and a half of the past ten years, and has probably done more to mould it in his image than anyone since the country's fascist dictator, Benito Mussohni. For the past 30 months he has clung to power with improbable tenacity, shrugging off scandals that would have felled the leader of almost any other country. And he has still not gone, quite. As he has already told the president, he will leave only once the legislature has approved a package of economic reforms agreed on with the European institutions and intended both to shrink Italy's government deficit and revive its flagging economy.

This postponement, coming on top of a technical change that demanded more margin on holdings of Italian government bonds, sent the markets into panic, with Italy's bonds soaring through the 7% level that was the signal for the bail-outs of Greece, Ireland and Portugal. To some extent investors were reacting irrationally. If Mr Berlusconi had gone immediately, it could have blocked the approval in parliament of the very measures they have come to see as a test of Italy's credibility. The incurable optimist Alarm was also spread by Mr Berlusconi's initial insistence on a general election as the only way out of the political deadlock, and by his naming of a perceived stooge, Angelino Alfano, the secretary of his People of Freedom (PdL) movement, as his likely successor: the man who, as justice minister, introduced a 2oo8law, later ruled unconstitutional, that provided Mr Berlusconi with immunity from prosecution. Not even an agreement by parliamentary business managers to pass the economic reforms by November 14th stemmed the run on Italian debt. Mr Berlusconi had become a problem

for two reasons. First, his personal aversion to reform. Though he came into politics 17 years ago depicting himself as a freemarket crusader and always called himself a liberal, he did not act like either. His most decisive intervention in the economy came in 2008 when he blocked the sale of Alitalia to Air France, insisting on patriotic grounds that it should remain in Italian hands. With difficulty, he pulled together a consortium of Italian entrepreneurs to take over the ailing flag-carrier and gave it a monopoly on the most profitable route, between Rome and Milan. Scarcely the action of a free-market zealot. Mr Berlusconi's resistance to structural reform appeared to harden as the country's problems deepened. He had made himself Italy's longest-serving post-war leader by purveying unceasing optimism to an electorate naturally inclined to look on the bright side. He was almost physically incapable, it seemed, of telling voters that things were bad and would get worse if they did not make sacrifices. His government was also incapable of agreeing on, and then steering through parliament, the necessary measures. He led a cabinet with no clear economic ideology.

~~

Briefing The Italian crisis 31

The Economist November 12th 2011 ~ Some

of his ministers, such as Rena to Brunetta, who holds the civil service portfolio, or Giancarlo Galan, at the heritage ministry, are genuine liberals. But his finance minister, Giulio Tremonti, has become increasingly sceptical of modern capitalism. Making things worse, a rebellion in mid-2010 by his former lieutenant, Gianfranco Fini, left the government with a thin and fluctuating majority in the Chamber of Deputies. Nor could it be permanently enlarged. The only party that could have given Mr Berlusconi's coalition the votes it needed was the Centre Union (unc), a party of Christian Democrats that formed part of his government from 2001 to 2006. But the unc's leader, Pier Ferdinanda Casini, had pledged never again to sit in a cabinet presided over by Mr Berlusconi. The challenge for Mr Napolitano will be to find Italy a government that has both broad support and a clear, detailed reform agenda. Even if Mr Berlusconi leaves office in a matter of days, an election could not be held until January. But Mr Napolitano does not have to call an election at all if he can find support for another solution. Some favour a "technocratic" government, such as the one headed by Lamberto Dini which replaced Mr Berlusconi's first administration in 1995. In this the interior minister was a judge, the defence minister a general, and so on. Mr Napolitano has made it clear that the man he would like as prime minister in such an administration is the former EU commissioner, Mario Monti. On November 9th he gave him a place in parliament as a life senator, which looked like the first step towards inviting him to form a government-perhaps as soon as Monday. Such an appointment should delight the markets. Mr Monti is a distinguished economist, president of the business-oriented Bocconi University in Milan, and served twice as a European Union commissioner in Brussels. Investors would expect him and his ministers to draft sensible, effective bills. But bills can become law only with the approval of the legislature and, according to James Walston, professor of international relations at the American University of Rome, "If Monti has any sense he will not take the job unless he can count on a big majority in parliament." The chances of his being able to do so rose significantly as Italy's sovereign-bond yield soared and Mr Berlusconi's resistance to a caretaker administration reportedly crumbled. But Mr Berlusconi's coalition partner, the Northern League, remained implacably hostile to a technocratic government, and many PdL lawmakers were also said to oppose the idea. By November 1oth there was even a prospect of Mr Berlusconi's party splitting on the issue-a bitter blow for the outgoing prime minister, who sees the creation of an all-embracing right-

wing party as his greatest political achievement. A German-style grand coalition, led by Mr Monti or a respected elder statesman like the socialist Giuliano Amato, is another possible solution to the Italian conundrum. But the divisions in Italian politics are deep and bitter after the Berlusconi years. The way out being mooted by some in the PdL, as an alternative to elections, is a government of the existing coalition plus the unc and perhaps one or both of two small parties loosely allied to it, in a socalled "Third Force". But could such a government carry forward a programme of bold and energetic reform? Mr Tremonti, a tax lawyer by profession, has been a very prudent keeper of the public accounts. By the time Italy was affected by contagion in June, its budget deficit was lower than most in the euro zone. What first spooked the markets, indeed, was a rumour that Mr Tremonti was to be removed by the prime minister. But where Mr Tremonti has failed dismally is in finding ways to stimulate growth. One of Italy's peculiarities is that, in recent years, the centre-left has done more for the cause of reform than the centreright. The only concerted programme of liberalisation in recent years was fostered by Pierluigi Bersani, the leader of the Democratic Party, when he was industry minister in Romano Prodi's last government from 2006 to 2008. And liberalisation-or even just modernisation-is crucial to Italy's prospects. Same beach, same sea For beyond the immediate political and economic problems lie others that stem from deep within Italian society. These will take much longer to tackle. Mr Berlusconi's sojourn in government thwarted a

Benvenuto, Monti

renewal, not just in politics, but in the economy and society, after the collapse of Italy's Christian Democrat-dominated post-war order in the 1990s. He inherited the Christian Democrats' electorate of small businessmen, small farmers, liberal professionals and self-employed workers, and never told them they had to move on from the world they look back on so fondly: that of early 1960s Italy, the land created by its post-war "economic miracle". If, for example, Italians cannot find a dry cleaner's open on a Saturday; if they have to pay thousands of euros to a dispensable public notary to buy a house; if they are forced to accept the service laid on by a single, erratic (and doubtless strikeprone) local bus company, then it is because Mr Berlusconi-and the others who have led Italy over the past couple of decades-have left in place a web of entrenched monopolies, vested interests and cartels that stifle competition and diminish competitiveness. Brave attempts have been made to reform pensions and education. The outgoing government has had considerable success in tackling organised crime. But Italy still suffers from deep-seated ills. Social convention keeps too many married women at home, limiting the size of its workforce. Its capitalism is opaque, typified by cronyism, government interference and shareholder pacts. The trade unions are skewed towards the public sector and the protection of mostly older workers in permanent employment. Italy's cumbersome justice system, in which the average length of a civil suit is nine years, desperately needs an overhaul to reassure investors that contracts will be enforced and dodgy accounting punished. The Italy Mr Berlusconi will hand to his successor ranks 87th in the World Bank's Ease of Doing Business survey, behind Albania. The bank found it was harder to get an electricity supply than in Sudan. In Transparency International's latest corruption perceptions index, Italy ranked 67th. Rwanda and several other African countries were cleaner. Till now, Italy's increasingly geriatric politicians could argue they were responding to a widely shared mistrust of change in a country where change has seldom been for the better. "Per quest'anno non cambiare", sang Mina in a song from 1963 that is still frequently quoted as offering sage holiday advice." Stessa spiaggia, stesso mare": "Don't change this year. Same beach, same sea." Italians' innate traditionalism has, in some respects, served them well. It is what explains their superb cuisine, for example. But it is also the root cause of the mess they are in now. Mr Berlusconi's promised departure offers them a chance to break with years of stagnation-social, economic and political. It is time to try another beach. •

32 Briefing The Italian crisis

The Economist November

Europe's debt crisis

Rushing for the exits

A scramble is under way to reverse the run on Italian bonds

HE moment when a throng of peace- I fully moving people turns into a panT icked herd is difficult to predict. Yet, once triggered, it is almost impossible to calm the hysteria. In financial markets too, it is better to avert panic than to try to pacify it. On Italy's bond market, the world's third-largest, where yields had been rising for weeks, fear turned to panic early on November 9th. Risk officers at LCH.Clearnet, which stands between banks trading in bonds, said that its members would have to post much higher margins against their holdings of Italian government bonds. This was intended to protect the clearing house by reducing the risks posed by banks trading Italian government bonds, given the wild swings in their prices over the past few months. Yet this technical change to a part of the financial system that most people have never heard of had the same effect as shouting "Fire!" in a crowded theatre. Almost at a stroke banks trading Italian government bonds, or using them as collateral for other transactions, would have either had to come up with billions of euros in extra cash or would have quickly had to sell some of their holdings. Within minutes of the market opening there was a fully fledged run on Italian government bonds. Buyers were hard to find, and in thin markets yields on the bonds jumped past 7% before stabilising just below 7.5% on what traders assumed was buying by the European Central Bank. "The clearing platforms have no option but to protect their members and in doing so, they will inevitably turn the screw on Italian government bond markets and push yields closer to levels which could potentially trigger a death spiral," wrote Don Smith of reAP, which helps dealers trade. The margin increase was not entirely unexpected. Over the past year the clearing house asked for more margin on Portuguese and Irish bonds after their prices fell sharply. Yet the increase on Italian debt came sooner than expected, as it was triggered before Italian bonds crossed a threshold that the clearing house was thought to use (4.5 percentage points above the average interest rate of AAA-rated government bonds in the euro zone). And the margin increase is unlikely to be reversed, even if ECB buying drives yields back. The triggering of margin calls has changed investors' perceptions of Italian government bonds and will worsen the government's funding position. The im-

D

No turning back Ten-year government-bond spreads over AAA-rated sovereigns*, % Portugal - Ireland - Italy (Apr7th2011)

(Nov10th2010)

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50 100 150 0 Trading doys before and after margin increase Sources: Bloom berg; *Average of France, Germany LCH.Clearnet; The Ecanamist and Netherlands Interactive: Predict and compare the path of government debt at Economist.comfdebtdynamics

mediate risk is that banks which might have held Italian bonds as part of their liquidity reserves or the building blocks of other financial products are dumping them for safer bets, such as German Bunds. "There is a reason why Bund yields are approaching 200-year lows," says Hans Lorenzen of Citigroup, a bank. "Everyone is trying to crowd into the same trade." Among the large European banks that are dumping Italian bonds are BNP Pari bas and Commerzbank. "It is what the market is asking us to do," says one banker. At the top of many bankers' minds are the woes of MF Global, a mid-sized investment bank that went bust at the end of October after loading up on Italian and other peripheral European government bonds. So toxic is their taint that shares in Jefferies, another mid-sized American investment bank, were pummelled over the firm's trades in European bonds, despite the fact that it had "shorted" them and stood to benefit if they fell in price. It too has been forced to cut back both its holdings and bets that they might fall. Now that a run on bond markets has started, it may well keep feeding on itself. After clearing houses raised margin requirements on Portuguese and Irish bonds, their prices fell sharply (pushing yields up), prompting clearing houses to increase margins yet again (see chart 1). Euro-zone bail-outs followed shortly afterwards. Rising bond yields can themselves stoke worries about a country's ability to service its debt. Italy's national debt is

12th 2011

high, but affordable at the yields it was paying earlier this year. If its borrowing costs were to climb for a sustained period its debt would begin to look unaffordable, prompting further selling and further increases in bond yields. Borrowing costs paid by Italian banks and companies are also likely to rise. Banks are generally unable to issue longterm bonds at interest rates lower than those paid by their governments, because they would be hardest-hit by a default. Higher borrowing costs for banks will force them to rely more on the ECB to keep credit flowing; and it will mean scarcer and costlier loans for Italian companies, which in turn may slow economic growth and hamper debt repayment. Italy's strongest companies can sell bonds directly, but the rates they pay are also correlated to the yields on government bonds. The very visible signs of runs in government and corporate bond markets seem to be mirrored in more opaque corners of finance. Greek banks have been bleeding deposits for months, yet panic may be setting in. Reuters reports that over the past week as much as €5 billion was withdrawn by savers. "My father sent me money as a 'gift', to get it out," says one Londonbased but Greek-born banker. In Italy corporate deposits have also been moving out of the country to other members of the euro zone, or to the subsidiaries of foreignowned banks in Italy, according to bankers. Another sign of strain may be found in demand for €500 bills. These are too large for everyday transactions and are mainly used for mattress-stuffing or money laundering, say bankers. Demand for them surged after the collapse of Lehman Brothers in 2008, and it has ticked up again in recent months (see chart 2). Worrying, too, are signs that companies across Europe are preparing for the possibility of a break-up of the euro zone. One London lawyer says he has been inundated by requests from clients asking about the validity of contracts. "There is a contractual obligation to make payment in euros," he says. "People are asking what happens if there isn't a euro." •

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TO DAY'S TAIWAN

-·-

REPUBLIC Of CHINA www.gw.gov.tw

A driving force for Asia-Pacific prosperity

34 Briefing The Italian crisis

The Economist November

Italy's economy

That sinking feeling

Italy may look like Greece writ large, but the truth is more complex VER since the euro zone's sovereigndebt crisis began in earnest two years ago, the common fear has been that the sheer bulk of Italy meant it was too big for other countries to bail out, should it sink. A quieter hope was that Italy's size might also save it. If investors rushed out of Italian bonds, went the whispered argument, there were few big markets where they could then park their euros and still get a decent return (the smaller German bond market could not accommodate everyone without yields falling sharply). Scared investors often rush into the big and liquid market for us Treasuries, despite anxieties about America's public finances. That safety-in-numbers logic ought to keep Italy from trouble, too. Some hope: Italian bonds are now a badge of shame for banks who are rushing to dispose of them (see previous article). Their ten-year yields have jumped beyond 7% and, once euro-zone yields reach these levels, they tend to spiral out of control. For some this proves that Italy is an oversize Greece: a country with a debt burden that is too heavy for it to bear and, unlike Greece, for others to help shoulder. There are uncomfortable parallels. Both countries' public debts have long been bigger than their annual G DP. Both suffer crippling rigidities in their economies. But there are enough differences in Italy's finances, and enough potential in its economy, to mean it could stay solvent if its borrowing costs could be capped at, say, 6%.

E

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'--'= ' - ='--'"

Sources: IMF World Econo mic Outlook; The Economist

Start with the finances. One reason why markets eventually shunned Greece, Portugal and Ireland was the uncertainty about how far their debts might rise. All three had huge budget deficits (so were adding to their debts at an alarming rate) and were struggling to keep their economies on track, while at the same time cutting spending and raising taxes. Greece's public debt was forecast to rise towards 190% of GDP, before some of its privatesector creditors agreed to a bigger write-off of what they are owed. Italy's public debt, by contrast, is set to stabilise at around 120% of GDP in 2012. Its government will run a small surplus on its "primary" bud-

12th 2011

get (ie, excluding interest costs) this year, and an overall deficit of less than 4% of GDP, below the euro-area average. Italy has fewer foreign debts than the other troubled euro-zone countries, as it ran only modest current-account deficits in the boom years. Its net international debt (what Italy's businesses, householders and government owe to foreigners, less the foreign assets they own) was 24% of GDP in 2010, not much above that of Britain or America, and well below the position in Greece (96%), Portugal (107%) or Spain (90%). Indeed Italy's overall privatesector debts are modest by rich-country standards. This matters for the nation's solvency. If less wealth goes outside Italy to service foreign debts, more is left to tax. The healthy rate of Italian household saving underpinning this could be tapped by the government as an alternative to bond-market funding, which looks a lost cause. Because Italy's deficit is fairly small and the average maturity of the bonds it has already issued is quite long (around seven years), it would take a while for higher borrowing costs to make a huge difference to its interest payments. Next year, Italy has €306 billion of bonds and bills coming due, around a fifth of its stock of capital-market debt, in addition to the budget deficit it has to finance. Assuming all new debt is priced at 7.5%, Italy's overall interest costs would rise by around 1% of GDP next year-steep but not yet crippling for the sovereign (though Italy's banks would struggle). Italy's debt could be capped, but could it ever be reduced to a more comfortable level? Bold privatisation would go some way, but in the long run what is needed is faster G DP growth. The average Italian was worse off in 2010 than in 2000: GDP per head fell over the decade (see chart). Outsiders point to the lost option of devaluation to explain Italy's funk. But the root cause of Italy's lost export competitiveness is its dismal productivity growth. The deeper causes of weak productivity are a two-tier jobs market, which protects the jobs of older workers in dying industries but traps youngsters in temporary work; the industry-wide wage bargains that mean businesses cannot match wages to productivity; the closed-shop professions and trades that are a barrier to innovation and efficiency; and so on. Italy still has some world-class firms and brands, and an exporting prowess that could be built on. Yet it does not have enough firms of sufficient scale. The ubiquity of micro family businesses is related to Italy's rigid regulations, as are its tax-collecting problems. Small firms fall below the regulatory thresholds and are less often attached to the formal economy. If Italy is to carry its outsize public debts, it urgently needs to promote an environment where big businesses can flourish. •

35 Also in this section 36 Ohio's referendum 38 The deficit supercommittee 38 Taxing Christmas trees 38 Philadelphia's mayor 40 Herman Cain's problems 40 Water in Texas 41 California's public pensions 42 Lexington: The elusive progressive majority

For daily analysis and debate on America, visit Economist.comfunitedstates

The politics of the South

Hunting for votes FRANKFORT , KENTUCKY , AND JACKS ON , MISSISSIPPI

The president tries to shore up his fragile gains in a region that is getting ever more Republican

T AST month Barack Obama, following Lhis approval ratings, headed south. He took a three-day bus tour through Virginia and North Carolina, both of which he had won in 2008, reversing a decades-long erosion of Democratic support in the South. He met soldiers, students and teachers. Virginia's Democratic politicians, however, stayed away. Tim Kaine, a former governor now running for the Senate, pleaded a full schedule elsewhere. Others were less kind. Phillip Puckett, a Democratic state senator, declared, "I don't plan to support President Obama for re-election." Churlish, perhaps, but it worked: on Tuesday Mr Puckett won his own re-election battle. Elections this week across three southern states produced oddly mixed results. The Republicans' steady march through the state capitols and governor's mansions of Dixie continued in Mississippi, where they appear to have captured the state's House of Representatives from the Democrats for the first time since the aftermath of the civil war. Their candidate for governor, Phil Bryant, trounced Democrat Johnny DuPree (although voters spurned a proposal backed by both men, to confer "personhood" on the unborn). Yet in Kentucky Steve Beshear, the Democratic incumbent, romped home by an equally wide margin. Democrats riding on his coat-tails swept four of the five other statewide races. Virginia, meanwhile, saw only

modest gains for Republicans, with control of the state Senate, previously in Democratic hands, hanging on a wafer-thin Republican victory headed for a recount. All this is of great interest to followers of national politics. Given Mr Obama's fraying support in much of the Midwest, he will struggle to keep his job next year unless he can win at least one of the three southern states he carried in 2008: Florida, North Carolina and Virginia. Strategists from both parties are therefore poring over this week's muddled results in an effort to decipher whether and under what circumstances Democrats can still prevail in the battlegrounds of the South. There is little question that the Republicans remain the party to beat in most of the region. The drubbing that they delivered to Democrats in state elections in Louisiana last month is typical. Assuming Republicans have indeed taken Virginia's Senate and Mississippi's House, they will control every legislature in the South save in the fringe states of Arkansas, Kentucky and West Virginia. The Democrats' decline has been decades in the making. The presidential vote was the first to go, with the five deep southern states (Alabama, Georgia, Louisiana, Mississippi and South Carolina) plumping for Barry Goldwater in 1964 in spite of the fact that their congressional delegations were Democrats almost to a man. The

wave accelerated in the 1980s, as Ronald Reagan captured the white, working-class voters who had kept conservative southern "yellow-dog" Democrats in office. In 2000 AI Gore, despite being a southerner himself, failed to win any southern states. There are now just two Democrats in statewide office in the deep South: Mary Landrieu, a senator from Louisiana, and ]im Hood, the attorney-general of Mississippi. Even Mr Beshear's victory is not as heartening for Democrats as it appears. Like Arkansas and West Virginia, Kentucky is firmly in the Republican column when it comes to presidential elections. Democrats may do well at the state level, but that rarely translates into victory in federal elections. Jack Conway, the state's Democratic attorney-general, cruised to re-election this week by10 points. But he was trounced in a Senate race last year by Rand Paul, viewed as extreme even by many Republicans. Democrats in those three fringe states tend to succeed by distancing themselves from the national party. Mr Be shear directed Kentucky to join a lawsuit against the Environmental Protection Agency over its coal-mining regulations. It was hard to find the word "Democrat" anywhere in his campaign bumf. Mike Beebe, the governor of Arkansas, has said he would have voted against Mr Obama's health-care legislation had he been in Congress. Joe Manchin, then the popular Democratic governor of West Virginia, disavowed Mr Obama's ideas about health-care reform and global warming-going so far as to run a commercial in which he fired a bullet through the cap-and-trade bill supported by Democrats in Congress-to secure a seat in the Senate last year. Earl Ray Tomblin, who won a special election to succeed Mr Manchin as governor last month, had a ~~

The Economist November 12th 2011

36 United States ~ staunchly

anti-abortion voting record as a state senator and was endorsed by the National Rifle Association. In spite of all of this, Mr Tomblin only just scraped by, thanks in large part to his opponent's relentless efforts to tie him to Mr Obama. Moreover, the success of Democrats in Arkansas, Kentucky and West Virginia rests on those states' unusual demography, making it hard to emulate elsewhere in the South. All three are predominantly rural, and have fewer blacks and Hispanics than the national average. In other southern states big urban and minority populations hold sway in Democratic primaries, pulling candidates to the left of the general electorate and highlighting polarising issues such as race and immigration. In fact, in recent federal elections in the South, Democrats have done best by appealing to minorities and relatively liberal migrants from outside the region-"eggheads and African-Americans" as one sneering pundit puts it. That is how Mr Obama carried Florida, North Carolina

and Virginia, and how Democrats have retained Senate seats in all three states. Until recently, the Obama campaign even talked of turning Georgia, with its swiftly growing black and Hispanic populations (and a booming Atlanta economy that has attracted its share of eggheads) blue in 2012. Mr Obama's popularity has fallen in the Southern battlegrounds, but less quickly than it has in many Midwestern states. Blacks, who account for about a fifth of North Carolina's population, are steadfast in their support, according to a recent poll. Residents who do not consider themselves Southerners, another fifth, favour Mr Obama by seven points over Mitt Romney, the Republican front-runner. The election results from Virginia tell much the same tale. The Republicans picked up seats in rural, yellow-doggish areas. But the suburbs of Washington remained loyal to the Democrats, denying the Republicans a strong majority in the state Senate. That is enough to give Virginia Democrats a little hope. •

Ohio's referendum

A blacl< eye in the Buckeye

COLUMBUS , OHIO

The unions flex their muscles in Ohio

N TOUGH economic times it might well Isector seem reasonable to suggest that publicworkers need to contribute a bit more, or to admit that their unions have extracted some unreasonably generous benefits. Even Democrats such as Rahm Emanuel, the mayor of Chicago, and Andrew Cuomo, New York's governor, have said public-sector workers need to tighten their belts. Yet in Ohio the public-sector reforms of the Republican governor, John Kasich, were roundly rejected in a ballot on November 8th. Earlier this year Ohio's legislature narrowly approved a bill that banned publicsector workers from striking and greatly restricted their collective-bargaining rightsfor example by preventing them from bargaining over health-care benefits. The legislation sparked widespread, union-led, demonstrations that mirrored earlier protests against similar laws in Wisconsin and Indiana. However in Ohio, the state constitution makes it possible to force a public vote on legislation, and by July activists had collected nearly three times the number of signatures they needed to do so. In the 2010 gubernatorial election, Mr Kasich defeated the Democratic incumbent by promising to address a large budget deficit and stem a tide of job losses. Ohio has shed around 6oo,ooo jobs in a

Kasich clobbered

decade-something that only Michigan and California have managed to beat. The new governor interpreted his mandate as standard Republican fare of public-sector restraint and tax cuts. Something, however, went badly awry, as 61% of voters ended up choosing to re-

peal Mr Kasich's collective-bargaining legislation this week. His reforms were widely interpreted as an unfair attack on ordinary Americans. Although some states, such as Texas and Virginia, ban collective bargaining and others restrict it, in Ohio the reaction to this proposition has been far more hostile. The idea that the law went too far reached across party lines, with one conservative commentator saying it offered unions nothing more than collective begging. The scale of Mr Kasich's defeat probably came about because his opponents cleverly blended a national debate about inequality with local arguments over what is fair to workers-particularly to the popular firefighters and police. A powerful coalition of public- and private-sector unions united to campaign against the reforms, and to turn the referendum into a broader national argument. The unions made an effective job of selling the idea that Mr Kasich's tax cuts for the wealthy, such as eliminating inheritance tax, have come at the expense of ordinary workers. Even people who profess not to care much for organised labour say they voted against the legislation. Amy Hanauer, of Policy Matters Ohio, a left-leaning think-tank, thinks that fear about inequality played a large role. Voters were "not interested in hurting other working people in the name of lowering taxes," she argues. There is also an issue of tone. Most people in Ohio like to see themselves as moderates, but straight after his election Mr Kasich took an especially punchy conservative line. He enthusiastically told lobbyists at one lunch that if they didn't get on the bus that "we'll run over you". He added for good measure "and I'm not kidding." Hope for Mr Obama? Faced with a sound thumping, Mr Kasich said only he would catch his breath and gather his thoughts. The unions, meanwhile, are not missing a beat. Their next target is the Republican governor of Wisconsin. They are seeking signatures for a vote to unseat Scott Walker and predict they will have enough for a ballot next April, which will be another test of the mood of the heartland. Looking towards the 2012 election, some strategists think the Ohio result strengthens Barack Obama's hand in this most critical of swing states. The front-running Republican presidential candidate, Mitt Romney, supported the collective-bargaining legislation, something that Tim Ryan, a local Democratic congressman, smilingly describes as "very helpful". As for Mr Kasich, while licking his wounds, he must find a way to boost approval ratings now stuck at around 33%. Otherwise, he is more likely to be a hindrance than a help to the Republican nominee next year. •

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The Economist November

38 United States The defidt supercommittee

Hints of a deal or a false dawn? WASHINGTON, DC

Republicans hint at flexibility on taxes to reach a budget deal

AMERICA is at an impasse over its fi.1"\.nances because, in a nutshell, Democrats will not agree to less generous social entitlements unless Republicans agree to tax increases; and Republicans will not agree to tax increases. This dynamic has produced one showdown already and now threatens another as a "supercommittee" of six Democratic and six Republican legislators seeks $1.2 trillion-1.5 trillion in deficit cuts over the coming decade by November 23rd. It is thus significant that Republicans may be wavering in their opposition to higher taxes. On November 2nd 6o Democratic and 40 Republican members of the House of Representatives sent a letter urging the committee to reduce the deficit by $4 trillion, which would, unlike the $1.5 trillion target, be enough to put the federal debt on a downward path as a share of gross domestic product. All spending and revenues "must be on the table," it said. Past Republican offers of new revenue have rung hollow because, on closer examination, they included little in the way of actual tax increases, emphasising instead one-off sales of public land, oil and gas leases, and radio spectrum; higher postal rates; and increased premiums for Medicare, the federal health plan for the elderly. One Republican offer disingenuously included $200 billion of revenue from the higher growth their plan would supposedly bring about. Non-partisan scorekeepers don't normally count such benefits, as they are too hard to quantify. Then, on November 7th, Pat Toomey, a

Taxing Christmas trees Barack Obama seldom gives a speech without caLLing for miLLionaires, biLLionaires, private-jet owners and oil companies to pay more taxes. But the middle class had been given a break until this week, when the Department of Agriculture dedded to charge a 15 cent Levy per Christmas tree. The proceeds were to be used "to strengthen the Christmas tree industry's position in the marketplace", a euphemism, presumably, for class warfare against the owners of plastic trees, espedally evil imported ones. Republicans gleefully bewailed the tax on Christmas, with much invocation of Grinches and Scrooges. The fearless public servants in the White House resisted a fuLL 24 hours before resdnding the fee.

Republican senator from Pennsylvania and member of the supercommittee, submitted a proposal that, according to news reports, would cut spending by $770 billion and raise $550 billion to $6oo billion in new revenue. While most of that revenue would still come from fees, sales and other creative ploys, it also reportedly comes from closing loopholes, such as on charitable deductions and mortgages on second homes. The offer still contained what for Democrats would be a deal-killer: it would not only make permanent the lower marginal income tax rates enacted by President George Bush in 2001, it would lower the top rate even further, to 28%, from its current 35% (Mr Obama has repeatedly pressed to let it return to its pre-2o01level of 39.6%). That strikes Democrats as an intolerable gift to the wealthy: most of them want the top rate to rise, even if lower rates are frozen. Still, the principle of closing loopholes in return for lower marginal rates is one that Democrats have embraced in the past, provided that the result is a net increase in receipts. Thus, Mr Toomey's offer represents the potential, though not yet the substance, of a deal. But mistrust still permeates the process. Democrats believe Republicans are making empty offers in hopes of blaming Democrats when talks collapse. Republicans doubt Democrats' sincerity on entitlement changes and reckon real reform will have to wait until, as they hope, they win both the White House and the Senate in a year's time. At best, then, the committee will reach its mandated $1.5 trillion. It may well fall short; if the number agreed is lower than $1.2 trillion (or if there is no deal at all), automatic cuts to defence and discretionary domestic spending, are supposed to take effect in 2013 to make up the shortfall. But with a year and an election intervening, those cuts may never occur. "Congress is not bound by this," John McCain, a Re-

12th 2011

publican senator and former presidential candidate with a bad habit of speaking the truth, recently noted. "It's something we passed; we can reverse it." Congress has a record of doing just that: it has regularly voted to reverse cuts to the payments made to doctors for treating Medicare patients, for example. The supercommittee is not the only potential for fiscal fireworks hanging over the markets. A stopgap measure funding most government operations expires on November 18th and the two parties are already wrangling over how to extend it. In coming weeks, Congress must also vote on a balanced-budget amendment. The silver lining of Europe's crisis is that it diverts attention from the divisions that continue to hobble American budget making. •

Philadelphia's mayor

Michael, more PHILADELPHIA

Michael Nutter easily wins a second term in City Hall

AT HIS inauguration in January 2008, .!"\.Philadelphians waited for up to four hours outside City Hall to shake newlyelected Michael Nutter's hand. He promised a "new day and a new way." And in many ways he fulfilled that promise, despite being hampered by a weak economy and an often unco-operative city council. With Democrats still outnumbering Republicans in the city by six to one, it was no surprise that he was easily re-elected on November 8th. The last time a Republican was the mayor of Philadelphia was in 1952. Mr Nutter won 75% of the vote, soundly beating two weak challengers. Turnout was very low, at about 18%. But even so, it seems clear that Philadelphians want Mr Nutter to finish what he set out to do. He took office with ambitious goals. He promised to lower the murder rate by 30-50%. Philadelphia, a city whose name means brotherly love, is still one of America's most violent. In 2007 there were 392 killings. Although the rate has fallen by an impressive 20%, already this year there have been 282 murders, a shockingly high number for a city of 1.5m people. Violent crime is at its lowest since1992, all the more remarkable given that police overtime has been cut as have police academy classes. The city prison population is down by n% since 2009. Perhaps most telling, according to one poll, Philadelphians worry less about crime than in 2009. The big worry for residents is the economy. Mr Nutter was only in office for a few months when the bust began to affect the city. As the Philadelphia Daily News put it,

~~

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The Economist November 12th 2011

40 United States ~ he

went from "managing a city to managing a crisis." Unemployment, at 10.9%, is much higher than the national figure, and one in four live in poverty. According to Pew, the percentage of adults neither working nor looking for work is higher than in any big city bar Detroit and Cleveland. Mr Nutter managed to avoid mass layoffs. But he cut spending and he raised sales tax and property taxes, something one in five cities had to do this year. Planned tax breaks were delayed. He cut

his own salary. And he deferred payments into the state pension fund-worryingly, as it is woefully underfunded. Daniel Fee, a Democratic political strategist, reckons that Mr Nutter did a good job in his first term, but nothing really bold. That may be true, but what he has done, he did well. Earlier this year, for instance, his response to violent "flash mobs" was swift and effective. He announced curfews for teens and accompanying fines for their parents. And, so far, he is smoothly han-

dling the Occupy Philadelphia protesters, who are literally camped on City Hall's doorstep. He has embraced ethics reform, no small thing in Philadelphia. In his second term, he plans to take on the city's abysmal education attainment level. He feels strongly about gun control. Dodgy types can get their hands on guns far too easily, including by renting them, which he calls "insane". As Mr Nutter said during his re-election victory speech, "we are not doneyet". •

Herman Cain's accusers

Water in Texas

Anonymous no longer

The thirsty road ahead

WASHINGTON, DC

And Herman Cain is the front-runner no longer

HEN the allegations of sexual harassment first surfaced, one of W Herman Cain's lines of defence, apart from asserting that he had never harassed any woman in his life, was that he could not respond to anonymous allegations. That particular line of reasoning is no longer available to the Republican presidential candidate after two of the women came forward this week to give their stories. First, on November 7th, came Sharon Bialek (pictured), who popped up at a press conference inN ew York, with a celebrity lawyer in tow, to claim that Mr Cain groped her in 1997 when he was running the National Restaurant Association and she was seeking a job. She said that, in a car after dinner and drinks, Mr Cain had stuck his hand beneath her skirt, reached for her genitals and pulled her head towards his crotch. Though he desisted when she told him that was not what she wanted, she accuses him of responding: "You want a job, right?". Next to surface, a day later, was Karen Kraushaar, the hitherto unnamed employee of the restaurant association who had received a severance payment after complaining of sexual harassment. Now a spokesperson at the Treasury, she said she hoped that all the women who claim to have been harassed by Mr Cain might now decide to give their evidence together. At least two other women have yet to identify themselves. In defending himself Mr Cain has insisted steadfastly on one central point, namely that all the allegations against him "simply did not happen". But his explanation for the flood of allegations has been less consistent. At different times he and his campaign have blamed the liberal media, the Democratic machine and Rick Perry, one of his Republican rivals. In Arizona this week he said the problem was that he was a businessman, and "the machine to keep a businessman

AUSTIN

Drought may force the state to take tougher measures

HIS year Texas had the hottest summer T ever recorded in any state. In September wildfires swept through the town of

A dish best served after 14 years

out of the White House is going to be relentless". Asked if he would submit to a lie-detector test, he said he would, but only if he had a "good reason". One reason might offer itself soon. Mr Cain's polling numbers are starting to slide. This week's Economist/YouGov poll finds that 21% of Republican primary voters intend to vote for him, a fall from 26% last week, which means he has lost his position at the head of the field to Mitt Romney, who now scores 24%. Mr Romney is also sure to be helped by the latest instalment in the implosion of Rick Perry, the governor of Texas and another former Republican front-runner. During a debate on November 9th, he forgot the details of his own plan for dismembering the federal government, stammered excruciatingly and ended with the distinctly unpresidential word "oops".

Bastrop, outside Austin, destroying more than 1,000 homes. Thousands of cattle have been sold. The town of Big Spring, up the road from the oil hub of Midland, is planning to recycle wastewater for drinking; two of the reservoirs that supply the city are almost empty. The severe drought that has parched most of the state this year shows no signs of abating. The state climatologist reckons that it could last for the rest of the decade. But the most sobering fact may be that Texas's water woes are structural. A growing population needs more water. As it stands, the state needs about 18m acre-feet of water a year, according to the Texas Water Development Board (TWDB). By 206o demand is projected to rise to 22m acre-feet a year. The available supply is expected to decline from 17m acre-feet to about 15.3m, as some aquifers are being depleted and areas of the state will come under new regulations. The TWDB forecasts a total statewide shortfall of 8.3m acre-feet by 2060, because the regions that have enough water cannot simply pipe it to the driest places. If nothing is done, it warns, the economic losses could reach $115.7 billion a year by 2060. The agency's water plan for 2012, which is set to be approved later this month, recommends 562 new projects-developing new reservoirs, improving conservation, preventing erosion-that would free millions of additional acre-feet. On November 8th voters narrowly approved a ballot initiative that will authorise the state to issue up to an additional $6 billion in bonds for such efforts. But the TWDB's recommended projects would cost an estimated $53 billion, and still leave some places short. "Well, I think we need to pray for

~~

The Economist November

United States 41

12th 2011

~ rain,"

says Chris Wingert, the general manager of the West Central Texas Municipal Water District in Abilene. At least water cannot be ignored. "I don't know what you mean by conservationist," says John Delaney, a pecan farmer from Comanche, politely. But, he continues, he does try to save water when he irrigates his trees, just as a person would ration snacks from the fridge if they had to last for three months: "It doesn't take much sense to do that." That is becoming the consensus view. And while some heavy users are pursuing conservation out of necessity-agricultural demand is projected to decline as irrigation systems become more efficient-others, such as energy companies, may get a stronger signal. "I'm telling the industry it's not a choice," says Troy Fraser, a Republican state senator from Horseshoe Bay and chair of the state Senate's Committee on Natural Resources. The gas industry, for example, uses several million gallons of

•

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Department of Agriculture

freshwater when "fracking" a well, and the water is not recycled for drinking, thanks to the additives that are used. If the companies do not change voluntarily, Mr Fraser warns, they could face new rules in the 2013 legislative session. That would be a real change in the weather. •

California's public pensions

Not so retiring

LOS ANGELES

The state with the biggest pension problem is stumbling toward a solution

ERRY BROWN, aged 73, likes to joke that he is not only California's governor but also its "best pension buy". After all, he has spent much of his life in public service (including a first stint as governor from 1975 to1983), but neither draws a public pension nor plans to, if he can get himself re-elected. Nonetheless, his commitment to fixing California's daunting public-pension problem has been in doubt. A Democrat, he was elected one year ago in a race against a self-financed Silicon Valley billionaire, largely with the help of independent spending by public-sector unions. The question has been whether he can stare down his own allies, those unions, and pass the necessary reform. Mr Brown has now released a plan. Initial reactions suggest that he may pass his test: the unions were outraged, many Democratic legislators (often beholden to the unions) felt awkward, and several Republican legislators were supportive. But now everything is in flux, as all parties choose their tactics for the fight. The main changes Mr Brown proposes concern new employees of state or local governments. They would have to wait till 67 to retire, whereas many current government workers can retire at 55 or even earlier. They would also have hybrid plans, with part of the traditional defined-benefit pension replaced by a defined-contribu-

J

tion plan of the sort common in the private sector. Mr Brown also wants to make current as well as new employees contribute half of the cost of funding their pension (today, many pay nothing). And he wants to end sneaky ways of upping benefits (called "spiking") and other abuses. This is all eminently sensible. Indeed, it

Aword in your ear ...

is remarkably similar to the demands a handful of Republican legislators were making in June, when Mr Brown was begging for their votes to reach the necessary two-thirds majority to let Californians vote in a ballot measure to extend some tax increases. (He did not get those votes, and ended up with an all-cuts budget he doesn't like.) Even so the proposal still falls short, says David Crane. He is a Democrat who advised Mr Brown's Republican predecessor, Arnold Schwarzenegger, and who was a gadfly on one of the large pension-plan boards for 11 months. California's unfunded pension liabilities are staggering, he points out; they have been estimated at between $240 billion and $500 billion. Plugging that hole will increasingly crowd out other things that Democrats care about, such as schools, parks and courts. But Mr Brown's plan might save at best $11 billion over 30 years. Which is why Mr Brown's plan may not be the final one. This month, a group led by several eminent Republicans filed two versions of what may become a ballot measure in next year's general election. With a nod to Mr Brown's effort, one alternative is somewhat more aggressive, the other a lot more. The main difference is that current workers would start paying much more of the cost of their pensions. This Republican plan, in whichever form, might end up helping Mr Brown: either by showing the unions how bad the alternative is, so that they support him after all; or by allowing him to tell them that he tried to be considerate, but now has to endorse the tougher Republican plan as part of a package of other ballot initiatives. In that scenario, the state just might achieve the grand bargain that seems to be eluding the rest of the country. •

The Economist November 12th 2011

42 United States

Lexington The elusive progressive majority I

One day a majority of minorities may put the Democrats permanently on top. But not yet

N BOXING they call it the tale of the tape. Before battle is joined, Irecord fight fans and managers compare the height, weight, reach and of the contestants. This, roughly, is the equivalent moment in American politics. One year out from a presidential election is the point at which big strategic decisions about the shape of the forthcoming fight are being made. It is also the time when a bad strategic decision can turn out to be fatal. Is the campaign to re-elect Barack Obama about to make a mistake of this kind? One person who thinks it might be is Bill Galston, a former member of Bill Clinton's White House. He has just explained why in a paper for the Brookings Institution, of which he is now a senior fellow. But to understand his worries you need first to look back more than a year at a different argument set forth by another political analyst, Ruy Teixeira, not long before the Republicans captured the House of Representatives in November 2010. In the long run, Mr Teixeira argued then, and unless the Republicans changed their ways, the great tectonic plates of American society were moving against them. Mr Teixeira's point was not that the Republicans were necessarily on the wrong side of the argument. It was more that they were on the wrong side of demography. Simply put, most of the parts of American society that have tended to vote Republican are shrinking in size. By 2050, on current trends, the United States will no longer have a white majority. The Latino share of the population will double from15% to 30%, and the share of African- and Asian-Americans will grow from 19% to 24%, so turning America's minorities into a proportion of just over half by the middle of the century. Since minorities vote disproportionately Democrat (8o% voted for Mr 0 bam a in 2008), that is bad long-term news for the Grand Old Party unless their preferences change. If you slice the population by age and occupation, the prospects for the Republicans look no better. By the end of the decade 90m voters will be so-called "millennials" (roughly, the generation born between 1978 and 2ooo), almost four out of ten. In 2008 this cohort supported Mr Obama by 66% to 32%. Mr Obama also scooped up a handsome majority of the votes of unmarried and college-educated women, white college graduates with "professional" careers, and religiously unaffiliated or "secular" voters. One thing that all of these groups have in common is that they

are growing fast as a share of the population, at a time when traditionally pro-Republican groups, such as the white working class and conservative white Christians, are shrinking fast. Mr Teixeira's paper was about the long term: the shifting tectonics of America were putting the Democrats in a more comfortable position than the Republicans, but to press this advantage home Mr Obama would still have to perform effectively in government. So far, in the eyes of many Americans, he has not. Over half disapprove of his job performance. Moreover, this failure is not just turning "independent" voters against him. It is also weakening his support among some of the fast-growing groups who helped him win in 2008. The young offer an example. The Pew Research Centre reported last week that the age gap that emerged in the 2008 election remains wide. The millennia! generation continues to favour Mr Obama by 61% to 37% overall (though Mr Obama and Mitt Romney, his most likely challenger, score evenly among young whites). But will they vote? The young have been faster than the old to lose faith in politics. According to Pew; the engagement of millennials is much depleted. At this time four years ago, 28% said that they were giving a lot of thought to the presidential candidates, and 24% that they were following election news closely. These numbers have slumped to 13% and17% respectively. The enthusiasm of Latinos seems to be waning too. At the same time, Pew reports a surge in the interest shown by older Republicans. Colorado versus Ohio Turn back now to Mr Galston. His fear is that Mr Obama, who has lately moved sharply left to energise the party's base, is focused too much both on Mr Teixeira's alluring but distant future and on his own victory of 2008. That victory was built on a new coalition of minorities, young people and college-educated white women. A similar coalition re-elected a Democratic senator in Colorado in last November's mid-terms, bucking the national trend. It was a victory that David Axelrod, one of Mr Obama's closest political advisers, who has quit the White House to work on the campaign, called "particularly instructive" in an interview in January with Ronald Brownstein of the National]ournal. What if Mr Obama tries to win in 2012 by relying more on this new coalition of progressive voters in states like Colorado than on the traditional Midwestern battlefield states such as Ohio, which contain a large share of white working-class voters who by all accounts are even less keen on Mr Obama this time than they were in 2008? That, says Mr Galston, could be "a mistake of epic proportions". Obamamania is over. And although in theory Mr Obama could lose in Ohio and several other Midwestern states and still gather enough electoral-college votes in other states to be re-elected, Colorado, where nearly seven out of ten voters in last year's mid-terms had at least one degree, was a "total outlier". Ohio, with its increasingly disgruntled white working-class, is far more representative of the rest of America. Mr Galston notes that the last Democrat to win the White House without Ohio was Kennedy-but he won a swathe of southern states, including South Carolina and Texas, which are nowadays beyond the Democrats' reach. One day, perhaps, demography will favour a "progressive" coalition. But this president needs Ohio and its ilk, which means addressing the concerns of its voters, and moving back to the centre. • Economist.comfblogsflexington

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M A R T I N*

45

Also in this section 46 Joint ventures in Cuba 46 Human rights in Mexico

For daily analysis and debate on the Americas, visit Economist.comfamericas

Security in Colombia

Top dog down BOGOTA

The death of the FARC's leader is a triumph for the government. But will it make peace any easier to attain?

OLOMBIAN officials have sometimes exaggerated their successes over the C Revolutionary Armed Forces of Colombia (FARC). But there was no room to quibble when Juan Manuel Santos, the president, called the killing of the guerrillas' leader on November 4th "the most resounding blow against the organisation in its entire history." Following two air strikes on his camp in the south-western province of Cauca, Guillermo Leon Saenz, whose nom de guerre was Alfonso Cano, tried to hide in the surrounding jungle. But troops flooded the area and found his glasses, wallet and false teeth. A soldier then spotted him trying to escape and shot him dead. He had shaved his signature beard and moustache. It is the first time in the FARe's 47 years that their chief has fallen. Mr Cano, once a middle-class anthropology student, spent 33 years as a guerrilla. He took over the FARC in 2008 after Pedro Antonio Marin (known as Manuel Marulanda or "Sureshot"), their founder, died of a heart attack. He was known as an intractable Marxist who advocated taking power by force. "Our struggle is to do away with the state as now it exists in Colombia," he told The Economist in 2001. "Preferably by political means, but if they don't let us, then we have to carry on shooting." When he became leader, the FARC were reeling from a series of setbacks. The government of Alvaro Uribe had rescued their most prized hostages, including In-

grid Betancourt, a former senator, and killed one of their top commanders, yielding a trove of intelligence. Many security analysts doubted that Mr Cano could hold the group together. But he soon proved his mettle by returning the FARe to their guerrilla roots, conducting hit-and-run ambushes on troops and relying more on urban militias. Last month the group staged two surprise attacks that killed 20 soldiers. Even as he strengthened the FARC militarily, however, Mr Cano kept the door open to peace talks. He praised a law granting reparations to victims of armed conflict and returning land taken from them, and said in a video message released in August that "dialogue is the way." Ariel Avila, an analyst with Nuevo Area Iris (New Rainbow), a think-tank, says Mr Cano had won consensus among the FARe's leaders to seek talks, although that would not guarantee a willingness to lay down their arms. (The FARC made a sham of the 1999-2002 peace talks by using their "safe haven" territory as a military training ground). It is unclear whether Mr Cano's successor will be able to offer a credible peace deal. The top two candidates to replace him are Luciano Marin Arango (known as Ivan Marquez) and Rodrigo LondoiioEcheverry (Timochenko). Colombian officials say they live mainly in Venezuela. Mr Marquez is the only FARe secretariat member who has participated in civilian politics: he served in Congress for the Patri-

otic Union, the group's failed attempt at a legal political wing. Timochenko joined the FARe at 13 and was a protege of Mr Marulanda. He is seen more as a military leader than a political one. Neither candidate would be likely to drop Mr Cano's strategy. But they would need years to consolidate authority before entering talks. By that time, the FARC may well have become a different type of threat. Since Mr Santos served as Mr Uribe's defence minister, he has focused on attacking the group's leaders to cause disarray in the ranks. If he maintains this strategy, says Jorge Restrepo of the Conflict Analysis and Resource Centre in Bogota, the FARe might break up into smaller gangs-possibly merging with the violent drug-trafficking mobs that took shape after right-wing paramilitary groups were demobilised. Mr Santos has presented a constitutional amendment that would establish a transitional justice system to reinsert demobilised FARC members into civilian life, including the possibility of participating in politics. Although Mr Cano's death may make it harder for the FARC to resume peace talks, it also makes it easier for Mr Santos to propose them. As the guerrillas resumed attacks, he was criticised for letting them regroup-particularly by Mr Uribe, who had reduced their ranks by half. By decapitating them, he has won enough political capital to enter talks without risking a backlash. His approval rating rose from 79% to 83% on the news, according to one poll. For now, though, Mr Santos is focusing on the fight, keeping up military pressure until the FARC has a change of heart. "When we see that will for peace," he says, "we will open the door for dialogue." • Correction: In our briefing on Brazil's oil ("Filling up the future", November 5th 2011) we said Brazil has a trade deficit. We meant it ha s a current-account deficit. Its trade surplus, however, was shrinking until recently.

The Economist November 12th 2011

46 The Americas Business in Cuba

A risky venture HAVANA

Arrests of foreign businessmen reflect the cautious pace of reform

TANDING beside Belarusian tractors and Chinese machine parts at Havana's S annual trade fair last month, Rodrigo Malmierca, Cuba's foreign trade minister, said the presence of 3,000 executives from over 6o countries proved the appeal of joint commercial ventures with the Cuban government. Many in the audience saw the speech as an attempt at reassurance. Since July Cuba has arrested several foreign managers, and closed three such ventures. Most recently, on October nth, Amado Fakhre, a British citizen and the head of Coral Capital, an investment fund, was woken at dawn and taken for questioning by state security agents. He has been held without charge ever since. His company owns Havana's poshest hotel in partnership with the government, and hoped to win a $400m contract to build homes around a golf course. Its Havana office has been closed and declared a crime scene. Two Canadian executives, Sarkis Yacoubian and Cy Tokmakjian, have met a similar fate. Their questioning has gone on for months, again without charge. Their companies imported cars (including the president's fleet of BMws) and machine parts destined for nickel mining. Cuba's official media have not published details of the cases. But rumours of the allegations-which range from overpaying local staff to offering kickbacks for contracts-highlight the difficulties for foreign investors posed by President Raul Castro's incremental approach to reform. After the fall of the Soviet Union, Mr Castro's brother and predecessor, Fidel, decided that Cuba had to court foreign investment to survive. Hundreds of companies, mostly from Europe and Canada, soon began investing in oil, mining and hotel construction. However, the government never set up tender contests to pick its corporate partners, encouraging corruption. It also required firms to hire workers through a state employment agency that paid meagre salaries, and to restrict any perks-even extra-tasty lunches in staff canteens. As public finances deteriorated, the government cut distributions of subsidised food. Meanwhile, prices for items like soap and petrol have soared. State salaries of $20 a month can no longer cover basic expenses. Cubans fill the gap by trading on the black market, receiving foreign remittances or stealing from state firms. Raul Castro is trying to be bolder than his brother. To shrink the public payroll, he

has legalised self-employment in over 180 professions. Last month he authorised Cubans to buy and sell homes and cars. Perhaps because some of these steps are controversial, he is also cracking down on corruption, which the cash-strapped state can no longer afford to fund. Gladys Bejerano, the comptroller-general, has had dozens of employees in the sugar, mining, telecom and tobacco industries jailed for graft. Yet for now, Mr Castro still considers letting foreign firms pay market wages a step too far. That has forced companies to break the law-and run afoul of his newfound efforts to enforce it. "My people help run a business which brings in millions of dollars to Cuba," says one European businessman, who pays bonuses to his entire local staff under the table. "I need to pay them a monthly salary which is rather more than the price of a taxi ride home." • Human rights in Mexico

Friendly fire MEXICO CITY

Sending soldiers to do the job of police has led to widespread abuses

ARZATE was walking to his home Ia SRAEL in Ciudad Juarez in February 2010 when truck pulled up. Two men forced him into the back seat. When they got out, he says, they blindfolded him, made him strip, and applied electric shocks before suffocating him with a plastic bag. He finally broke when they told him that without his co-operation, his wife would be found "dumped and raped in an empty lot". Gangsters rich on drug profits have brought hell to Juarez, a dusty border city full of such grim tales. Yet Mr Arzate's alleged torturers were not criminals but soldiers. As part of a crackdown on organised crime, Felipe Calderon, the president, has

A cure worse than the disease?

sent so,ooo troops to police the streets of Mexico. They have helped to kill or capture some of the country's most wanted kingpins. But poorly trained and under pressure to get results, some have resorted to the same tactics as the criminals. Complaints against the army have soared. In the four years to 2006, the National Human Rights Commission (CNDH) received 691 such accusations. In the next four years, following the troops' deployment, it received 4,803. Officials admit that many cases go unreported. On November 9th, Human Rights Watch (HRW), a lobby, presented evidence of the police and army's role in 24 extrajudicial killings, 39 disappearances and 170 cases of torture since December 2006-all in just five of Mexico's 31 states. "Rather than strengthening public security in Mexico, Calderon's 'war' has exacerbated a climate of violence, lawlessness and fear," it said. Not everyone wants the troops out: soldiers patrol only at state governments' request, notes Felipe Zamora, the undersecretary for human rights. And despite the violence, Mr Calderon has not exercised his option to suspend some human rights by declaring a state of emergency, he says. Still, the government has shown little interest in prosecuting offenders. Rogue soldiers have operated with impunity, partly because investigations against them are run by secret military tribunals even when the alleged crime is against a civilian. The number of investigations carried out by the army rose from 210 in 2007 to 1,293 in 2009, according to HRW. But so far only 29 soldiers have been convicted. That partly reflects the glacial pace of justice. Raul Plascencia, head of the CNDH, is critical of the army's investigations, but says that many are still open and may yet yield convictions. On November 4th a military tribunal sentenced 14 soldiers to long jail terms for a checkpoint shooting that killed five women and children in 2007. Better still would be to bring soldiers into the civilian legal system. The InterAmerican Court of Human Rights has declared Mexico's military tribunals illegal four times. In July the country's own Supreme Court ruled in agreement. But the tribunals go on. Mr Zamora says that changing the law is a "high priority". But Mr Calderon himself has suggested placing only some crimes under civilian jurisdiction, leaving others-including extrajudicial execution-to the army. With the war going badly, the government seems in no hurry to expose soldiers' wrongdoing. Brushing such problems under the carpet will ultimately be counter-productive. The government's biggest task, Mr Zamora says, is to "rebuild the social fabric" of the country. For people like Mr Arzate, still behind bars following his "confession" to helping a drug gang massacre teenagers, faith in society will be hard to restore. •

47

Also in this section 48 Pakistan and the rise of Imran Khan 49 Afghanistan and the Tali ban 49 Asia-Padfic trade initiatives 50 South-East Asian summitry 52 Banyan: One dam thing after another

For daily analysis and debate on Asia, visit Economist.comfasia Economist.comfblogsfbanyan

China's restive Tibetan regions

No mercy SONG PAN

Self-immolations continue, as do the Communist Party's hardline policies "THEY are suffering. They have no rights", says a red-robed monk of his fellow Tibetan Buddhists on the other side of a snow-topped mountain in Sichuan province, in south-west China. His small monastery in Songpan county has so far been spared the worst of an intense security clampdown in Tibetan areas of Sichuan, following a series of self-immolations by Tibetan protesters, most of them monks and nuns. China calls them terrorists, and fears the suicides could spark renewed unrest across the vast plateau. Over three years ago Tibet and Tibetaninhabited parts of Sichuan, Qinghai, Gansu and Yunnan were engulfed by the biggest wave of anti-Chinese unrest in decades. Today it is in Sichuan's highlands that the authorities appear to be struggling most to contain simmering discontent among ethnic Tibetans. Sichuan's two "autonomous prefectures" with large Tibetan populations are Aba (Ngawa in Tibetan) and Ganzi (Kardze), whose combined area is almost the size of Great Britain. Much of the area was once part of the famously warlike traditional Tibetan region of Kham. In 1991, China's then Communist Party chief, Jiang Zemin, said that "to keep Tibet stable, it is first necessary to pacify Kham". That attitude is an ancient one among China's rulers, and still applies.

600 km

Beijing

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A

Songpan county is perched on the north-eastern edge of Aba and has become a magnet for ethnic Han tourists from across China. But tourists are not encouraged to go deep into Aba, where police swarm in remote towns and keep restive monasteries under guard. In Aba town itself, about 150km (95 miles) away, armoured personnel carriers have been deployed on the streets. The authorities have been trying to keep foreign journalists out of the worstaffected areas of Aba and Ganzi. They are nervous that news of the immolations and the grievances that led to them will inflame tensions among more than rm Tibetans in the two prefectures. (The population

in Tibet proper is three times larger.) The handful of journalists who have ventured beyond Songpan this year have been briskly caught and turned back. The police have recently been helped by snowfall on the mountain road from Songpan to Aba town, which is at around 3,200 metres (10,500 feet) above sea level. Officials have reason to be fearful. For Tibetans, self-immolation is a new form of protest. Such acts are difficult for the authorities to prevent, and images of them can have a powerful psychological effect among sympathisers. Eleven Tibetans have tried to kill themselves this way since March. Six have succeeded, the latest a 35year-old nun in Ganzi on November 3rd. On October 19th Tibet's exiled spiritual leader, the Dalai Lama, held a prayer ceremony for the dead in Dharamsala, the Indian town where he now lives in exile. China's foreign ministry accused him of inciting "terrorism in disguise". Fire extinguishers have become the accoutrement of choice for police patrols (see picture) as far away as Lhasa, the Tibetan capital some 1,2ookm south-west of Songpan. The anger and desperation that has prompted Tibetans to set fire to themselves is common across the plateau. In all of China's Tibetan-inhabited areas, the authorities have rounded up innumerable monks, nuns and laypeople for taking part in the 2008 unrest. Reports of torture are rife. Many monks have been forced to denounce the Dalai Lama, who even in Songpan, where things are relatively calm, is deeply revered by Tibetans. This correspondent was often asked for news of him. "You can't call yourself a monk unless you support the Dalai Lama", says a Songpan resident. ~~

The Economist November

48 Asia But Aba and Ganzi share an additional layer of resentment. Both prefectures saw the only well-documented cases of police firing on demonstrators in 2008 (20-30 people may have been shot dead in Aba town). Unlike Songpan county, where monasteries are small and scattered, Aha's main monastery, called Kirti, is large and central. Monks at Kirti have been particularly prominent in the prefecture's unrest, and the monastery is now under heavy police guard. Woeser, a Tibetan blogger in Beijing who closely monitors the region, says the authorities inadvertently exacerbated Sichuan's instability by expelling hundreds of visiting monks from monasteries around Lhasa after the 2008 unrest. Many of these monks were from Sichuan, and they returned to their monasteries with tales of Lhasa's upheaval and the recrimi-

nations that followed. Others, barred from their original monasteries, became wandering malcontents. In Ganzi, Woeser says, passions have been stoked by the hardline fulminations of the prefecture's ethnicHan party chief, Liu Daoping. (Aba has a Han party secretary too, as, invariably, does Tibet itself.) The authorities have tried to intimidate Sichuan's Tibetans into giving up their protests by imposing heavy sentences on monks accused of involvement in the immolations. Free Tibet, a London-based NGO, says six have been jailed so far. Whose side the judiciary is on is clear from the title bestowed on Songpan's county court: "Advanced Collective Engaged in the Task of Opposing Separatism and Preserving Stability". Not much subtlety or accommodation there. Sichuan's restive monks can expect no mercy. •

Pakistan and the rise of Imran Khan

Second coming ISLAMABAD

A brilliant cricketer hopes that decency and charisma can overturn a corrupt political order AS A magnificent fast bowler, Imran 1""\.Khan terrorised batsmen. Now a politician, he told an adoring crowd late last month that one of his feared inswingers would knock out both President Asif Zardari of the ruling Pakistan Peoples Party (PPP) and the main opposition leader, Nawaz Sharif. The next general election is due by early 2013 but likely to be called before that, possibly as early as the spring. Mr Khan captained the Pakistan cricket team to a famous world-cup victory in 1992, a moment Pakistanis still talk about. For 15 years he has tried to apply his looks and charisma to a political career. Until recently his efforts have underwhelmed. But after a huge and vibrant rally in Lahore,

capital of Punjab province and the country's second-biggest city, the mainstream parties can no longer ignore him. Some 1oo,ooo cheering supporters showed up. Mr Khan dreams of leading a mass movement of motivated Pakistanis calling for an Augean clean-up of the country's abysmally corrupt politics. He adds a strong dose of conservative (though not radical) Islam to the mix. Meanwhile he calls for Pakistan to walk away from its stormy alliance with the United States and the "war on terror": America, not the Islamist militants, is to blame for the region's violence and instability. The message now resonates among urban, middle-class types such as those at

12th 2011

the rally in Lahore. Many had not previously engaged in politics. But Mr Khan also attracted others, from mullahs to lorry drivers. Now no longer so young himself-he turns 59 this month-Mr Khan seems to appeal especially to18- to 30-yearolds, who make up a quarter of the population of 177m. It helps that many Pakistanis are deeply disillusioned with the country's political class. They see a kleptocratic state, teetering on the edge of anarchy and serving only a ruling cabal of politicians, bureaucrats and the military men who operate in the shadows. There was a time when all the mainstream parties came knocking at Mr Khan's door for support. He now represents a real threat. In particular, Lahore is the home base of Mr Sharif, leader of the conservative Pakistan Muslim League-N (PML-N) and a former prime minister whom the army ousted in1999. This is one reason why the soldiers are keen on Mr Khan; another is his anti-Americanism. Mr Khan's appeal is that of an anti-politician, someone not part of the oily system. Raising funds from the public, he built a university in a rural area and a cancer hospital where rich and poor are treated. It gives him a moral standing above the country's tawdry politicians. And also, say his critics, a Messiah complex. Certainly, Mr Khan can come across as naive. Make corruption disappear, he says, and you have solved all the country's political and economic problems. He also believes he can negotiate with the extremists, bringing peace to the country "within 90 days". Some of his policies, such as electing police sheriffs and using traditional tribal justice to settle local disputes, could go scarily wrong. Messiahs are not enough in Pakistan's electoral system, where elections are won constituency by constituency, and party machines are all. The two established parties have formidable organisations. Their candidates have the connections to provide constituents protection from predatory police and the vagaries of the local courts. Mr Khan wants to overturn these corrupt relationships. But his own political party, Pakistan Tehreek-e-Insaf (Movement for Justice), has only ever managed to win a single seat. Mr Khan predicts a political "tsunami" carrying him to power. But unless he shows a firmer grasp of both organisation and policy, the country's brilliantly awful politicians will continue to milk state funds to run their regional fiefs. Arif Nizami, the editor of Pakistan Today, says that one blockbuster rally does not mean that the political game has changed. Mr Khan faces a dilemma over whether to field political outsiders at the next election or bring familiar faces into his party. They would help pull in some votes, says Cyril Almeida, an analyst, but would alienate those seeking a new politics. An

~~

The Economist November

Asia 49

12th 2011

Asia-Pacific trade initiatives

Afghanistan and the Tali ban

Dreams and realities

Collateral damage KABUL

The Taliban are more violent, but the locals are not turning against them

OR years a dark hope has lurked in the F minds of some senior NATO soldiers in Afghanistan: that the Tali ban-led insurgency might turn on the country's rural population, killing, maiming and intimidating civilians instead of wooing them in more subtle ways. The hope, voiced always in a whisper, is that a nastier Tali ban would then be com prehensively rejected by ordinary Afghans. Such unmentionable thoughts are deeply at odds with the stated NATO policy of trying to protect the population as much as possible from the de predations ofTaliban insurgents. Nonetheless, the view is particularly prevalent among American military alumni of An bar, the province in Iraq that descended into hell when (foreign) al-Qaeda insurgents overran it. In 2006 Iraqi civilians took a stand against the insurgents and ran them out of town. During the past year or so Tali ban insurgents appear to have taken ever less care to protect civilians. According to UN statistics, they were responsible for fourfifths of the 1,500-odd civilian deaths caused by fighting in the first six months of this year. One reason is that, as local insurgents have been captured or killed inN ATO operations, Tali ban leaders have responded by sending in fighters from "out of area": usually young, inexperienced hotheads from Pakistani madrassas, less fussy about harming or alienating locals. Kate Clark, at the Afghanistan Analysts Network, reports that in the south-east, the insurgents' quasilegal structures for establishing the guilt of alleged spies have largely been abandoned in favour of summary executions. This summer insurgents in Helmand province in the south hanged the eightyear-old son of a local policeman. This kind of thing is at odds with Tali ban claims to protect ordinary people from predatory warlords, corrupt government officials and infidel NATO invaders. In a sign that the movement itself is ~

alliance with Mr Sharif would almost guarantee election victory. Yet, for now, Mr Khan is squarely targeting Mr Sharif's core supporters in the east of the country. Opinion polls still have Mr Sharif well out in front. But they also indicate rising support for Pakistan Tehreek-e-Insaf. One unpublished survey in the summer put its national support at an astonishing 20%, which is level with Mr Zardari's PPP and only eight points behind PML-N. The poll

starting to worry about its own behaviour, Mullah Omar, the one-eyed Taliban chief, based over the border in Pakistan, has just issued a rare statement threatening rogue insurgents with sharia justice if they kill or injure civilians. Unfortunat ely, as NATO hastens to point out, just days after the mullah's proclamation, a suicide bomber blew himself up at a mosque in a north-eastern province, Baghlan, killing seven and wounding 17. Although the Taliban insurgency is getting nastier, little suggests that the Afghan people are being pushed towards an An bar-style "awakening". Despite a few isolated incidents, including one group of infuriated villagers in Helmand who stoned a Talib to death this summer, Afghans are still more likely to blame their increasingly miserable circumstances on the foreigners. What is more, levels of violence are nowhere near those that prevailed in Iraq at the height of its insurgencies. And the risk of defying the Tali ban is still high. Civilians know that the Afghan government will only rarely be able to protect them.

Hotheads, or nice local lads? showed that Mr Khan also has support in the north-west, though more so in the nonPushtun areas there. Ethnic Push tuns, who have borne the brunt of extremist violence, appear to be put off by what they see as his weak stance against militants, the poll found. They are not swayed by Mr Khan's message of hope. But in Lahore last month a lot of people seemed to believe that things can improve, and the Khan bandwagon rolls on. •

SEOUL AND TOKYO

A battle over American-led free trade brews in Asia

HE American president is bringing a T new-or at least rewarmed-cause to the Asia-Pacific region: free trade. Barack Obama recently signed a ground-breaking free-trade agreement (PTA) with South Korea, after years of Washington foot-dragging. He signed FT AS with Colombia and Panama on the same day. On November 12th-13th the president hosts an Asia-Pacific trade jamboree in Honolulu which, he seems to hope, will give momentum to the idea of a remarkably ambitious free-trade zone at just the time when global trade talks are going nowhere. Mr Obama's plans hang on negotiations for a little-known but rather liberal trade grouping, called the Trans-Pacific Partnership (TPP). These will take place on the sidelines of the annual summit of APEC (Asia-Pacific Economic Co-operation), a gathering long famed for its waffling. Currently, TPP members number only four small economies: Brunei, Chile, New Zealand and Singapore. But over the past year America, Australia, Malaysia, Peru and Vietnam have made progress in talks to join the club. Were America a member, its trade with its eight fellow TPP members would amount to little more than 5% of all its foreign trade. But some quietly hope that the TPP will serve as a "docking station" for an APEC-wide free-trade area. That would further move the global centre of economic gravity from the Atlantic Ocean to the Pacific. An announcement was expected after The Economist went to press that will heavily influence such an outcome. In Japan the prime minister, Yoshihiko Noda, was expected to declare that his government would join the TPP talks, despite strong reservations even from within his own party. Japan's share of America's trade, at 5.6%, exceeds that of all the current TPP partners put together. A combination of American and Japanese heft could, say TPP advocates, entice other countries, such as Canada, to join the group. Even China, where some are deeply suspicious about the project, might eventually feel compelled to join. Yet such impetus also hangs on South Korea. There, President Lee Myung-bak's Grand National Party is desperately attempting to force ratification of the FT A with America through the National Assembly. It faces vigorous opposition from left-of-centre opponents-the same people ~~

so Asia ~ who

were in power when the original deal was agreed on in 2007. The public mood has shifted to the left before parliamentary elections next April. Mr Lee's struggle to win approval for the FT A in what is one of the most tradedependent nations on earth foreshadows political problems that are almost bound to arise elsewhere during attempts to enlarge the TPP . In America many greet the prospect of Japan's inclusion with caution. Congressional leaders from both parties question whether membership would really succeed in breaking down Japan's "deeply embedded barriers" to cars, farm products, medicines and other American exports. There is opposition from the United Auto Workers union, whose backing will be crucial for Mr Obama in the presidential election next year_ His support for free trade has never been more than tepid. Adding to the potential complications, the TPP would need the Obama administration to ask Congress to pass the bill under "fast-track" trade-negotiating authority, something very unlikely in an election year. Smaller TPP members will welcome Japan more readily, partly because it would give them access to a second huge market in addition to America's. And Tokyo might act as a counterweight to Washington in sensitive areas such as pharmaceuticals. However, all the minnows worry that the "gold standard" trade talks might be tarnished by enlargement. Currently, almost everything except labour mobility is up for liberalisation, making the TPP one of the most comprehensive free-trade treaties yet conceived. But if Japan takes part, it may seek to take its protected rice market off the table. That might embolden American efforts to shelter its extravagantly subsidised sugar industry. Yet the biggest battle may be in Japan itself. Analysts say that though Mr Noda believes in the TPP as a means to bring about a more competitive economy, he has yet to convince the public of its merits. And so the field is open to vocal opponents, who include protected farmers, doctors and small businessmen fearing an onslaught of competition. The main argument used in favour of TPP in Japan has been defined in negative terms: that without it, Japanese firms will be hard-pressed to compete with South Korean ones benefiting from their country's myriad free-trade deals of late. That is hardly an inspiring cause. To win over American sceptics, Mr Noda will need to convince his counterparts that he has enough domestic support to negotiate in good faith. If he can achieve that,Japan might start a long-overdue push to reform and revitalise its economy. And then the TPP might become more than just another Asia-Pacific acronym that only wonks have heard of. •

The Economist November South-East Asian summitry

The happening place JAKARTA

America, which declares it never went away, now says it's back HE Americans are back. As if to reasT sure a region that sometimes feels neglected, Hillary Clinton proclaims in an essay in the current issue of Foreign Policy that: "The future of politics will be decided in Asia, not Afghanistan or Iraq, and the United States will be right at the centre of the action." If all goes to plan, America will take big steps towards this goal at an upcoming summit hosted by the Association of South-East Asian Nations (ASEAN) on the Indonesian island of Bali on November 17th-19th. The ten-member regional grouping will first be holding its own heads-of-state summit on Bali. But their annual shindig will be overshadowed by President Barack Obama's planned attendance immediately afterwards at the East Asia Summit (EAS), a body to which the United States will formally accede. The EAS was founded six years ago as a diplomatic extension of ASEAN, and includes other countries, such as Australia, China and India, that have interests in the Asia-Pacific. America's accession will be momentous for everyone, argues Robin Bush, the optimistic head of the Asia Foundation in Jakarta, because it ensures America a permanent place at the forum where the region's future will be shaped. American diplomats claim this is reward for Mr Obama's economic and diplomatic investment in the ASEAN region, America's fourth-largest overseas market.

12th 2011

The United States appointed a special envoy to ASEAN, based in Jakarta, signed the A SEAN Treaty of Amity and Co-operation, and has taken part in the ASEAN Regional Forum, a security talking-shop. America has long had close relations with countries like Thailand, the Philippines and Singapore (which are all treaty allies). But in recent years it has also worked on improving ties with countries that have in the past antagonised it. It has forged what Mrs Clinton calls a "new partnership" with Indonesia, the giant of South-East Asia and the world's most populous majority-Muslim country. This has even meant a resumption of training Indonesia's controversial special forces, accused of past human-rights abuses in East Timor, West Papua and Aceh. The rapprochement with Vietnam has deepened, both economically and politically: in 2010 the USS George Washington was the first American aircraft-carrier to visit the country since the end of the Vietnam war. This year America even appointed a special envoy to Myanmar, a country it had previously shunned. Meanwhile, ASEAN countries have become increasingly keen for America to come closer, if only as a balance against a rising China. The past couple of years have seen increasing regional tensions, for example in the sea lanes of the South China Sea. Several ASEAN nations dispute ownership of islands with China, and China's preparedness to assert its claims with aggressive warnings and even a bit of gunboat diplomacy has worried smaller neighbours, notably Vietnam and the Philippines. As well as presumed mineral riches under the sea bed, the sea lanes are a vital route for shipping. Balancing Chinese ambitions is also partly why A SEAN has been keen to draw other powers, including Japan, Australia, India and Russia, into its summitry. The association is far too polite to speak so frankly. It talks instead of a new policy to maintain a "dynamic equilibrium" in the region, a term coined by the Indonesian foreign minister, Marty Natalegawa. Above all, A SEAN hopes that America will be in a better position to help keep the peace in the South China Sea. As interests converge between America and ASEAN, ambitions grow. One American think-tank, the Centre for Strategic and International Studies, urges America to move quickly towards negotiating a United States- A SEAN free-trade agreement. For Indonesians, at least, all that lies in the future . For now they are just wondering whether Mr Obama, whose stepfather was Indonesian and who lived in Jakarta as a child, will actually turn up. They have been disappointed a couple of times before, and know the president's schedule can suddenly change. But surely a weekend on Bali is incentive enough? •

Stor2just ban l< ing.

52 Asia

Banyan

The Economist November 12th 2011

I

One dam thing after another

Though the Mekong is in peril, riparian governments seem oddly insouciant

LIMATE change threatens the Mekong river, continental South-East Asia's lifeblood, at both source and mouth. As C glaciers shrink in the Tibetan Himalayas from where the river springs, so will the snow melt that helps to feed it; as sea levels rise, salination will worsen in the Mekong delta in Vietnam at the far end of its 5,oookm (3,200-mile) length. Yet it is what is planned in between-no fewer than 19 dams on the mainstream, in addition to dozens on its tributaries-that is terrifying ecologists. The flows of fertile sediment that have for centuries sustained farmers along the Mekong's banks will diminish. Species of fish that have provided livelihoods and protein for millions of people (some 6om live in the lower Mekong basin) are unlikely to survive the obstacles to their migrations. Four dams have already been built and another is under construction on the northern half of the river in China, which is hungry for its hydroelectric potential. China argues that its full "cascade" of eight dams, to be completed within a couple of decades, will enable it to help avert the dreadful wet-season flooding to which the region is prone-this year, of course, above all. Yet downstream countries-Laos, Thailand, Cambodia and Vietnam-are nervous about the control over them this will give China. Of more immediate concern is the Laotian government's determination to build the first mainstream dam south of China, at a place called Xayaburi. It is already building roads to the site, despite calls for a delay from Vietnam, supported by the Mekong River Commission, an intergovernmental body grouping together the four lower-basin countries. The commission is to meet from December 7th-9th, partly to discuss the Xayaburi project. But as a spokesman for its secretariat puts it: "no country has a veto". It is merely a consultative and research body, not a transnational regulator. The $3.5 billion project, promoted by a Thai developer and involving a dam 850 metres (2,800 feet) wide with a 6okm-long reservoir behind it, would generate 1,260MW of power. It seems to have almost unstoppable momentum. Laos's government has long seen exports of electricity to Thailand as offering its best chance of bringing prosperity to its 6.5m people, most of whom live in poverty. A 2010 study ("The Mekong; River under Threat") by Milton Osborne of the Lowy Institute, an Australian think-tank, cites an es-

timate of 77 "live" dam projects in the country. Of the world's rivers, only the Amazon has more species of fish than the Mekong. Most are migratory, and experts believe the planned dams will endanger many of them. Michio Fukushima, of the National Institute for Environmental Studies in Japan, who has spent five years studying the Mekong's fish, says no one really knows the impact Xayaburi alone would have. Fishery is one of the many aspects of the environmental-impact assessment prepared for Xayaburi's developers that has been flayed by experts as woefully inadequate. The real fear, however, is that once that project goes ahead, the taboo on the downstream construction of dams would be broken. Others would follow. The country most at risk from this is Cambodia. By some estimates seven-tenths of Cambodians' consumption of animal protein comes from fish caught in the Mekong or in its great lake, the Tonle Sap. At its low point, the Tonle Sap has an area of 2,700 square kilometres (1,ooo square miles), much of it just a metre deep. In the wet season it more than doubles in area with a depth in some places of nine metres. As it starts to empty, each October or November, 50,000 fish a minute swim out of the lake. So it is puzzling that Cambodia, though it has expressed reservations about Xayaburi, is not up in arms about it. This is a country, after all, that this year risked all-out war with Thailand in a petty spat over a bit of disputed borderland. There are a number of possible explanations. One is that two of the 11 planned downstream dams are in Cambodia itself. Another is that China supports dams and is a generous benefactor to the elected but dictatorial government of Hun Sen, the prime minister. A third is that Cambodia, like Laos, is riven with corruption. A tiny percentage of a billion-dollar project can buy a lot of acquiescence in poor countries. Perhaps leaders are ignorant of or simply do not believe the weight of scientific evidence against the dams: for instance, experts concur that the mitigation techniques advertised as saving migratory fish, such as ladders, lifts and bypasses, are ineffective. Mr Osborne speculates that another factor is the perception that dams, electricity and mega-projects are the symbols of a modernistic future; fishing and subsistence farming, by contrast, are reminders of a backward past. Bear in mind, too, that both Laos and Cambodia are top-down, one-party states where NGOs are weak and public opinion is not a prime concern. Michael Coe, an expert on South-East Asia at Yale University, makes the comparison to the Soviet Union's devastation of the Aral Sea. Vietnam, along with the region's environmentalists, is much clearer in its opposition to going ahead with Xayaburi. Laos's willingness to ignore such critics suggests that, these days, the foreign voices it listens to most attentively come from the north, from China.

The otolith race That Laos's downstream neighbours-both of them partners in the Association of South-East Asian Nations, ASEAN-have no mechanism for stopping its plans shows the limits to regional cooperation. The Mekong River Commission, like ASEAN itself, is about consultation, process and consensus. No member is prepared to cede its national sovereignty, even on an issue as patently transnational as the Mekong. And so Mr Fukushima, whose expertise is in examining otoliths-the ear bones that provide a history of a fish's migratory patterns-says he feels he must hurry to finish his research. •

53 Also in this section 54 Libya and its allies 54 Chad, Mali and Niger 55 Egypt's military Leaders 55 Africa's amputees 56 Nigeria's new government

For daily analysis and debate on the Middle East and Africa, visit Economist.comfworldfmiddle-east-africa

Israel squares up to Iran

That's right, Iceman. I am dangerous A game-changing report by the UN's nuclear watchdog could be the prelude to a strike on Iran. Or maybe not.

'l '1 JESTERN governments have long VV been convinced that Iran is pursuing military objectives with its secretive nuclear programme. But until this week the International Atomic Energy Agency (IAEA), jealous of its credibility as a non-political, science-led body, said it had no unambiguous proof of Iran's intention to build a bomb. A report it published on November 8th still falls just short of that proof, but nonetheless marks a watershed. The IAEA's report says that it "has serious concerns regarding possible military dimensions to Iran's nuclear programme. After assessing carefully and critically the extensive information available to it, the agency finds the information to be, overall, credible ... that Iran has carried out activities relevant to the development of a nuclear explosive device." A 12-page annexe offers a convincing narrative of Iran's progress towards becoming a nuclear-weapons power. It says that Iran created computer models of nuclear explosions in 2008 and 2009 and conducted experiments on nuclear triggers. It says that the simulations focused on how shock waves from conventional explosives could compress the spherical fuel at the core of a nuclear device, which starts the chain reaction that ends in an explosion. The report goes on to state that Iran went beyond such theoretical studies and built a large containment vessel at its Parchin military base, starting in 2000, to test

the feasibility of such explosive compression. It calls such tests "strong indicators of possible weapon development." Western intelligence sources believe that Iran now has enough highly enriched uranium to build, should it choose to do so, at least one nuclear weapon within a year and that this could be rapidly followed by several more. It is less clear whether Iran is capable of putting a miniaturised warhead on one of its Shahab 3 ballistic missiles, which have a range of 1,200 miles (1,900 km), but the IAEA suggests it has conducted experiments to that end. The report, predictably rejected by Mahmoud Ahmadinejad, Iran's president, will give new impetus to Western diplomatic efforts to tighten the UN Security Council's sanctions regime. However, with China and Russia already saying that they will oppose any attempt to impose more punitive sanctions on Iran, there has also been fresh talk of resorting to military action, particularly from Israel. Over the past fortnight, a number of articles have appeared in Israeli newspapers claiming that the prime minister, Binyamin Netanyahu, and the defence minister, Ehud Barak, have dusted off long-standing plans for a pre-emptive strike on Iran's nuclear facilities. Many Israeli analysts believe that the two men are capable of winning round more sceptical cabinet colleagues, and that once they have done so the leadership of the Israeli Defence Force will

swallow its doubts, salute smartly and get on with an attack. Those doubts are, however, wellgrounded. Iran's nuclear facilities are numerous and dispersed; several of them are sheltered underground and defended by modern short-range Russian missiles; there may even be some that the Israelis know nothing about. It is likely that an Israeli attack would concentrate on three fairly visible sites: the uranium-enrichment plant at Natanz (a hardened underground facility that would need to be hit several times); the heavy-water reactor at Arak; and the Russian-built light-water reactor at Bushehr. By throwing in every military thing at its disposal, Israel might slow by a few years Iran's progress towards acquiring the bomb. But there would be no guarantee of that, and it would be a near-certainty that Iran would react with missile attacks of its own, and by its well armed proxy forces: Hizbullah in Lebanon and Hamas in Gaza. Why would Israel attack now when, for some of the reasons above, it has previously stayed its hand? There are several possible answers. The first is that Iran is rapidly moving centrifuges to its once-secret site at Fordow, buried deep inside a mountain and possibly invulnerable to attack by conventional weapons. Second, Syria's internal chaos may take Iran's most important regional ally out of the game. Third, the departure of American forces from Iraq removes both a focus for Iranian retaliation and a constraint on America. Fourth, if Messrs Netanyahu and Barak reckon that they need America's military might to complete what they start, there may be no better combination to ensure that than a politically weak president whose Republican opponents have made unquestioning support for Israel a wedge issue a year before a presidential election. •

The Economist November 12th 2011

54 Middle East and Africa Libya and its allies

All too friendly TRIPOLI

The war may be over but foreign powers are still busy in Libya HE Libyan rebels who triumphed in T their six-month uprising against Colonel Muammar Qaddafi could not have prevailed without arms, air-cover, funding and diplomatic support from NATO and Arab allies. Even so, victory belonged to them. No foreign ground troops were deployed. Brave Libyans protected Benghazi, defended Misrata and captured Tripoli. The country's new rulers emerged from the war with hard-earned legitimacy, giving them a decent chance of setting up a unified national government. Last month they thanked their foreign allies and bid them goodbye. Most allies in turn stressed that the Libyans were in charge. Time to go home, they said: this was not Iraq in 2003. However, since the fighting ceased some allies have become more involved in Libyan affairs, not less, according to Western diplomats. Libya is a small, rich and homogenous country. None of its political factions and fledgling parties are dominant. To gain influence (and wealth) they know they must co-operate. A successful post-war political system will be based on competition. But it can only work if no one group gains dominance. Some could potentially make a bid for hegemony, but only if they have access to outside resources. Parts of the new establishment are worried when they see foreign powers giving selective backing to their opponents-often those prepared to do their bidding. This not only undermines the new republic's aura of legitimacy, but risks igniting internecine conflicts beyond the messy politics that is already playing out in Tripoli. The worst offender is Qatar, according to several Tripoli-based diplomats. The small Gulf state was instrumental in arming the rebels. Earlier this year it sent hundreds of weapons shipments and military advisers to Libya and lobbied hard for international intervention. Not surprisingly, the Qataris are revered among Libyans. All over Tripoli, squares and districts have been renamed in their honour. Yet the Qataris are now supporting the political ambitions of hand-picked leaders and commanders, undermining attempts to form a unified military command. Some members of the National Transitional Council are seething. They say even during the war the Qataris bypassed them, sending weapons directly to favoured units at the front. To a lesser extent some Western powers are also pushing their own men or models.

This is not a new phenomenon in the Middle East. In Lebanon and Iraq, two volatile Arab democracies, outside powers run democratic proxies and interfere in national affairs at will-often out of self-interest. One political group is in the pockets of the Saudis, another is paid by the Iranians. If Libya wants to have a better future it must avoid going down that road, wise heads in Tripoli warn. Neighbours like Egypt have so far stayed out of Libya. But they will not want to be outflanked by Gulf states on their own doorstep. Thankfully, Libya is coping well with liberation. Shops and cafes are once again open late, celebratory gunfire has died down, concerts are held in Tripoli's Martyr's Square, known as Green Square under previous management. Life has returned to normal. Admittedly, heavily armed groups from different parts of the country still control overlapping turfs. One Tripoli militia comprising about 50 gunmen is operating out of an appropriated computer-showroom decked out with revolutionary tricoloured flags. The militia was recently involved in a firefight with rivals. A squabble outside the Central Hospital between fighters from Zintan and Misrata left one dead. But such skirmishes will not undermine the new order, says Bashir al-Sweie, a commander based in a governmentowned arboretum, who would like to return to business once the security forces are in place. Many young men, said another commander, are frustrated that they risked their lives on the battlefield but have yet to be rewarded. A plan to educate and rehabilitate soldiers will probably take months. Outsiders who want to help could offer to support that, instead. •

Chad, Mali and Niger

Just deserts

NAIROBI

The backwash from Libya's revolution UAMMAR QADDAFI was adept at M negotiating with Tuareg nomads in the Sahara and created alliances with many of their clans. Hundreds of Tuareg fighters stood by him as his regime fought a losing battle for survival. Now they are going back to the desert regions of Chad, Mali and Niger, possibly bringing a host of problems with them. Some Tuareg acquired high-tech weapons during Libya's civil war, and may have taken them home. At least 13 died in a shoot-out with government forces in Niger on November 9th. Gold dished out by fleeing Qaddafi officials could pay for insur-

Libyan relations MAU

1990s Tuareg rebellions, peace treaty mediated by Qaddafi 2007-09 Tuareg rebellions, ceasefire . _bro_ke_red ~¥. qad_~afi_. '" ..... . NIGER 1980s Libya supplies Tuareg rebels with training and arms Mid-1990s peace treaty, mediated by Qaddafi 2007-09 Tuareg rebellion s, ceasefire . _bro_kered ~¥. qad_da_~ ........ .......... . CHAD 1986 unsuccessfu l Qaddafi invasion 1990 military coup 1994-95 rebel militia clashed with army 1998-2003 frequent fighting in Tibesti region 2006 and 2008 rebel assaults on capital Sources: International Crisis Group; Conflict and Conflict Resolution in the Sahel: The Tuareg Insurgency in Mali by Colonel Kalifa Keita ; press reports; The Economist

gencies. Fighters might also link up withalQaeda in the Islamic Maghreb, a regional terror group. This comes at a time of growing radicalism in Mali and Niger, with illiterate and disillusioned citizens finding solace in mosques. Yet talk of Tuareg uprisings is often overstated. For all their swagger and Star Wars-style dress, the Tuareg are not numerous. Mali has 75,000 in a population of 15m. Some rebel groups may contain no more than a few dozen fighters. The main threat from the Libyan revolution to its southern neighbours is the economic impact. Idriss Deby, Chad's president, owed his strongman role in part to Qaddafi's largesse. He is not trusted by Libya's new rulers, who are unlikely to continue the colonel's open-purse policy. Chadian oil revenues are also in decline. Mali is more stable, but President Amadou Toure is stepping down next year and elections may be combustible. Another concern is the new Libyan government's lack of interest in Qaddafi's investments in Malian agriculture, which this year produced bumper harvests. In Niger the government has had to work hard to distance itself from dozens of Qaddafi loyalists, including at least one son, who have taken refuge in the country. Furthermore Tuareg returning from Libya are mostly from Niger. An estimated 2oo,ooo Nigerien migrant workers have suddenly come home as well. President Mahamadou Issoufou, who came to power this year after replacing a caretaker military regime, is already dogged by coup attempts. •

The Economist November

Middle East and Africa 55

12th 2011

Egypt's military leaders

Not doing well CAIRO

The ruling generals seem increasingly out of touch HE shoes of Hussein Tantawi, the 76T year-old field-marshal who has led Egypt since February's revolution, were stolen recently from the door of a mosque (Muslims pray barefoot). Or so says a rumour, speedily plundered for jokes and flashed around by text message, Twitter and Facebook. One purported ransom note read: "Give us back our government and we'll give back the shoes." Ever humourless, the Supreme Council of the Armed Forces (scAF), the ruling body headed by the field-marshal, issued a statement denying that any high-ranking footwear had gone missing. But the gibes have persisted, perhaps because, as is often true in a country famed for sharp wit, the joking masks serious messages. One is growing public irritation at remaining under the thumb of an army that repeatedly promised to surrender power to an elected civilian government but that keeps finding excuses to linger, while trying civilians in military courts-more than 12,000 so far. Egyptians look enviously towards Tunisia, which also rose up last winter but has almost completed a smooth transition to democracy. Three weeks before elections that might at an earlier stage have been cheered as a stride in the right direction, many Egyptians are in a grim mood. The economy is sinking into an ever-deeper mess. Military rulers appear incompetent, out of touch and violently reactionary, while civilian politicians bicker and appear increasingly polarised between Islamists and secularists. Worst of all, the road map for transition outlined by the generals is so meandering and open-ended that many Egyptians find it hard to discern a horizon that might mark the end of their country's political transition. Polls that open on November 28th, for instance, are only the first of no fewer than 12 rounds of voting that will take place over the following three months. These are to choose both upper and lower houses of parliament, according to a bewilderingly complex voting formula that mixes proportional and direct representation while reserving half of all seats for "workers and peasants". These bodies will then, in theory, choose a10o-person constitution-writing council, which would submit its draft to a referendum after six months, followed by presidential elections and then, presumably, more elections for a fresh parliament under new rules.

Even more frustratingly the generals have decided to change the rules. Concerned that the Muslim Brotherhood and its more extreme Islamist allies could win enough parliamentary seats to force through a radical constitution, they have belatedly pressed for a set of supra-constitutional principles that would bind future drafters. Some secularists have welcomed a proposed clause that describes the army as a guarantor of the civil (as opposed toreligious) nature of the state. But the generals seem to have overreached with their latest demands, alienating not only Islamists. Liberals were outraged by suggestions that Egypt's military budget should be shielded from parliamentary oversight, while the SCAF enjoys

veto power over any legislation affecting the army. As has happened several times since the revolution, faced with pressure the army backed down and suggested compromises. But in the eyes of many Egyptians it has now revealed its hand, proving that it is not particularly interested in democracy and rather keen on ensuring its own dominance. With the country's liberals in perennial disarray, and Islamists scenting a chance to put on a convincing show of force at the polls, the stage looks set for an uncomfortable and prolonged struggle. Much as under Mr Mubarak, Egyptians may find themselves choosing between the stuffiness of military rule and the constraints imposed by Islamists. •

Africa's amputees

Not just the winning that counts FREETOWN

A football championship brings hope to war victims AFRICA'S recent history is punctuated ./"\..with nasty civil wars. Angola, Congo, Liberia, Sierra Leone, Sudan and others. Most are now over, leaving behind millions of survivors, many short of one or more limbs. The nimblest in several nations have banded together in football teams and will play each other at a continent-wide tournament in Ghana from Novemben8th. The idea is to give hope to amputees, says an organiser, who "might think life has come to an end". Amputee football, which was played elsewhere in the world before its African debut in 2003, has its own rules. The tournament in Ghana is seven-a-side; most players are single-leg amputees (although those with one incapacitated leg are also permitted); goalkeepers have one hand. Samuel Tengbeh, a 28-year-old mem-

ber of the Liberian team, lost his leg in 1999 during the country's civil war and long felt demoralised. "I truly believe we are going to do our best now," he said. African countries with mostly peaceful histories man their teams with accident victims. Francis Antwi-Darkwah, a Ghanaian, lost his right leg in a car crash. He believes amputee football allows the disabled to present themselves in a more positive light. "The community usually looks down on less privileged people," he said. Eight countries have confirmed that they are taking part in the tournament: Angola, Ghana, Kenya, Liberia, Niger, Nigeria, Senegal and Sierra Leone. Lindsay Maggs, who is making a documentary film about amputee players, says the sport offers them "a sense of hope, camaraderie and purpose".

56 Middle East and Africa

The Economist November 12th 2011

Nigeria's new government

Groping forward ABUJA

One and a half cheers for the economy. None for security

RESIDENT GOODLUCK JONATHAN Pmenrecently invited a group of businessto a cattle ranch for a retreat to discuss how to generate faster economic growth. At one point he handed the assembled notables unmarked brown envelopes. Raised eyebrows rippled around the room. The president often castigates corruption. Yet he motioned for the tycoons to open the envelopes. Inside they found not cash but blank pieces of paper, on which he asked them each to write the names of three rentseeking officials hurting their businesses, promising to investigate. It is the sort of story Nigerians like to hear about their president, following his re-election in April. He spent several months in purdah, putting together a cabinet. He lured Ngozi Okonjo-Iweala, the World Bank's managing-director, back home from Washington to act as a superminister for finance and the economy. Olusegun Aganga, her predecessor at the ministry who was once a Goldman Sachs banker, swallowed his pride and stayed on as trade and investment minister. The central bank's outspoken governor, Lamido Sanussi, completes what some call a dream team, others a "scream team". Rivalries among the triumvirate were inevitable; turf boundaries are unclear. But after three months in operation they are generating a new sense of momentum in Nigeria's capital, Ahuja. On October 18th they set up the country's first sovereignwealth fund, hoping to curb the perpetual plunder of oil revenues. They seem willing to pull out the stops to create jobs and raise incomes. Despite global woes, the economy keeps growing by around 7% a year. The Standard Bank predicted on October 17th that it will overtake South Africa's by 2015 as Africa's largest. All the same, the high expectations that came with the president's re-election may not be met. His signature policy, a plan to liberalise the electricity industry, has plainly fallen behind schedule. The start of privatisation has slipped from this year to next. Most Nigerians have no more than a few hours of mains supply a day-the economy's single biggest bottleneck. Africa's most populous nation gets as much grid power as a mid-size European city. If power reform fails, the country's hopes of becoming a G-20 economy in the next decade will remain fanciful, despite its vast size, plentiful resources and undoubted entrepreneurial spirit. Warning

lights are flashing. The unemployment rate in the formal economy has reached a new high of 21%. Inflation has spiked. The currency, the naira, has fallen out of the exchange-rate bracket set by the central bank, which in turn has raised interest rates to a growth -slowing 12%. A proposed phasing out of fuel subsidies is making people tense. The plan is sound in theory. The government spends billions of dollars every year on refined fuel it buys on international markets and retails for only 6o cents a litre at home. Smugglers take some of it to neighbouring countries for resale at full value. Better to spend money on roads and power stations, says the government. Yet poor Nigerians fear that corrupt officials will pocket the savings. The subsidies at least benefit us a bit, they say. Demonstrations and strikes loom. The economy apart, the outlook is no better. Public security has sharply worsened. Boko Haram, an Islamist extremist group, was once a nuisance confined to the far north-east. It has now extended its reach across the country. In September it blew up Ahuja's main UN building, killing 23. In October it assassinated a member of parliament. On November 4th it killed more than 100 people in a series of bombings. The American government later warned of attacks against big hotels in the capital. Boko Haram has dominated Mr Jonathan's second term. Its attacks bear witness to growing ambition and sophistica-

Thank goodness it's not an electric blanket

tion. Foreign and Nigerian officials believe it has linked with al-Qaeda's north-African wing. During his election campaign the president talked of improving relations between the country's Muslim north and Christian south. Instead the gulf is deepening. A former president, Olusegun Obasanjo, a notorious back-seat driver, says he would hold direct talks with the group if he were still in charge. The president is not sitting on his hands. Road-blocks have gone up around Ahuja and some parts of the city are blocked off. But co-ordination is poor. The checkpoint at the airport's entrance has turned into a toll-booth where women collect fees but armed guards are absent. Ministers argue that economics is a higher priority than security. The centralbank governor says extremists mostly want economic growth and that Nigerian Islamists differ from Arab ones, though they say they want most of all to impose sharia law. "The problem will fade if we create jobs," he says. Alas, creating employment in the poor north is a distant prospect. Government reforms will mainly benefit pockets of development in the south, where investors want to go. There is no sign that the machinery of government will soon be able to bring improvements across the rest of country. Still, many Nigerians remain optimistic. They are used to bad news, and there is still a bit of the good sort. Millions are being lifted out of poverty every year, though at a slower rate than in some other booming African countries. The president has also had some foreign-policy successes. Unlike his South African counterpart, he backed the winners in Cote d'Ivoire and Libya. But Mr Jonathan still needs to switch on the lights. Apart from his dream team, he has attracted few bright new minds. And he still seems bent on repaying election favours to a rapacious old guard. He should hand out a lot more brown envelopes. •

SPECIAL REPORT EUROPE AND ITS CURRENCY

Staring into the abyss

The euro crisis might wake Europe up. But more likely, argues Edward Carr, it will lead to compromise and decline

ACKNOWLEDGMENTS Many people helped with this special report, some of them on condition of anonymity. Particular thanks go to: Steven Taylor, Valerio De Molli, Daniela Schwarzer, Thomas Mayer, Matthias Vollbracht, Markus Kerber, Hans-Olaf Henkel, Ulrike Guerot, Martin Roth, Pawel Swieboda, Pawel Zak, Sweder van Wijnbergen, Bart Rijs, Adriaan Schout, Bertholt Leeftink, Eduardo Serra, Jose Manuel Amor, Thomas Klau and Willem Suiter.

WHEN BRITAIN ABANDONED the gold standard in 1931, it was not only forsaking a system for managing the currency but also acknowledging that it could no longer bear the mantle of empire. When America broke the dollar's peg with gold in 1971, it ushered in a decline that continued until Paul Volcker re-established confidence in the currency in the early 1980s. As Joseph Schumpeter, the great Austrian economist, once wrote: "The monetary system of a people reflects everything that the nation wants, does, suffers, is." In the same way, the crisis that has engulfed the European Union (Eu) is about much more than the euro. As government bonds, share prices and banks swoon and global recession knocks on the door, the first fear is of financial and economic collapse. But to understand what is happening to the currency you also need to look at what is happening to Europe. The euro will not be safe until Europe answers some fundamental questions that it has run away from for many years. At their root is how its nations should respond to a world that is rapidly changing around them. What will it do as globalisation strips the West of the monopoly over the technologies that have made it rich, and an ageing Europe starts to look increasingly like the western peninsula of aresurgent Asia? Some Europeans would like to put up carefully designed fences around the EU's still vast and wealthy market. Others, including a growing number of populist politicians, want to turn their nations inward and shut out not just the world but also the elites' project of European integration. And a few-from among those same elites, mostly-argue that the only means of paying for Europe's distinctive way of life is not to evade globalisation but to embrace it wholeheartedly. This is not some abstract philosophical choice. It is a fierce struggle for Europe's future, being waged in Athens as George Papandreou loses power to a temporary government of national unity, in derelict factories in France and Belgium and in the wasted lives of millions of unemployed young Spaniards. This struggle will set the limits on Europe's welfare state. It will determine how the unbalanced partnership between Germany and France, and an increasingly detached Britain, will shape the Eu.lt will define the high politics of Brussels and the low politics of European populism. And it will decide the fate of the device that Schum peter would see as the embodiment of all this: the euro.

The Economist November 12th 2011

CONTENTS

5 The causes

Avery short history of the crisis 6 Austerity

Destructive creation 6 The economics

In theory 8 Anti-EU backlash

Beyond the fringe 10 Europe's big two

The Nico and Angela show 13 Non-members

Look at it this way 14 After the crisis

Making do

A list of sources is at Economist.comjspecialreports

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An audio interview with the author is at Economist.comfaudiovideof spedalreports

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SPECIAL REPORT EUROPE AND ITS CURRENCY FINLAND NORWAY

Just now the euro zone is caught in a Euro-area SWEDEN dismal downward spiral. Fears about government whether the governments in Greece, Porgross debt LATVIA tugal, Ireland, Spain and, most alarmingly, As%ofGDP 2011 forecast Italy will honour their €3 trillion ($4.2 trilDENMARK LITHUANIA Over125 lion) or so of borrowing are wrecking 100-125 European banks, which own their debt. UNITED 75-100 Struggling banks undermine confidence KINGDOM NETH. 50-75 and credit. Coming on top of fiscal austerPOLAND ity, this is bringing on recession, deepen25-50 BELG. G E R MA NY ing fears that governments will be unable 0-25 I LUX. to pay back their debts, which further 0ther European CZECH REP. Union members weakens the banks. And so the vice turns, down towards disaster. Source: European Commission The euro zone still has the capacity FRANCE to stop this run on its banks and governments. As a block, it is less indebted than America and its public-sector deficit is lower. It has the money to fortify its banks against the default of GreeceS PAI N and Portugal and Ireland, if need be. And it is minded by the European Central Bank (ECB), which can in principle stand CYPRUS behind those vulnerable governments by Interactive: Explore our guide to buying their debt in unlimited quantities the troubled economies of Eu rope at MALTA L' on the secondary market. But the EU has Economist.comfeuroguide2011 repeatedly failed to put forward a convincing euro rescue. Its latest and bravest official reckons that, if the French president had at that moment attempt, at the end of last month, fell short of the mark-just like asked for a vote, the heads of government would have suspendall the others. That is because the Europeans are deeply at odds over what the crisis is really about, and riven by disagreement ed the rules. The crisis today is at least as grave as it was then. over what each country must contribute towards solving it (see Since it is possible to avoid such a catastrophe, you might next article). So long as the euro zone's members cannot settle think that the worst will not happen. And indeed it is unlikelybut not impossible. Precisely because of the dire consequences, these arguments, or at least agree that their differences matter less than finding a solution, the collective action needed to deeveryone is counting on the next person to see reason. The new Greek government might reckon that Europe would never let fend the euro will remain impossible. Greece collapse. At the same time the ECB and Germany might Many roads to disaster refuse to step in, because they do not want countries to evade reWhile the world waits for Europe to make up its mind, caform. Or perhaps austerity might eventually lead to populists that turn away from the euro-to hell with the consequences. tastrophe is in the air. It could take many forms. A country might A euro-zone central banker confesses that he has lately storm out of the euro-which the treaty forbids, but who could stop a determined government? European banks might suffer a been thinking about historical catastrophes such as the first world war and wondering how the world blundered into them. fatal loss of confidence. Italy or Spain might become unable to "From the middle of a crisis", he says ominously, "you can see borrow on decent terms. Or a government trying to impose aushow easy it is to make mistakes." terity might be replaced by one that rejects it. Any of these could Economic and Monetary Union (EMU) was supposed to cause contagion and plunge the world economy into depression. Some people speculate that Germany might lead a breakbanish the competitive devaluations that threatened the single away core of euro-zone countries. But as the Teutonic euro market in the early 1990s. It promised to bind a unified Germany soared in value, banks and companies would lose huge sums on into the EU and pave the way for some sort of political union in Europe. Today that dream has not vanished altogether, but the their assets abroad and its exporters would find themselves at a disadvantage. Besides, for Germany to flout an EU treaty so brazsingle market is under threat once more. Europe's nations are at loggerheads, Germany is in a state of outrage, and the link beenly would damage all EU law, which argues strongly against it. Greece is more likely to buckle under austerity and quit tween the euro and the nation state is more fraught than ever. EMU truly is, writes David Marsh, author of a history of the euro, after a succession of governments like the new one. But it would "Europe's Melancholy Union". be a desperate act. Banks would collapse and capital flee, and many of Greece's companies, unable to pay their euro-denomi"The 2008 crisis shows that the dominant economies were not as dominant as they thought," says Dominique Straussnated bills, would go bankrupt. Already shut out of debt markets, Greece would probably lose all financial aid from the EU. Kahn, the French former head of the IMF. "If Europe fails, it will Amid recession and the contagion of a debt default, bank suffer from low growth, economic domination and cultural collapse or Greek departure from the euro, Europe's single mardomination." Can Europe turn back from the abyss? Only if the core countries will support the rest as they submit themselves to ket would be in danger. At an EU summit in 2008, when the financial crisis was raging, Nicolas Sarkozy chastised the commisradical political, social and economic reform. Nobody should be sion for being too zealous in upholding competition. A senior under any illusions about how difficult that will be. •

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The Economist November 12th 2011

SPECIAL REPORT EUROPE AND ITS CURRENCY

count deficits. Low interest rates fuelled domestic spending and spurred inflation in wages and goods, which in turn made their exports more expensive and left imports relatively cheaper. But it was also because Germany was recycling the surpluses produced by its export machine, financing their consumption. Germany's economy is remarkable in many ways, but it was as unbalanced as the euro zone's peripheral economies. In their determination to save, Germans seemed to forget that in the long run the point of exports is to pay for imports. They must now regret having invested their savings abroad in American sub prime mortgages and Greek government debt.

The causes

A very short history of the crisis To understand the politics of the euro, it is necessary to Look at its causes IN GERMAN EYES this crisis is all about profligacy. Greece set the tone when it lied about its circumstances and lived beyond its means (see map and charts opposite and below). There is no disputing Greek dissipation, nor the fact that the euro zone's troubled members, which also include Portugal, Ireland, Spain and Italy, must now pay a heavy price. But those other troubled countries were not exactly profligate. Before the crisis the governments of both Ireland and Spain ran budget surpluses. Both meticulously kept within the limits for deficits and debts set down by the stability and growth pact-unlike Germany, which flouted the rules for four years from 2003 (and avoided punishment). Nor did Italy lurch into extravagance. Debt in these countries has become a burden not because of government profligacy but because each enjoyed a decade of low interest rates and was then hit by the financial crisis. Easy credit fuelled debt in households and the financial sector. The European Central Bank oversaw a binge of cross-border lending. In the crisis unemployment and hardship have deepened, increasing the bill for welfare. Some countries, such as Ireland and Spain, have needed to find money to prop up their banks. These new expenses fell on the state just when tax receipts collapsedcatastrophically in countries that had seen a property boom. At the same time interest rates surged. Before the crisis investors assumed no euro-zone government would default on its debt. However, as Peter Boone and Simon Johnson of the Peterson Institute in Washington, nc, explain, Germany then signalled that defaults could happen and that investors would have to bear a share of the losses-a reasonable demand, but a hard one to introduce in the middle of a crisis. Some investors asked to be rewarded for the extra risk and others, unwilling to start paying for credit research, just walked away. This set off a spiral of falling bond prices, weakening banks and slowing growth. Even where troubled euro-zone countries had not been profligate, they have been running unsustainable current-ac-

I

Your debt, your fault To end the crisis, the euro zone members agreed last month to write down half of the Greek debt owned by the private sector, recapitalise Europe's banks and boost the fund created as a firewall to protect solvent euro-zone governments. It is an ambitious plan, but Greece may need even more help and the firewall does not look strong enough to withstand a bout of contagion. And even when the crisis has abated, restoring Europe to health will take many years. That is because the troubled countries need to control their government deficits and to re-establish sound current accounts by improving their competitiveness. Germans feel that the responsibility for this lengthy adjustment lies exclusively with borrowers, which must urgently restore budget discipline. Significantly, the German word for debt, Schulden, is the plural of Schuld, meaning guilt or fault. However, this strategy risks being self-defeating. By pushing for immediate austerity the euro zone is deepening recession in the troubled economies, which will only make their debt harder to service. Germany's approach suffers from a fallacy of composition. It is not possible for everyone to save their way to prosperity. As Keynes argued after the Depression, someone, somewhere must be consuming. In Europe that should be countries such as Germany and the Netherlands that were running vast current-account surpluses during the boom. But the creditors are loth to accept that they are part of the problem. Creditor governments, most of all Germany, face a dilemma. They need to save troubled governments in order to prevent contagion. On the other hand they also want to keep up market pressure for reforms and to establish the principle that governments are on their own-so that German taxpayers will not be landed with the bill every time some EU country goes on a spending spree. So far Germany is trying to have it both ways, and succeeding only in getting everyone deeper into the mire. •

II

Who are the champions? -

Ireland

Spain

-

Italy

-

France

-

Portugal

-

Greece

-Germany

Budget balance

Nominal unit labour costs

Ten-year government-bond yields

%ofGDP

2000=100

%

................ -

...... - ...................... - ..- ....... -

............................... - ..................................................................................... 30

.............._. 10

-········--·-·········-··............___......... --····...........................,......... -·· 25 _ ....................................................................................................... _..,. ...... 20 ......................................

2000

02

04

06

08

10

12

2000

02

04

06

.1-..L---'- 90 10

08

1995

2000

05

"'" 15

1011

Sources: Bloomberg; European Commission; IMF; Thomson Reuters

The Economist November 12th 2011

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SPECIAL REPORT EUROPE AND ITS CURRENCY

Austerity

Destructive creation The economic case for reform is overwhelming, but the politics will be hard TIP OS INFAMES IS a fine bookshop in central Madrid, run by three young friends and stocked with the sort of books you were always meaning to read, until work and children got in the way. Well aware that the intellect needs gentle encouragement, the owners lure you in with strong coffee and generous glasses of Spanish wine. Running a bookshop is difficult, says "Curro" Llorca; these days he doesn't get so much reading done either. But business is passable. Curro and his friends needed three years to set up shop. They had to obtain a full house of separate permits, one to sell books, a second to sell coffee and a third to sell wine. The town hall said not to worry and advised Curro to open his doors while he was still waiting for the paperwork. But the budding entrepreneurs wondered what they would do if the police turned up. Tormented by unemployment, Spain needs new firms like Tipos Infames. Yet in the World Bank's ranking of how easy it is to start a business the country comes only133rd, after Kenya. Next to quelling the crisis, the single most important task facing Europe's economies is to grow, because only then will they eventually be able to pay off their debts. In order to do that, they need to improve their competitiveness. And the best route to improved competitiveness is to streamline the public sector and overhaul the markets for labour and services.

In theory OVER THE PAST decade Europe's troubled economies have lost competitiveness against Germany, as the charts on the previous page show. Within a fixed currency they cannot devalue. Instead they need a combination of lower real wages, lower input prices and higher productivity. Higher inflation in Germany would make that easier. Structural reforms are hard, otherwise governments would have undertaken them long ago. But if countries continue to avoid hard choices, the adjustment will eventually be forced on them through recession and unemployment. Atthe same time these economies must work off their debts. For the public sector, that can be through a combination of tax increases, spending cuts or growth. But it is hard, not least because Western societies have started ageing, which means that fewer people a rein work paying tax and more in retirement claiming bene-

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Athenian democracy on four Legs

Yet Europe has failed for many years to accomplish just such structural reforms. Looking at Curro, the economic logic for change is unanswerable. But the politics is grim. Across Europe, business is held back by bureaucracy. Powerful interest groups are protected at the expense of everyone else. The crisis only strengthens the case for reform (see box). But it also means that reform must take place against the background of austerity, as societies struggle to determine who will shoulder the burden of debt. The darkening clouds of civil disobedience and anarchy confronting Greece's new government show where this struggle can lead. Europe's future depends not just on governments putting forward the right policies but on the capacity of democracies to bring . • I I I about peaceful change. fits. The IMF reckons thatfor the rich world's How to gain in Spain governments to take public debt back to How might reform work? Again, 60% of GDP by 2030 they would need to consider Spain. Reform there should improve their budget balances by a huge 8% stand a good chance. The country has ofGDP by 2020. If governments fail to get done well out of EU membership. After it their borrowing under control, then the joined in 1986, incomes caught up with adjustment will, again, be forced on the the rest of the union. Its large exporters economy-this time by the bond markets. have remained an island of efficiency, as Experience suggests that some policompetitive as any in Europe. Spain recies are better than others. If you wantto cently signalled its commitment to the increase competitiveness, productivity euro zone by writing a cap on future defgrowth is less disruptive than wage cuts, icits into the constitution. and wage cuts are better than unemployMoreover, the Spanish may be ment. If you want the government to shift about to vote for change. An election later its fiscal balance, you should cut spending this month is likely to bring in a new conby roughly four times as much as you raise servative government under Mariano Rataxes. Growth is better than either tax rises joy of the People's Party (PP). If the opinor spending cuts-but, experience also ion polls are to be believed, he stands to suggests, growth after credit busts is win a sweeping victory and to be able to scanty. The best recipe for growth is to raise govern with an absolute majority. Given productivity through structural reformsthat the PP also controls many of Spain's but nobody said that was easy. regions, Mr Rajoy will have an unpreceThe Economist November 12th 2011

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dented mandate to remake Spain. "People know the PP is going to be severe," says Jose Ignacio Torreblanca of the European Council on Foreign Relations. But what a task he faces. A prime target will be Spain's no toriously dysfunctional labour market. This provides a group of ageing, virtually unsackable "insiders" with gold-plated contracts, whereas the rest have to make do with highly insecure temporary contracts. Among other things, insiders benefit from wage-escalation clauses, so that in 2009 real pay rose by 3.2% even though the economy shrank by 3.7%. And Spain gives young people a terrible deal: in a downturn they are the first to be sacked. Not only are roughly half of under-3os out of work, but those who do have jobs are mainly on temporary contracts that leave them without a career structure and give firms no incentive to train them. Mr Rajoy is elusive about his plans. The outgoing government has undertaken some labour-market reform, but most people expect the PP to go much further and doubt that the weakened Spanish unionswillbeabletoputupmuchofafight. But that is the easy bit. To transform the Spanisheconomy,MrRajoyalsoneedsto take on twofarmoreelusivefoes. First is the country's dense jungle of regulation and bureaucracy. This dates back to Franco, who from the 1950s sought to give Spaniards more freedom by trying to establish the rule of law even as he denied them democracy. The profusion of administrative law created a dense and unaccountable bureaucracy. Ignacio Sanchez-Cuenca, director of the Juan March Institute in Madrid, encountered so many obstacles to hiring academics from outside the EU for the institute that it took up a quarter of his time. So he hired a firm of lawyers to do the job and now spends 5-10% of his budget that way. What makes Spain's bureaucracy especially poisonous is

Mr Rajoy's second foe: the country's fiercely independent regions. Each tends to interpret regulations in its own way, so over time the Spanish market has fragmented.JuanJose Guemes, a PP politician and a professor at the IE Business School in Madrid, explains how the star-rating system for hotels differs slightly across Spain, which limits competition among national and international chains and reduces economies of scale. Last year the Catalan government decreed that hotels must serve pa amb tomaquet, bread with tomato, a local speciality, if they are to count as "luxury". Miguel Cardoso, an economist at BBV A, a Spanish bank, estimates that, thanks to a lack of competition, half of the inflation in Spain over and above the average for the euro zone in the past 15-20 years came from firms increasing their margins. Mr Guemes's colleague at IE, Fernando Fernandez, adds that each of the regions sponsors its own development policy and its own businesses, often financed by local savings banks. This is inefficient, but the regions are popular because they spend taxes collected by the central government. Moreover, regional autonomy is an antidote to the centralising, anti-union bias of Franco's Spain. Even if the centre can control the regions' spending-a big if-"we have a free market at the national level and are protectionist at the regional level," says Mr Fernandez. Each reforming government in Europe faces different obstacles, but Spain is typical of them all in the sense that radical structural reform entails rewriting the social contract. Just now the generous wages of many of those in Spain's protected jobs are supporting entire households of unemployed spouses and grown-up children. Scrapping thousands of bureaucratic rules will not just make the economy more efficient but also recast the relations between government and citizen. However unambiguous the economics of reform, the politics is almost always hard. Too hard for some. Rome alone is said to have half as many lawyers as the whole of France. The legal system there moves so slowly, Italians joke, that they put you in jail when you are accused and release you when they find you guilty. Yet faced with the liberalisation of their profession in a recent budget, Italy's lawyers somehow managed to hang on to their perks-was it because so many politicians are lawyers? Instead of imposing reforms, the fag-end of a government under Silvio Berlusconi has relied excessively on tax rises. After he was shamed by euro-zone leaders during recent summits Mr Berlusconi at last came up with a more ambitious programme-but even then he was ob-

Spain needs new companies like Tipos Infames. Yet the country comes only 133rd in the World Bank's ranking of how easy it is to start a business

The Economist November 12th 2011

liged to accept the supervision of the IMF. The mix of hopelessness and humiliation has left his government close to collapse. Others have shown more courage. Ireland's government has cut wages and slashed benefits and services. Unit labour costs have fallen by 8% and the economy grew by1.6% in the second quarter. The cuts have been even harsher in Estonia, where the economy shrank by 15% in 2009. Growth has soared since then and unemployment tumbled. Still, both economies face a hard slog. Because they are counting on foreign demand as a source of growth, they are vulnerable to a global recession.

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The nightmare is Greece. Government there has never been about the rational design and administration of policy, but about dishing out patronage. When George Papaconstantinou, the country's finance minister at the time, was asked why tax receipts collapsed in 2009, the year his government came to office, he explained that "the first thing the government does in an election year is pull the tax collectors off the streets." Even so, the government of George Papandreou (in which Mr Papaconstantinou served) undertook reform with a savagery that would once have been unthinkable. He had a gun to his head, because the troika of the EU, the IMF and the ECB release aid each quarter only if the Greek government meets its targets. Yet, beset by protests, a shrinking economy, the dishonour of being bossed around by foreigners and the prospect of a decade of further austerity, Mr Papandreou could not carry the country with him. His reluctantly resigned, following a botched proposal to hold a referendum on the euro zone's plans for Greece. The installation of a new government of national unity smacks of Argentina, where a succession of short-lived administrations fought to avoid default-before eventually succumbing. Mr Papandreou's ejection contains a warning. At root, the solvency of a country is determined by the government's capacity to raise revenues and cut spending. Politicians run up against the popular will long before they run out of things to tax. The crisis has also brought down governments in Ireland, Portugal and Slovakia. Spain, and others, are likely to follow. Where will voters turn when they have had their fill of austerity and reform? The lesson of the 1930s and of emerging-market crises down the years is that people can take only so much austerity. If the burden gets too heavy, the political system collapses. This fear lies behind the warnings of Milton Friedman and Martin Feldstein, two American economists, who said that the euro is inherently unstable. Until recently euro zone leaders scoffed at such talk. But in the past couple of weeks they have suddenly begun to contemplate Greece's departure from the single currency. And contemplation is one step short of action. Their change of heart is not just because of mayhem in Athens, but also because of the difficult politics of the euro at home. •

Anti-EU backlash

Beyond the fringe The rise of populists is a threat both to the euro and to the EU as a whole EUROPE HAS A dissonant new voice. Anti-Muslim, antielite, anti-globalisation and increasingly anti-Brussels, populists now count for something in the Nordic countries, among the Dutch and Flemish, in France, Italy and Austria, and in parts of eastern Europe. They come in many varieties, but all claim to represent what Pierre Poujade, France's original post-war populist, called "the ripped-off, lied-to little people". These movements are sometimes described as neo-fascist. Some of them indeed are, and all of them embrace odious and intolerant views of one sort or another. But to dismiss them as fascist, and thereby safely rule them out of European political life, offers the liberal mainstream false comfort. Over the past few years populists have found ways to set themselves apart from a neo-Nazi ideology. Many support gay and women's rights 8

Atouch of xenophobia (all the better, they think, to bash the Muslims), and many are fervently pro-Israel. They are here to stay. Europe's populists are not likely to form governments; they lack the votes and are completely unequipped for office. However, mainstream politicians do not know how to see them off. So their obsessions and their resentments have seeped into the debate, even among those who would never vote for them. This matters just now for three reasons. First, because the euro and its independent central bank are elite projects par excellence. The high priests of Europe's political class handed down the edict that Europe needed its own currency. They forced their economies to converge during the 1990s and masterminded the extravagantly complex job of issuing new notes and coins. Now that the technocrats have been shown up as bunglers, the antitechnocrats stand to gain. Second, populists are nationalists and protectionists and reject both the idea of paying to save Europe's troubled periphery and the sort of structural reforms that Europe needs for growth. And third, populists feed the widespread mistrust of Brussels and all its works, which will constrain the options available to fix the euro. To understand how populism has taken root, look at what has happened in the Netherlands, once the very model of a tolerant, pro-integration member of the EU. In his study of the murder of Theo van Gogh, a film director, by a radical Dutch Muslim in 2004, Ian Buruma borrows the term regenten to describe the modern Dutch elite. Like the self-confident 17th-century ruling class of merchants smugly gazing from the portraits of Frans Hals, the 21st-century regenten looked out for themselves and neglected the things that bothered ordinary people. In the Netherlands the beef was with the immigration that created "dish cities" of Turkish and Moroccan households tuned to satellite television from abroad. The regenten were all in favour of multiculturalism and in no hurry to press immigrants to assimilate. In the early 2ooos a flamboyant gay university lecturer called Pim Fortuyn made a political career out of condemning what he saw as Muslim intolerance and regenten neglect. What did this have to do with Europe? At first, nothing at all. But after Fortuyn, too, was murdered in 2002 (by an animalrights activist, not a Muslim), another Dutch politician, Geert The Economist November 12th 2011

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Wilders, took up his cause and increasingly exploited popular resentment against the regen ten project of European integration. As the EU has grown from six to 27 countries, the Dutch, who were among the founder-members, have felt their influence drain away. They have gone from being beneficiaries of European funds to net contributors. They feel they have had to take in migrant workers from eastern Europe who threaten their jobs. Sometimes the EU has imposed unpopular decisions, as when it ruled that the distinctive, often religion-based Dutch housing associations were discriminatory, or that Turks were exempt from a mandatory exam for immigrants because Turkey is an official candidate for EU entry. The extent of anti-European sentiment became clear back in 2005, when the Dutch voted in a referendum to reject a proposed new constitution for the EU by a crushing 62% to 38%. It was the first time the Dutch elite had condescended to ask ordinary people about Europe and, says Andre Krouwel, a political scientist at Amsterdam Free University, even people who had nothing against Europe found something in the constitution to dislike. With Mr Wilders's Freedom Party on one side and the antiglobalisation Socialist Party on the other, the pro-European, proglobalisation middle is being squeezed out of Dutch politics. The centre parties used to win 80-90% of the vote. In the most recent election they got only 54%. Meanwhile, the tweets of Mr Wilders, whose party has just 16% of the seats in the Dutch parliament, manage to grab 40% of the media coverage of politics, reckons Mr Krouwel. "He has destroyed Dutch consensus democracy," he adds. A similar story is emerging across Europe, though the details differ. The True Finns are more Eurosceptic than anti-Muslim; the Danish People's Party and the Sweden Democrats are obsessed by immigration; Italy's Northern League is consumed by contempt for Naples and the feckless South, as well as immigrants and the Eu; Belgium's Vlaams Belang stands for Flemish independence; France's National Front is being dragged away from its fascist, anti-Semitic past by Marine Le Pen; Hungary's Jobbik has not even begun to change out of its jackboots. But the punchline is the same. Heather Grabbe of the Open Society Institute in Brussels calls it "the politics of resentment against elites". This sentiment makes office a dangerous place for populists. After J6rg Haider's Freedom Party won 27% of the vote in an Austrian election in 1999 it joined a coalition government, but in the 2004 elections to the European Parliament it got only 6.3%. Out of power, the Austrian populists (now split into two parties) saw their overall strength recover to almost 30% of the vote within just four years. These days populists prefer to stand half-in and half-out of government, where they can claim credit for policies on, say, immigration even as they disown the difficult decisions that ministers often have to take. That was the strategy of Pia Kjaersgaard's People's Party, which put its stamp on immigration policy in Denmark until the election of the Danish left in the summer. These parties talk tactics with each other, says Sarah de Lange of the University of Amsterdam. And so the Danes have been copied by Mr Wilders, pictured above, who supports a Dutch minority government but is not part of it.

The Dutch finance minister, Jan Kees de Jager, says that this leaves the Dutch approach to Europe unscathed. The government can pass legislation on the EU by calling on the support of the opposition centrist parties, depriving Mr Wilders of influence. That line is supported by surveys showing that the level of Dutch backing for "Europe" in the vaguest, most generalised sense has not dramatically fallen over recent years. But this argument is not wholly convincing. Dutch attitudes to sovereignty have hardened. Politicians come back from Brussels to The Hague complaining that they could not get the deal they wanted. The idea of spending Dutch money to rescue the Greek economy was unpopular. If fixing the euro required another referendum, the government would struggle to win. Don't Look for gratitude Moreover, that Dutch vote against the European constitution was part of a Europe-wide popular backlash against the EU. The constitution was supposed to renovate the EU's creaking legislative machinery as well as bringing Brussels closer to the people. But the people either did not understand it or were not interested. Having been rejected in France as well as theN etherlands, the constitution was reworked as the Lisbon treaty and was at first rejected again, this time by a referendum in Ireland. The treaty-cum-constitution limped into law in 2009, eight difficult years after work on it had begun. The instrument intended to fortify the EU with popular legitimacy won just three out of six referendums. Ten governments had backed away from promises of

With Mr Wilders's Freedom Party on one side and the Socialist Party on the other, the pro-European middle is being squeezed out of Dutch politics

The Economist November 12th 2011

popular votes. The message is clear. However unpleasant some of the populists' views are, they are on to something with the EU. Ordinary Europeans see Brussels as remote and elitist (see chart 2, next page). As it happens, the European project was like that from the very beginning-and for the best possible reasons. Look back to the founding of the European Economic Community, the Eu's forerunner, in 1957. What from the vantage point of 2011 might seem like an undemocratic fix was actually inspired statecraft. After the second world war many Europeans feared that the ghastly cycle of economic depression, instability and war was going to begin all over again. They were caught between the horror of German revanchism and the nightmare of a communist takeover. Europe was the antidote to the madness that had almost destroyed Western civilisation in two world wars, and it was to be administered by the regenten of the day. The architects of the EEC did not seek to harness popular enthusiasm, because it was such enthusiasm that had led to Fascism and Bolshevism. No wonder that EU business has always been more about the horse-trading of the committee room than about the rhetoric of the debating chamber. David Marquand, a former British MP and a commentator on Europe, writes: "At the heart of the European project lay an unacknowledged but pervasive ambivalence about politics. In transcending the nation state, the founding fa-

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thers were also seeking to transcend-or rather to escape fromthe messy, vulgar, clamorous irrationality of political life." Inspired by the quest for peace, Europe's designers expected their creation to be justified by what the Brussels officials still call "output legitimacy"-that Europeans would accept the EU because it worked. But that is not what has happened. Today's Europeans take peace for granted. They are more inclined to measure the EU by the prosperity it has brought. However, it does not get the full credit for that either because national politicians, instead of explaining how much the EU has contributed to Europeans' wealth, take the credit for themselves. And many of them like to blame Brussels for everything that is bad. The EU has not helped its own cause. Terms like "the community method", "Coreper" or "co-decision" seem almost designed to scare people off. Its processes are comically obscure. Paul Magnette, a Belgian politician, reckons that there are 22 different legislative procedures and 30 legal instruments for decision-making in the Eu-and that is only counting what is known as the "first pillar" of EU competencies (don't ask). All this has led critics to complain about the EU's "democratic deficit". But that line of attack is off-beam. The commission (which is unelected, but must be approved wholesale by the parliament) can only propose legislation and help to enforce it. New laws need the backing of ministers from national governments and the elected European Parliament. Compared with national capitals, Brussels is admirably free with information and briefings once you penetrate the jargon and the procedure. What the EU lacks is not democracy but popular engagement. It always has and it always will. There is a small industry churning out suggestions for how to remedy this. How about directly electing the commission's president? Or sending national MPS to sit part-time in the European Parliament? Or staging Europe-wide referendums, so that a single country cannot hold the other 26 to ransom? None of them would change the fact that the EU is remote, impenetrable and elitist. However hard it tries, the EU will not be loved by European citizens-even those who are broadly pro-European. In the words of Anand Menon, a British academic, it is "structurally condemned to inspire apathy". "Public opinion is a new actor in the EU," says Charles Grant, director of the Centre for European Reform. "It limits what technocrats can do." Beset by populist anti-elitism on one side and impenetrable technocracy on the other, the fate of the euro therefore lies squarely in the hands of national governments. And none more so than the duo that have long made the running in Europe, France and Germany. •

I

II

Europinions "My voice counts in the EU",% of respondents who: 0

20

"

~0

Denmark Belgium Germany Sweden Netherlands France Poland Spain Finland Euro area* Ireland Romania Austria Portugal Italy Britain Greece Source: Eurobarometer, spring 2011

10

*Average

Europe's big two

The Nico and Angela show Is Europe run by France and Germany, or by Germany alone? WHEN DE GAULLE'S foreign minister asked him which officials France should dispatch to Brussels to staff the new European Commission, the general replied: "Send the most stupid." Although these days France installs some of its best people in Brussels to watch what the EU gets up to, that condescending attitude has never entirely disappeared. If it had a choice, France would keep the commission firmly in its place and run the show with Germany as a sort of European G2, but enlargement of the EU to 27 countries got in the way. The euro crisis presents France with the best chance in decades to drag the EU back on track. At the same time, though, the crisis has established a new German dominance in Europe. As the continent's biggest economy, Germany has set the terms of the various euro-zone rescues. Having largely absorbed east Germany since unification in 1990, it is looking for markets in the emerging economies. And, bit by bit, it is carving out a more assertive and independent role. When Nicolas Sarkozy, France's president, meets Angela Merkel, Germany's chancellor, the atmosphere can be chilly. Ms Merkel has said she thinks she is "the most boring person Mr Sarkozy has ever met". But what matters more is the unresolved combination of France's designs and Germany's power. Their difficult partnership weaves yet another strand into the drama of the euro, adding to the uncertain future of the EU itself.

The blues in Berlin During the euro crisis Ms Merkel has often seemed torn, refusing such things as a concessionary interest rate for Greece, only to change her mind later. That partly reflects her temperament: cautious, tactical and naturally inclined towards the middle path between standing firm and coming to the rescue. But, to be fair toMs Merkel, it is also because Germany itself is torn. On the one hand, Germans know that their fate is still bound up with European integration, as it has been for the past 6o years. The country's pro-European finance minister, Wolfgang Schauble, says that although Germans might be sceptical of the euro, they are not Eurosceptics. Opposition parties have criticised Ms Merkel for being too reluctant to save the euro zone. They have put forward bold plans, such as Eurobonds issued jointly by the entire euro zone, combined with a leap in fiscal integration. The opposition has been rewarded with a strong performance in regional elections. By contrast, Ms Merkel's party has suffered at the polls and her coalition partner, the more Eurosceptic Free Democratic Party, is on its knees. Moreover, the German economy is intricately tied into the European economies around it: they are a source of parts and supplies for German industry, a place where German banks and insurers have invested their savings, and a market for German goods. A collapse of the euro or a chaotic default by a European government or bank that spread through the EU economy would be a terrible outcome for Germany. On the other hand Germans also feel indignant. They think that at the time of monetary union they were conned with the false promise that the euro and the European Central Bank would be worthy of the mighty o-mark and its guardian, the The Economist November 12th 2011

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SPECIAL REPORT EUROPE AND ITS CURRENCY

II

The best and the rest GDP per person

Unemployment rate

Overall debtt

Average annual growth rate, 2001-10,%

Harmonised definition, September 2011 or latest month, %

End 2010,% ofGDP

0.4

0.8

\2

4

Germany

Germany

Brita in

Britain

Euro area*

United States France

i~====~·T

United States France Euro area*

Sources: IMF; OECD; McKinsey

~

Bundesbank. These were potent symbols of German nationhood. As Helmut Kohl, chancellor at the time, told the then French president, Fran~ois Mitterrand: "The n-mark is our flag. It is the foundation of our post-war reconstruction. It is the essential part of our national pride; we don't have much else." The euro is no n-mark. Day after day German television and newspapers portray Europe as a threat to German prosperity. The "no bail-out" clause, designed to ensure that governments will not be held liable for other countries' debts, has been trampled underfoot. As the crisis has grown, the share of Germans who think the euro will be a long-term success has fallen from 78% in 2008 to 55% earlier this year. Ordinary Germans are asking if they should ship their savings to Switzerland. And, in German eyes, the ECB is no Bundesbank. When the bank proposed to buy bonds of troubled governments in the open market, two Bundesbank vigilantes objected, arguing that the policy took the ECB across the threshold from monetary to fiscal policy. Having lost the argument, they resigned. At the end of last month the Bundestag passed a non-binding resolution against the ECB's financing the euro-zone rescue fund or continuing to buy bonds once the rescue fund can do so instead.Jorg Rocholl, dean of the ESMT business school in Berlin, talks of a "common feeling of betrayal" over the ECB. When Germans look at Europe's periphery they see economies that partied when they should have been sobering up. After unification Germany put itself through economic boot

Keep up now, Nicolas The Economist November 12th 2011

Britain

"'Average

tGavernment. household and corporate debt. excluding financial sector

camp. The unions agreed to lower pay rises. The government cut benefits, raised charges and made it harder for workers to claim disability allowances. Between 1994 and 2009 the country's unit labour costs fell by about 20% against the rest of the EU. But the adjustment was a hard slog. Jobs went abroad, where labour was cheaper, and unemployment rose to a peak of 12.1% in 2005. That same year the Social Democrat-led government of Gerhard Schroder paid the price at the polls, bringing Ms Merkel to power. Yet, thanks to these efforts, Germans have enjoyed worldclass economic performance over the past decade (see chart 3). No wonder, then, that they resent seeing the fruits of their own self-denial being used to pay for everyone else's self-indulgence. In any case, Germans have never quite got over the anxiety that they developed in those years of austerity. Whereas the rest of Europe looks at Germany and sees an economic powerhouse, many younger Germans doubt that they will live as well as their parents do, and fret that the social safety net will not be there when they need it. There was a time when Germany bore its financial contributions to the EU with stoicism. Uwe Kitzinger, a British academic and former official in Brussels, called them "a form of delayed war reparations". But now the country is making its anger felt. "As the pivotal state in monetary union," writes David Marsh, "Germany is becoming more self-centred but less surefooted, more hectoring but more vulnerable." Mr Schroder put down a marker back in 2000. At a summit in Nice he demanded that in ministerial votes on EU legislation Germany's large population should have a bigger say than other countries. Last year the Bruegel think-tank in Brussels published an essay entitled "Why Germany Fell out of Love with Europe". And Jean-Claude Juncker, the prime minister of Luxembourg and head of the Eurogroup, in which the euro-zone's finance ministers meet, complained that the "Germans are losing sight of the European common good." Moreover, the world is changing. German trade has been shifting away from the euro zone. In 1999 German exports to Portugal, Ireland, Spain and Greece totalled €30 billion, a multiple of those to China, just €6 billion. By last year exports to China, worth €53 billion, exceeded those to the four peripheral economies. Goldman Sachs, a bank, reckons that China is poised to match France as Germany's biggest trading partner. And Germany, too, is changing. Its controversial decision not to join France

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Britain in the NATO campaign against Libya's Muammar Qaddafi represented what Constanze Stelzenmiiller, of the German Marshall Fund, calls "a loosening of the ties". NATO, she says, is no longer bound by the "unifying energy of the Russian threat". Reflecting on Germany's strife over the euro and its refusal to fight in Libya, Hans Kundnani, editorial director of the European Council on Foreign Relations, recently argued in the Washington Quarterly that "Germany's economy is too big for any of its neighbours, such as France, to challenge ...but not big enough for Germany to exercise hegemony." This, he concluded, is an economic statement of the "German question" that tormented Europe for 75 years after German unification in1871. The most likely answer to that question today is compromise. Germany is not about to walk away from Europe, nor to let the euro fail. But Germany's price will be a rescue in which it will be explicitly seeking to put its own interests above all others. What does that mean for France?

opportunity to sideline the commission by creating new institutions controlled by governments. If decisions can be taken by the 17 members of the euro zone, rather than the 27 of the EU, then the restored Franco-German duo might take charge. France has already made progress. Throughout the euro crisis Mr Sarkozy has appeared alongside Ms Merkel at Franco-German summits to set policy for the entire euro zone. His reward was that the euro zone will have two summits a year and its own secretariat. Germany has seemed willing to fall in with the French preference for an intergovernmental "Europe des patries". Yet even if the other 25 countries in the EU are ready to go along with this, France faces a huge obstacle. To be an equal partner, it has to be a plausible match for German power. "Ideas

Germany still needs France to get things done in Europe. If Paris and Berlin can agree on a policy then most of the other countries will rally round

The pressure in Paris Thanks above all to De Gaulle, France has been fabulously successful in Europe. Having been defeated and occupied by Germany, France was humiliated and neglected by America and Britain. In 1954 Eisenhower called the French "a helpless, hopeless mass of protoplasm". But armed with the general's brilliant combination of cunning and self-belief, France made itself indispensable to the construction of Europe. It then used that status to tame the German threat, to project French power in the world and to get the EU to pay for its own expensive farm subsidies. But that policy has run its course. A senior French politician says that today's Franco-German coalition "is fragile and public opinion is hostile". In French eyes today's EU suffers from three flaws. First, the commission and the ECB have too much scope to act independently of governments. Second, the British-backed policy of enlargement has gradually changed the character of the union, making it harder for French views to prevail and overemphasising open markets. And third, taking Mr Kundnani's German question, France needs to renew its deal with Germany. The euro crisis offers a tantalising chance to do so. Because the euro will need more and better governance, France has an

Running out of rope French government, % of GDP

Debt

Spending ········--····-·-··-·-··· 54

90 ·····················-· ·········-···············--··-··-······ ·····-······-··--··-·····-··-·--··--

80 --··-·-----··· .....................................................

.... 52 50 .... 48

.. 46 40 ·

..... 44

30 "" 20 •

.... 42 . 40 ..... 38

10 "' o ~~yu~~yuL+~yu~~yw~~uw~~~·~

1980

85

Source: European Commission

12

90

95

2000

05

10

can come from France only if it is economically strong," says Andre Sapir, of the Bruegel think-tank. France's military force helps, but the economy lets it down. Moody's and Standard & Poor's have both warned that they might cut their rating of French government debt, alarming the government in Paris. The economy's problems run deep. French industrial exports have fallen from 55% of Germany's in 2000 to around 40% now. Fewer than a third of France's industrial companies spend money on R8m, compared with almost half in Germany. And although France's government finances are fairly healthy compared with those of many other rich countries, the markets doubt the country's long-run capacity to pay its way. Demography is on France's side: its population is growing, whereas Germany has one of the EU's lowest fertility rates. Yet the trajectory of government borrowing raises concerns, given that in 1980 France's debt was only 20% of GDP (see chart 4). The public sector's share of the economy is already greater than Sweden's, which limits the scope for tax increases. Mr Sarkozy's government reformed pensions last year, the first increase in working time in France since the second world war. However, the change put the minimum retirement age back by only two years, to 62, and it met with huge resistance. The Socialists are promising to reverse it if they win the presidential election next year. Jean Pisani-Ferry, a director at the Bruegel think-tank, points out that the French are ambivalent. Although they are creditors, the media have covered the Greek crisis very differently from the German ones, emphasising the suffering of ordinary people. "The French see a magnified version of their own failings," he says. Germany still needs France to get things done in Europe. If Paris and Berlin can agree on a policy then most of the other countries will rally round. But in the recent summit talks over a euro rescue, France gave way to German demands-notably that the ECB should not lend to the rescue fund. The risk for France is of becoming a foil for Germany rather than a genuine partner. In the 1990s France qualified for monetary union by clinging doggedly on to the strong franc, even as others devalued. Some of those who run France readily acknowledge that they need a similar act of will today. "Politicians have not told the French people the truth," says Bruno Le Maire, the French agriculture minister. "We said there was no need to change. It's false ... France has to accept the world as it is ... We have to give Germany the idea that we can succeed with the market, not with a protected Europe." • The Economist November 12th 2011

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Non-members

Look at it this way The euro crisis is a threat to non-members too EVERY COUNTRY SEES "Europe" as a projection of its own hopes and fears. For Germany it is redemption; for France a means to amplify French power; for Italians it is not Rome; for Belgians it is not Brussels; for the Baltic states it is a long way from Moscow; for Romania and Bulgaria it is order; for Spain it is the solution; and for much of central Europe it is home. The rest of the world has a stake in what happens in Europe, too. The overwhelming feeling is frustration that European leaders seem so incapable. Andrew Balls, of PIMCO, the world's largest bond investor, says that the difference between emergingmarket crises and GlO crises has always been that you expect GlO governments to remain in control. After a series of half-rescues of the euro, he wonders whether this rule still applies. It is a sure bet that at crucial moments America will be on hand to browbeat Europeans into taking action. The Federal Reserve will stand by to back the European Central Bank. Neither wants to see the world economy dragged into recession by European blunders. But America has enough troubles of its own. The idea that China might become a dragon ex machina, spending hundreds of billions of dollars on the bonds of troubled European governments, is fantasy. China will offer encouragement. It may invest in the euro zone's new special-purpose vehicles to buy the debt of troubled euro-zone governmentswith the right political concessions, it may even be generous. But the amounts of hard Chinese cash will be limited, if only because the euro zone's creditor nations were unwilling to put more of their own money into the pot.

The ins and outs of being in Within the EU, the crisis is a test of the European dreams of countries that are not part of the euro zone. Many of them are relieved to have escaped the turmoil. But they are now in a spot. If one day they surrender their own currencies, as in theory they pledged when they joined the EU, the revamped governance of the euro will affect them deeply. Take Poland, by far the biggest economy among the former communist countries and still outside the euro zone. It has had a good crisis, being the only EU country to avoid a recession, at least so far. That is mostly because of domestic demand, but also partly thanks to its ability to devalue the zloty. And yet mainstream opinion in Warsaw is in no doubt that the nation's destiny is tied to the euro, and particularly to Germany. That is partly an economic calculation. Germany is a vital export market for Poland. Its components and parts help make German industry competitive. Ryszard Petru of demosEUROPA, a think-tank, argues that being part of the euro would help ensure that foreign direct investment (FDI) keeps coming. It has been very important in modernising the Polish economy, but remains relatively low. The Polish establishment also thinks that the euro makes political sense. Although the country started as fiercely Atlanticist after communist rule came to an end, it is now somewhat disenchanted with the United States. When Barack Obama cancelled the Bush administration's missile-defence shield (which would have protected Poland) in 2009, he chose a fraught date: The Economist November 12th 2011

Tusk gets into shape September 17th, the anniversary of the Soviet invasion of Poland in 1939. Poles felt slighted, even though the system's replacement turned out to be bigger and better. They also think they were not properly rewarded for their support of America in Iraq. As the idea has gained ground that the euro zone might form an EU inner circle, so Europe itself has come to seem more important to Poland. "It is not just tactical," says Aleksander Smolar of the Stefan Batory Foundation, a think-tank. "Fon,ooo years we have been trying to get into the real Europe, Charlemagne's Europe. Many times we have failed." Politicians are quick to say that Poland "has no problems with tighter discipline and budget control". They point out that the Polish constitution already says government debt should not exceed 6o% of G DP-one of the criteria of the Eu's much-abused stability and growth pact. Polish officials still have fresh memories of their country's EU accession, when they were bossed around and told to shape up. After that, a dose of euro-zone discipline might not seem too irksome. What does worry Poles, though, is any hint that their country might lose influence. The normally equable Donald Tusk, Poland's prime minister, flew into a rage in February when his country and the other nine euro "outs" looked as though they might be excluded from the "competitiveness pact", a German scheme to help integrate the 17 economies in the Eurogroup. Mr Tusk won a reprieve, with a promise that the outs could join in a special "euro plus" group. But this may not add up to much: the real decisions may still be taken by the 17 euro members. In the end, if Poland wants to be confident of making its voice heard, it will probably have to take the plunge and apply to join them. They see things differently in Britain, and to a lesser extent

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Denmark, both of which have formal exemptions from joining the euro-though Denmark's currency is pegged to it. The dominant emotion among Eurosceptic Britons is not sympathy for their main trading partners but fury that Britain is being dragged down by what they see as continental Europe's failure.

After the crisis

Making do

Blighty and bluster Under the Conservative Party, the senior partner in the ruling coalition with the pro-European Liberal Democrats, Britain is fast drifting off into the Atlantic Ocean. Many Conservatives would like to use a new treaty on the euro, agreed on among all 27 EU members, as a chance to put some British business onto the table. One group of Tory MPS has suggested repatriating powers over criminal law, social policy, financial regulation, farming and fisheries. These are not fringe voices: fully 81 Tory MPS defied their party to vote against the government in a recent bill calling for a referendum. In a continent full of visions of Europe, none is more jaundiced than Britain's. But even allowing for that, the Conservatives' scheming looks bafflingly complacent. The crisis could profoundly affect British interests. The euro zone represents over 40% of Britain's trade. London is the EU's biggest financial centre. And senior officials in Brussels think the Eurogroup could well become a place where important business is done, to the disadvantage of outsiders. "I see a real danger of Europe splitting," says one. Resented all over the continent as a bad European citizen, Britain should not expect any sympathy if the agenda turns against it. When you ask euro-zone politicians about British interests, they say: "If Britain is worried, there's an easy solution. It should come into the euro." Tory MPS think they hold all the cards, because they calculate that the euro zone needs British backing to reform the Eu's treaties. In fact Britain's hand is weak. Rather than give in to British demands to repatriate powers, the 17 euro-zone countries could just sidestep London and sign a treaty outside the EU. The Tory desire to strip down relations with Europe, as if Britain might become a giant Norway or Switzerland outside the club, makes no sense either. Britain is too big to be left alone by the rest of the EU. At risk is the single market. Not only is it the most important EU institution for Britain, but without Britain's liberal voice it may well veer towards protectionism. •

ToryMPs think they hold all the cards, as they reckon that the eurozone needs their backing to reform EU treaties. In fact, Britain's hand is weak 14

Instead of going all out for the serious reforms it needs, Europe is likely to settle for the minimum IN THE HEART of the EU's administrative district in Brussels, a little way inside the council building where EU ministers hammer out legislation, stands a big bronze bust of Justus Lipsius. A 16th-century humanist who sought to reconcile Christianity and Stoicism, Lipsius betokens learning and integrity. On closer inspection, though, the bust turns out to be made of painted plaster. If you rap it with your knuckle you hear the thwack of gypsum rather than the ring of cold metal. Low down on the great scholar's mantle is a small white patch where the paint has chipped away. Far from adding dignity to the business of the council, the mock-bronze inadvertently honours the Brussels tradition of making do. It is this spirit of grubby compromise, not lofty idealism, that will determine the future of the euro. That is because, as Joseph Schum peter argued, a monetary system cannot be separated from the society that underlies it. Saving the euro is about much more than the optimal design of a currency area. Even as the euro zone fights to steady its banks and its sovereign borrowers, it must grapple with the profound choices that this special report has set out.

Four choices The most important of these is Europe's attitude to globalisation. The more the euro zone embraces growth-enhancing reform, the lower the chance that its members will, after years of grinding austerity, succumb to the political fatigue that could lead to the euro's collapse. However, the economic imperative for austerity and restructuring is already putting the governments of the euro zone's troubled periphery under severe strain. A second choice is about what it means to be "European". Among the euro zone's creditors, populist parties are increasingly rallying against the EU. Battered by austerity, the citizens of debtor countries could easily go the same way. Elites all across Europe have lost their authority. The European Commission and the parliament tend to be resented by national governments. All this limits the scope for fixing the euro by transferring sovereignty to Brussels. A third is about the leadership of Germany and France. The crisis has given the leading role in Europe to Germany. It must decide what price it is willing to pay for leadership and how to use its new power. Will it come round to the idea that the European Central Bank (EcB) must put its balance-sheet behind the euro zone's governments? Meanwhile, France, greedy to redesign Europe according to its own tastes, must decide whether it is prepared to take the difficult steps needed to keep up with Germany. The fourth is about Europe's divisions. Eastern Europe is anxiously watching the confusion and disarray to its west. It must choose whether its destiny should eventually be inside the euro. Britain, too, must work out what it wants from the EU. In the past it has yanked the continent towards open markets and economic liberalism. Today Britain is striding away from Europe in a very British fit of absent-mindedness. These questions are complicating the rescue of the euro. In the crystalline world of political and economic theory the immediate task is to stop the run on Europe's banks and sovereign The Economist November 12th 2011

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borrowers. This requires a controlled default of insolvent governments-which, so far, means Greece-and the protection of solvent governments by a pledge to buy as many of their bonds as it takes to ward off market panic. At the same time Europe's banks must be protected with fresh capital. The euro zone showed at last month's summit that it is coming around to this design-though the package they came up with was still too puny. But the two other components of any complete euro rescue are still embryonic. One is reform of the euro's governance. The euro zone needs a fund that can help member states cope with shocks. More ambitiously, the credit rating of the entire area might be used to issue Eurobonds, which would be less vulnerable to speculation. The euro zone must ensure that delinquent borrowers do not exploit these facilities to run up bills for everyone else to pay. And, to block the vicious circle in which failing The sun sets banks amplify the weakness of sovereign borrowers, it must establish a European mechanism for insulating banks from their sovereigns. In theory all this is possible. In practice, however, it would involve a large transfer of sovereignty to give the central eurozone authorities the scope to raise money, regulate banks and prevent errant fiscal policy. Few countries are ready for that. The prospect of a United States of Europe is about as real as the bronze of Justus Lipsius's bust. For a start, Germany and France will not allow the European Commission to gain much extra power. In recent years Germany has become suspicious of the institution. Neither Ms Merkel nor Mr Sarkozy is fond of Jose Manuel Barroso, its president. The money for the euro-zone rescue pot, the European Financial Stability Facility, has come from the member states, mostly from France and Germany. They are not about to hand control over hundreds of billions of euros to the commission. One alternative might be to fix everything among governments, in the Eurogroup, as France would wish. But smaller countries have seen, in the treatment of Greece and Italy, how France and Germany get to call the tune: "intergovernmentalism" leaves them vulnerable. And Germany's federal constitutional court in Karlsruhe ruled after the 2007 Lisbon treaty, the EU's most recent piece of constitutional re-engineering, that the

tious transfer of sovereignty to Brussels. Instead, in the spirit of shoddy compromise, it will do as little as it can. As the summit in October hinted, the emphasis will be on binding countries by the norms of prudent economic management-a supercharged version of the set of rules the commission presented a year ago, including warnings about imbalances and fiscal sustainability. Perhaps such rules could be enshrined at national level. Just as euro-zone members are required to have an independent central bank, they could be obliged to set up independent offices of statistics and budget sustainability and to enact constitutional guarantees of good behaviour. That would provide euro-zone reassurance without euro-zone sovereignty. Perhaps, too, banks could be regulated at the EU level and be prevented from ever becoming as dependent on their sovereigns as they are today. All this will need to be backed up by strong discipline-and that will lead to yet more trouble. France would prefer the stick to be wielded at the discretion of governments. Germany, however, wants binding rules and strong punishments. Germany is likely to carry the day, but only if it can find a way to force through a new treaty. That will be harder than it sounds. A full treaty requires a convention, an intergovernmental conference and then ratification by national parliaments and a referendum in Ireland and quite possibly in other countries, too. Old Brussels hands think that all this would take three to four years. Moreover, the mood in Ireland just now is so bad that you could not get the ten commandments approved in a referendum. Scarred by the difficulties of trying to write and ratify a constitution for the EU, the euro-zone countries may therefore try to dress up a treaty as merely a "technical" adjustment. They may try to sign a treaty among themselves, outside the EU. That

Few countries are ready for a large transfer of sovereignty. The prospect of a United States of Europe is about as real as the bronze of Justus Lipsius's bust German government could never again transfer sovereignty away from the German parliament to Brussels without also ensuring that German citizens have more say at the European level. Deals among a roomful of governments do not meet that test. What about the German idea to give more power to the European Parliament? Many national governments would object. How would Nicolas Sarkozy, emperor of the Fifth Republic, feel if the European Parliament had more sway over him than his own tame Assemblee Nationale? In short, there is no consensus in the euro zone for an ambiThe Economist November 12th 2011

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15

SPECIAL REPORT EUROPE AND ITS CURRENCY

~

would stop Britain from causing trouble, and negotiations among 17 countries may be speedier than among 27. However, existing EU law requires the new agreement to mesh with all other EU treaties, which may be awkward. From an economic point of view such minimal new rules for governing the euro would be second-best. Despite what is often said, no economic law dictates that a common currency must have a common fiscal policy. But fiscal co-ordination does make life a lot easier. The price of a cobbled-together rescue is that some day the euro zone will probably have to endure yet another existential crisis. It is all very well to talk of discipline and oversight right now, when disaster is still an imminent possibility; but wariness is bound to fade with time. Bubbles inflate precisely because people fail to recognise that they are living with dangerous imbalances. One French official remembers being told by commission economists during the boom to copy Ireland and Spain. Now the same people are telling him to copy Germany.

Postwar postscript The third component of a textbook euro rescue would rebalance Europe's dangerously lopsided economies. In the troubled countries of the euro zone this requires a programme of thoroughgoing structural reforms, along with a plan to reduce government budget deficits over the medium term. The euro zone's creditor states would match this with a fiscal stimulus designed to boost demand in their economies. That would help drag the ailing members out of recession. Again, reality will fall far short of this ideal. The citizens of uncompetitive economies are already exhausted by austerity, and Germany and the other creditor nations are reluctant to run deficits. The danger is that people will refuse to accept the unemployment and austerity being imposed on them. If so, that will hugely raise the economic damage wreaked by crisis, as yet more output is lost and more jobs are destroyed. This is the greatest single threat to the survival of the euro. Governments will topple and the programmes underpinning international aid will fall apart. An angry, populist Greece might well storm out of Europe as a harmful act of protest. At that moment the risk of contagion would be at its greatest. Would the single market survive? Would the ECB and Germany, staring into the abyss, at last commit themselves to ringfencing solvent governments? Sometimes the worst really does happen. However, even if Greece goes, a general fragmentation of the euro zone remains unlikely. Collapse would not benefit any of its members. Even if joining was a mistake, quitting would be a bigger one. Moreover, all the arguments over rescue funds and bank bail-outs are in the end about who will pay, not whether the system is worth saving. The brinkmanship could go on for months and there might be more half-rescues like the one in October. But were a bank or a solvent economy suddenly to fall prey to a market panic, then governments and the ECB would surely step in. It would make no sense for the ECB to put its own reputation for orthodoxy before the ravages of deflation. And if the euro zone ceased to exist, the ECB would have nothing to be orthodox about. Remember, though, that even this action would only buy time for Europe's troubled economies to resume the relentless

slog of regaining competitiveworking off their debts. Sometimes you read that such an enforced workout is a hopeless Reprints cause. Ageing, comfortable Reprints of this special report are available Europeans have no stomach for at US$7.00 each, with a minimum of 5 copies, hard work or invigorating gloplus 10% postage in the United States, 15% postage in Mexico and Canada . Add tax balisation. Many governments inCA, DC, IL, NY, VA; GSTin Canada. will want to protect their comFor orders to NY, please add tax based on cost panies, not subject them to comof reprints plus postage. petition. The temptation to use For classroom use or quantities over 50, please telephone for discount information. the euro zone to defend unafPlease send your order with payment by fordable privileges will be cheque or money order to: strong. The political culture in a Jill Kaletha of Foster Printing Service country like France has long Telephone 866 879 9144, extension 168 or [email protected] seen globalisation as a threat to (American Express, Visa, MasterCard and be managed. That view may be Discover accepted) hard to shift. For more information and to order special Yet this argument is too fareportsand reprints on line, please visit talistic. Europe has a choice, just our website www.economist.com/rights as America had a choice after the miserable decade of the Future special reports 1970s, when it decided to beat Women and work November 26th 2011 inflation and re-establish the Computer games December lOth 2011 State capitalism January 21st 2012 dollar. Europe has much to offer: Pakistan February 11th 2012 creativity and imagination, Previous special reports and a list of skills in design and manufacturforthcoming ones can be found online: ing, expertise in science and eneconomist.comfspecialreports gineering. And it has something to prove to an interconnected world. Confronted by global finance and business, no political system seems able to cope alone. If collaboration cannot be made to work among the states of Europe, bound by history and culture, can it work anywhere? This newspaper's fervent hope would be that Europeans embrace globalisation by at last getting serious about reforming their rigid economies and their welfare states. Indeed, the present crisis has presented them with a unique chance to break apart the political interests that have held them back. Crises have a way of speeding up history. In his magisterial account of Europe after 1945, Tony Judt writes: "Postwar in Europe lasted a very long time, but it is finally coming to a close." The near-failure of the euro has made]udt's world seem more remote than ever. The post-Nazi taboo on populist parties is falling away. Without the Soviet Union's occupying armies, Germany is once again the power that leads Europe but is unable to dominate it. The bloodless politics of Brussels, once a bulwark against

The failure of the euro would not benefit any of its members. Even ifjoining was a mistake, quitting would be a bigger one

16

extremism, has now become an obstacle. The welfare state, built on postwar prosperity, has become too expensive for these straitened times. It is often said that in the face of the euro crisis the EU must either integrate or disintegrate. Either is possible. More likely, though, it will muddle through, integrating as little as it can get away with, disintegrating as Britain becomes ever more detached, and reforming just enough to get by. When the fuss is over, the chances are that Europe will breathe a sigh of relief and continue rather faster down the path of genteel decline. • The Economist November 12th 2011

57

Also in this section 58 Greece's dysfunctional politics 58 News in the ex-Yugoslavia 59 France's public finances 59 Azerbaijan 60 Nagorno-Karabakh 62 Charlemagne: The euro v democracy

For daily analysis and debate on Europe, visit Economist.comfeurope

Germany's economy

A case of the sniffles BERLIN

Unlike some of its neighbours, Germany is slowing rather than melting down

UCH of Europe has pneumonia. How is that affecting Germany, the M continent's biggest economy? Exports are surprisingly buoyant considering the European pandemonium; they rose by 0.9% in September. But industrial production dropped by 2.7% in September and new orders, a harbinger of future output, fell by 4.3%, the third monthly decline in a row. Business is bracing for harder times. Expectations have been falling since February, according to the Ifo Business Survey. The biggest problem is the euro crisis, which is playing havoc with Germany's trading partners. Industrial orders from the euro zone plunged by 12.1% in September. Demand will also wane from Asia and eastern Europe, which have been Germany's fastest-growing markets. Exports make up around half of the country's GDP, so a slowdown is inevitable. On November 9th the government's advisory council of economic "wise men" predicted that growth would shrink from 3% this year to 0.9% in 2012. They expect near-stagnation until the middle of 2012. Some pundits think the economy will shrink. This may look like poetic justice to peripheral euro-zone countries, which are suffering partly because Germany demands austerity in return for aid. But there are no grounds for Schadenfreude. First, German strength has helped them; they will fare worse if Germany falters. Second, Germany is still in pretty good shape.

Germany's economy is often more volatile than that of neighbours like France. Its specialisation in investment goods, cars and other expensive consumer products makes the upswings higher but downturns sharper. That pattern may now be broken. As Europe slides, Germany is likely to sink less than the others. But this rests on a hope: that European leaders-the German chancellor, Angela Merkel, in particular-will stop mismanaging the euro crisis. Germany's trump card is its labour market. Unemployment barely rose during the 2008-09 recession. With the recovery, it has dropped to a 20-year low. After years of sacrifice, wage-earners are starting to profit. Gross wages are expected to rise by nearly 5% this year and by about 3% in 2012. Disposable income, adjusted for consumer inflation, should increase by about 1% next year. Consumption is now contributing to growth, alongside exports. "German growth is much more balanced," says Holger Schmieding of Berenberg Bank. Employment should remain resilient during the downturn. Earlier labour-market reforms continue to put pressure on the unemployed to find work, notes Eckart Tuchtfeld of Commerzbank. As before the last recession, employers remain "extremely reluctant to let go of skilled staff", he says, in part because the labour force is shrinking. "Working time accounts" make it easier to avoid redundancies. These are credited when employees work extra

hours and can be drawn down when activity is slack. During the last two busy years they have been replenished. The wise men expect the unemployment rate to drop from 7.1% in 2011 to 6.9% next year. Luckily, Mrs Merkel does not plan for Germany the austerity she recommends for other countries. Mr Tuchtfeld calculates that fiscal policy will be neutral or even slightly expansionary in 2012. On November 6th the coalition sought to patch up disputes among its three quarrelsome members with a little extra spending. Starting in 2013 families that do not put their children in creches will get €100 ($136) a month, a sop to the Christian Social Union, the Bavarian sibling of Mrs Merkel's Christian Democratic Union. Roads will get a bit of extra cash. To placate the Free Democratic Party taxes will be cut. Tight credit is not an immediate threat: German companies have plenty of cash. The hope is that Germany's downturn will be short and shallow. But that depends on Europe's leaders getting to grips with the euro crisis. Unchecked, it will shatter the confidence of consumers as well as businesses. Germany's recession would then be as painful as anyone else's, says Mr Schmieding. "We have more of a buffer than most, but that doesn't protect us from everything." Rising unemployment would jeopardise Mrs Merkel's chances for re-election in September 2013. Perhaps for that reason, most economists are betting that Germany will eventually do whatever is necessary to end the crisis. The surest way is for the European Central Bank to buy the debt of wobbly countries like Italy, a notion that terrifies Germans, still seared by their grandparents' memories of hyperinflation. If that is what Mario Draghi, the bank's (Italian) new president, decides to do, Mrs Merkel may not stand in the way. •

58 Europe

The Economist November

12th 2011

News in the ex-Yugoslavia

Broadcasting to the Ball
Aljazeera's latest venture

N THE centre of Sarajevo, Bosnia's Iscript capital, a gleaming piece of Arabic adorns the top of a new building.

Greece's dysfunctional politics

Tomorrow and tomorrow ATHENS

How not to form a government

T TOOK several days of back-and-forth Iprivate talks, missed deadlines and public and outrage, but Greece finally has a new prime minister. On November 1oth Lucas Papademos, a former vice-president of the European Central Bank, was named to replace George Papandreou, who had pledged to stand down four days earlier. The decision meant Greece had come full circle in less than a working week: on November 7th Mr Papademos had looked like a shoo-in for the job before negotiations went sour. It may have taken a while to reach, but the choice at least looks sensible. Mr Papademos, an academic economist and a member of no political party, has the reputation to reassure Greece's bail-out partners, and his financial expertise should prove useful when it comes to implementing the complexities of the looming so% haircut private holders of Greece's bonds must suffer, under a deal struck in Brussels on October 26th. The last casualty of this week's wrangling was Philippos Petsalnikos, the speaker of parliament. A German-speaker skilled at keeping Greek lawmakers in order, he looked like a dead certainty to replace Mr Papandreou on the afternoon of November 9th. Mr Papandreou even delivered an emotional valedictory television address to the nation (although he did not name Mr Petsalnikos as his successor). Yet later that day Mr Papandreou (pictured, above, with President Karolos Papoulias) was forced to withdraw Mr Petsalnikos's candidacy amid a threatened rebellion by backbenchers in his Panhellenic Socialist

This is the logo of AlJazeera, the Qatari network that has changed the face of television news since it was founded 15 years ago. Inside the building, carpenters and technicians are putting the finishing touches to the offices. But this is not just another foreign bureau. AlJazeera's Balkan service goes live on November nth. This will be the second foreign-language station the network has opened, after Al]azeera English in 2006. But what language is it? Journalists will be broadcasting in "their" language, say station bosses. This tongue used to be called Serbo-Croatian; now it goes by a number of names: Serbian, Croatian, Bosnian or Montenegrin. (Think New Zealand, Scottish and American versions of English.) The target audience for the channel will be the former Serbo-Croatian speaking regions of the ex-Yugoslavia. But plenty of Macedonians and Slovenes understand the language, as do older Kosovo Albanians. Tarik Djodjic, the managing director, says that €15m ($2o.sm) has been invested in Al]azeera Balkans. The channel's editor, Go ran Milic, is linked in the (older) public mind with Yutel, a state-run news station that sought, between 1990 and 1992, to keep Yugoslavia from falling apart. Also based in Sarajevo, the channel died in the shelling. But Mr Milic dismisses any comparison with Yutel. His new venture is privately run, he says: "No one can tell us anything about our editorial decisions." What is not clear is whether people from one part of the Balkans are still interested in the others. They might enjoy each other's reality shows. But news broadcasts from Sarajevo, Banja Luka (capital of the Serb part of Bosnia), Belgrade and Zagreb are all utterly different. The channel faces another problem. Movement (Pasok). They blamed Mr Petsalnikos for helping Mr Papandreou put together his ill-fated proposal for a referendum on Greece's new €130 billion ($178 billion) bail-out package. That plan had been shot down by euro-zone leaders at the G20 summit in Cannes, triggering Mr Papandreou's decision on November 6th to step down (see Charlemagne). Mr Papademos's "first" candidacy fell foul because he wanted to choose his own economic team. This proved unacceptable

Many Serbs and Croats will assume it is "Muslim" television. Mr Djodjic concedes that "we will need some time to prove that prejudice wrong." Milos Solaja, an analyst in Banja Luka, says Bosnian Serbs will watch, but only to see what the other side is thinking. Gordana Igric, who runs the Balkan Investigative Reporting Network, says the station has a chance to make an impact. This year the BBC closed its last local-language radio services in the Balkans. The region's domestic media are dominated by the interests of politicians and tycoons; the few independent outlets are too poor to carry out serious newsgathering. Al]azeera Balkans has money, and its viewers will also be able to watch subtitled news and documentaries produced by the Arabic and English-language networks. Mr Milic says that when he took the job he was told that AlJazeera's only interest in the Balkans was to fill a gap in the market. But the channel's Arabic service played a key role in the Arab spring earlier this year. What sort of influence Qatar may want, or gain, in the Balkans, is a good question.

Milic is coming to a screen near you to Pasok, largely because it would probably not have included Evangelos Venizelos, Mr Papandreou's finance minister, who is not popular among EU and IMF officials. New Democracy was not keen on Mr Papademos either; he wanted an open-ended term rather than stick to an agreed February 19th deadline for elections. Mr Venizelos threw his hat into the ring at the last moment, after running a whispering campaign against Mr Papademos. An ambitious constitutional lawyer, he is

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The Economist November

Europe 59

12th 2011

~ keen

to succeed Mr Papandreou as Pasok leader. But he needs a position from which to build his campaign. Mr Papademos kept a dignified distance from the chaotic politicking of the last week. But he reportedly added two more conditions. He wants support from New Democracy, which was reluctant to take up more than a few cabinet posts in the new government. And in line with a European Commission demand, he insists that both party leaders should sign a letter of commitment to the new bail-out terms. Mr Papandreou is willing to sign up. But Mr Samaras caused consternation in Brussels by apparently refusing to do so following objections from his party (though a later statement left open the possibility). Mr Samaras annoyed Angela Merkel, the German chancellor, and other European conservatives by opposing Greece's first bailout. He says he supports the second one, but EU officials are still unconvinced. Over the next few weeks Mr Papademos will struggle with the country's first coalition government in modern times. Left-wing parties rejected Mr Papandreou's call for national unity. They plan to take their opposition to the streets. •

France's public finances

The belt-tightenerin-chief PARIS

Meet Nicolas Sarkozy, austerity-lover HORTLY after he was elected president in 2007, Nicolas Sarkozy marched uninS vited into a meeting of European Union finance ministers in Brussels to declare that France was postponing by two years its commitment to balance its budget. Even as the financial crisis set in a year later, he banned the term "austerity", a word that was said to scare the faint-hearted French. But now, with France's AAA credit rating still on the line, Mr Sarkozy is reinventing himself as a champion of fiscal prudence. On November 7th the government unveiled its second austerity plan in three months. This one promises savings worth an extra €7 billion ($9.5 billion) in 2012, on top of the €n billion announced at an emergency budget meeting in August. The new measures do not alter the timing of France's plan for the public finances: the deficit should still fall to 4.5% of GDP next year, and 3% in 2013. But the faltering economy means France needs an extra effort in order to meet these targets. In an interview last month, Mr Sarkozy conceded that GDP growth in 2012 would reach only 1%, down from a previous forecast of L75%. By current European standards the new

Beans on toast for dinner? French plan, which Mr Sarkozy left to his prime minister, Fran~ois Filion, to announce, is modest. Three-quarters of the measures taking effect next year are tax increases, not spending cuts. The rate of vAT on restaurant bills, for instance, will rise from 5.5% to 7%. Big companies face an extra five percentages points in corporate tax. The better-off will be particularly squeezed: income-tax and wealth-tax thresholds will be frozen, and investment income taxed more heavily. On the spending side, immediate cuts are limited, though more meaningful reductions will take effect in years to come. Raising the retirement age to 62 years, for example, will be brought forward by a year, to 2017. Action was certainly needed. France is the weakest of the six AAA euro-zone countries, and its banks are badly exposed to the likes of Greece and Italy. Last month Moody's put its credit rating under surveillance. As a share of GDP, public spending is higher in France even than in Sweden. Borrowing costs are rising. Mr Filion's stern tone this week-'"bankruptcy' is no longer an abstract word", he said-and the government's rapid response to the worsening outlook should help calm markets. France's plan proves a "clear willingness" to defend its credit rating, according to Guillaume Menuet at Citigroup. How long it will hold things together is a different matter. Natixis, a French investment bank, reckons that growth in 2012 will fall to 0.5%, half the government's forecast. It says extra savings worth up to €5 billion may be needed to meet next year's deficit target. Citigroup thinks growth will be just 0.1%, and identifies a potential need for another €9 billion of savings. The trouble is that France holds a presidential election next spring. This means that, should yet more emergency measures be needed early next year, Mr Sar-

kozy will be even less likely to make spending cuts, which the French dislike, instead of tax increases, which they tolerate. As it is, Mr Filion's tone is bolder than the measures he has announced. With European leaders around him tottering, Mr Sarkozy is not about to embark on unpopular structural reform of the welfare state. Indeed, he says he is proud of having "sheltered" the French from the sort of painful cuts other leaders have had to make. It is not clear that voters will thank him for his trouble, though they may appreciate his energetic efforts to solve the eurozone crisis. Last week, Mr Sarkozy managed to get Barack Obama to appear next to him for a gushing television interview after the G20 meeting in Cannes, in which the American president hailed the "impressive leadership" of his French counterpart. Although the G20 was wrecked by Greek drama, Mr Sarkozy was nonetheless portrayed in France as a tireless and authoritative leader. He may still be trailing his Socialist rival for president, Fran~ois Hollande, in the polls. But the gap is narrowing. One poll carried out after the G20 gave him an eight-point jump-taking him to his highest level since February 2010. •

Azerbaijan

How to spend it BAKU

A small country grows drunk on oil wealth ALK along the shore of the Caspian sea in Azerbaijan's capital, Baku, and W you smell oil in the air. You can also see it, or rather its effects: in the marble balustrade along a wide promenade, in the floodlit fountains, in the Tiffany and Gucci boutiques, in the London black cabs (repainted purple) ordered by the government, and in a vast state flag atop the tallest flagpole in the world, flying over the site where the arena for next year's Eurovision song contest is being built. An oil windfall since the main export pipeline began operations in 2006 has transformed an unloved Soviet city into a glitzy capital, often with locals evicted from their houses. The oil money has entrenched an autocratic and corrupt political system that is resistant to change. Azerbaijan is run by Ilham Aliyev. He inherited the presidency from his late father, Heydar, a shrewd KGB general who had also run Azerbaijan in Soviet times. When the son took over in 2003 many saw him as a Moscow-educated "golden youth" who lacked his father's skills. But in the past few years he has consolidated power, suppressed opposition, eliminated

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The Economist November 12th 2011

60 Europe Selected pipelines Gas:

f

f Oil

existing _,· proposed

Nagorno-Karabakh

Conflict on ice

RUSSIA STEPANAKERT

A sore in relations between Armenia and Azerbaijan still festers

"JAM almost full for next summer", boasts Mike Aghjayan, an Armenian

~ his

rivals and abolished presidential term limits. He has also overseen the country's rapid oil-driven growth. Although the wealth on display in central Baku does not extend even to the city's suburbs, ordinary Azeris have enjoyed rising incomes. Poverty has declined. This may explain why the ripples from the Arab revolutions stopped at Baku's shores. In March a few hundred protesters were overpowered by police; 14 are still in jail. The government tried to address some of the sources of discontent, even temporarily clamping down on petty corruption-until the mood calmed. The West has neither the will nor the power to criticise Azerbaijan. For America, it provides a vital transit route to Afghanistan. For Europe, it is an important potential source of non-Russian gas. Although gas and geography buy Azerbaijan international clout, it is oil-backed intimidation that keeps the regime in place. The opposition is toothless, but this does not mean that politics is dead, one official explains. Rather, it functions by balancing several oligarchic groups within the system. A key figure in mediating the clan interests is Ramiz Mehdiev, the 73year-old chief of staff, who served under Mr Aliyev senior and was entrusted by him to keep his son in power. But while Mr Mehdiev controls the interior ministry and civil servants, the oligarchs run the economy. One of the most powerful is Kemaleddin Heydarov, minister of emergencies with a flair for persuading pop stars to sing his compositions. He runs the customs. He and his son, a graduate of the London School of Economics who hobnobs with British royals, have amassed a business empire, including monopolies in fisheries and caviar, not to mention property and construction. Much of the economy works in the shadows. The black economy can be guessed at by the gap between the volume of goods exported to Azerbaijan and the volume of the same goods recorded as imports. Gubad Ibadoglu, an economist who analysed the data from 2003-09, puts the

from Lebanon who is managing a new hotel in the town Azeris call Shusha and Armenians Shushi. Visitors, mostly diaspora Armenians, will come from the United States, Canada, France, Russia, Lebanon and Iran. In1988 this was a pleasant hilltop town, home to 15,000. Today barely 4,000 live on amid the ruins of war. His guests, Mr Aghjayan explains, "want to see the land people gave their blood for." Nagorno-Karabakh is often described as one of several post-Soviet "frozen conflicts". However, as the war in 2008 between Russia and Georgia over the breakaway territory of South Ossetia showed, ice can melt quickly. In Soviet times Nagorno-Karabakh was a mostly Armenian-populated autonomous enclave inside Azerbaijan, some 4,000 square kilometres (1,540 square miles) big. Conflict erupted in 1988 as the territory's Armenians sought to secede from Azerbaijan. By the time the war ended in 1994, the victorious Armenians had doubled the enclave's size and carved out a land corridor to Armenia proper. Between 1988 and 1994 more than rm Armenians and Azeris fled from both countries and Nagorno-Karabakh. Azeri-populated towns in the region were left devastated. Outsiders have worked on peace plans since 1995 but none has stuck Yet the outline of a deal seems clear. Nagorno-Karabakh, which declared independence in 1991, will return to Azerbaijan much of the land it won in the war. Then, after an "interim" period, the people of the territory, including Azeri refugees living outside, will vote on its final status. Officials in Nagorno-Karabakh say there can be no deal without their agreement. This is not bravado. The president figure at more than $10 billion. But, as the International Crisis Group, a think-tank, wrote last year, corruption is not only a means of personal enrichment for the elite, but also a powerful tool of political control: everyone, from top to bottom, is complicit, and vulnerable to co-option. As one state employee explains, everyone gets two salaries: an official one and unofficial one, in an envelope. The government keeps a record of all unofficial payments. "The crime is not stealing," he says. "It is stealing and not reporting it." The government could easily turn bribery into taxes. But as Khadija Ismail, an investigative

of Armenia and his predecessor are from the region. Ara Haratyunyan, NagornoKarabakh's prime minister, says he doubts Azerbaijan will ever accept his territory's independence. Still, he cheerfully points out, GDP has doubled in the past four years (largely thanks to transfers from Armenia and the diaspora). In contrast to the war years, Azerbaijan is flush with cash from oil and gas. This yean6.5% of its budget has been set aside for military spending: this is roughly equivalent to the entire budgets of Armenia and Nagorno-Karabakh combined. Yet officials in Stepanakert, Nagorno-Karabakh's capital, seem relaxed. Russia is committed to Armenia's defence. And a strategic pipeline pumping oil to the West from Azerbaijan and Kazakhstan passes just12 miles from Nagorno-Karabakh-controlled territory. Shelling could quickly cripple it.

It's Lovely in the summer

journalist, argues, while envelopes make people grateful, taxes turn them into demanding citizens. But this system depends on an evergrowing pot of money. From 2005-08 Azerbaijan's economy grew by about 25% a year. This year, with most investment in oil production completed, growth will be less than 1%. The oil money creates an illusion of development, but not jobs. Although oil production is strong and the country is not about to run out of money, it needs to reform in order to grow. For now, though, the government is too intoxicated with the smell of oil to think about the future. •

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62 Europe

Charlemagne Europe against the people? I

Efforts to save the euro cannot run against the will of the voters indefinitely

UROPE has claimed the scalps of two leaders in almost as many days. First George Papandreou, the Greek prime minister, promised to resign, and then Italy's Silvio Berlusconi did the same. Both leaders have been in trouble for some time, but the immediate cause of their downfall is plain: the ultimatum they received from euro-zone leaders at the G20 summit in Cannes to reform their economies-or else. Mr Papandreou was instructed to approve the last European bail-out deal or risk losing his loans and being ejected from the euro. He scrapped his call for a referendum, and agreed on November 6th to make way for a government of national unity. With Italy's bond yields reaching danger levels, Mr Berlusconi was told he lacked credibility and was made to "invite" the IMF to supervise his reforms. On November 8th, though, Mr Berlusconi lost his majority in parliament, and agreed to step down once the reforms are passed. Two taboos were broken in Cannes. It was the first time eurozone leaders accepted that a member could default and leave the euro. (And once the unthinkable is possible, why stop at Greece?) It was also the first time leaders intruded so deliberately into the internal politics of other countries. True, the European Union has long influenced national politics. Think of how Conservative divisions over Europe contributed to the resignation of Britain's Margaret Thatcher in 1990, or how new members have transformed themselves to join the EU, or how Italy reformed its public finances to qualify for the euro in 1999. In the past year the crisis has brought down the prime ministers of Ireland and Portugal after they needed to be bailed out. Yet something has changed. Europeans see themselves as a family; they have rows, but nobody questions a member's right to be part of the clan. But at Cannes euro-zone leaders made plain that family members could be forsaken, even disinherited. Some see this as an assault on national democracies by the European elite, be it unelected or self-appointed (as in the case of the German-French duo of "Merkozy", Angela Merkel and Nicolas Sarkozy). Much has been written about the subjugation of Greece, the cradle of democracy, under a second German occupation. And much of it is nonsense. Italy and Greece chose freely to join the euro, and every club has norms of behaviour. In a mone-

E

tary union, irresponsibility by one member endangers the wellbeing of others. If Italy and Greece had not been so over-indebted and sclerotic, they would not be in such trouble today. Countries that extend financial help have a right to impose conditions to ensure that their loans are repaid. The alternative to euro-zone diktat is being abandoned to the market. And if a response is needed, it will inevitably be led by Germany and France. Yet there is something to the critics' charges. For many countries, such as Spain, the EU has been an anchor of democracy. But as the crisis persists, austerity drags on and the euro zone integrates to save itself, the legitimacy of the enterprise will suffer. The pain would be more acceptable if the creditors acted as if they believed they faced an existential threat. But rather than commit their full resources to the crisis, they are seeking to limit their liability. This raises a sense of double standards: one kind of democracy for creditors, another for debtors. Everybody must understand the constraints on Mrs Merkel. But Mr Papandreou commits a "breach of trust" if he calls a referendum. The debtors, moreover, bear the cost of the creditors' mistakes. In Greece the IMF (rightly) wanted the adjustment programme to focus more on growth-promoting structural reforms; the Europeans prioritised deficit-reduction. A deeper-than-forecast recession means Greece must chase ever-receding fiscal targets with ever more austerity. Its first bail-out gave it three-year loans at punitive interest rates, with no debt reduction. The latest rescue offers Greece cheap rates for up to 30 years, with a so% haircut on private bondholders. At least one of these options was wrong, and neither may be enough to save Greece. Germany belatedly accepted the need for the rescue fund to be larger and more flexible. Had all this been done sooner, the crisis might have been contained more easily, and at lower cost. First fight the fire Right now the emphasis needs to be on firefighting. Italy is burning, and the rest of the euro area could be consumed with it. Decisions cannot be hostage to the vicissitudes of 17 national parliaments. And Germany restraining the European Central Bank is like insisting that water buckets are used instead of fire engines. In the longer term, though, the euro zone will need a new fire code. The EU's treaties are likely to be reopened, again. Euro members will have to abide by stricter fiscal rules and accept intrusive inspection by outsiders. The loss of sovereignty would be more acceptable to debtors if the creditors were to accept the need, eventually, to issue joint Eurobonds. Independent institutions are needed to make the system work. Most would prefer the unelected European Commission over an intergovernmental body dominated by Merkozy. The commission, moreover, would act as a vital link between the 17 euro "ins" and the ten non-euro "outs", preventing the sort of two-speed Europe now openly advocated by France. More Europe should not mean more Sarkozy and less single market. Saving the euro requires more pain for some, more generosity from others and fundamental change for all. Is it worth it? Sooner or later, citizens must be asked. Without their support, no reform can last. And a real choice must include the option of leaving the euro. Now that this taboo has been breached, the euro zone should start thinking about how best to arrange the departure of those that cannot, or will not, live by Germanic rules. • Economist.comfblogsjcharlemagne

63 Also in this section 64 UncontroLLed borders 65 Tourism and the Olympics 65 The Love of cheap toys 66 Bagehot: Why Britain has centrist politics

For daily analysis and debate on Britain, visit Economist.comfbritain

Reshaping Local government

The mayors show BIRMINGHAM, LEWIS HAM AND MIDDLESBROUGH

Britain's few elected mayors have mostly worked well. That doesn't mean other cities will vote for them ISELA STUART, a Labour trots G round her Birmingham constituency, listening to gripes about traffic, litter and MP,

the sundry inconveniences of life in a busy city. She is good at this sort of thing. Ms Stuart became an election-night heroine last year for holding off an expected swing to the Conservatives in her Edgbaston seat. She could expect to fly high in Ed Miliband's Labour Party. But she is swapping that ambition for the chance to run her city. Others hope to follow. Next year n British cities will have the chance to replace the existing local-government structure, in which leaders are chosen from the ranks of councillors, with directly elected mayors. The coalition government sees this as a way of devolving power and strengthening localism. With a population of around rm, Birmingham will be the biggest city to vote. But all are hefty. Because the political boundaries of British cities often encompass suburbs and even bits of countryside, they can contain more people than larger-seeming American cities (see chart on next page). Elected mayors are still a political novelty. Londoners embraced a mayoralty in 2000. Since then the capital has had two high-profile leaders: "Red" Ken Livingstone and Boris Johnson (pictured), a Tory who has used the job to build his party power base and may return to national politics. Elsewhere, though, only a few

towns and a handful of London boroughs have plumped for directly elected leaders. Britain lags far behind France, where mayors have wide-ranging municipal powers. Germany, too, has gradually embraced elected mayors, previously confined to the south of the country. Now all but a few northern cities elect their leaders directly. German thoroughness manifests itself in requiring that applicants have a training in administration. Arguments for elected mayors tend to turn on their visibility. A poll conducted in January 2010 found that 57% of people in areas with an elected mayor could identify him or her, compared with only 25% who could identify their leader in traditional council areas. Lord Adonis, a Labour peer who is campaigning for elected mayors, points out that the mayor of Cologne has a web presence 19 times greater than the head of Birmingham's city council. Small bite, loud bark London's mayor controls transport policy (hence the capital's congestion charge), oversees the capital's policing through the Metropolitan Police Authority and sets a council-tax "precept"-a small addition to the property taxes levied by boroughs. His regional counterparts probably won't get anything like that degree of freedom. David Cameron, the prime minister, has backed away from earlier plans for power-

ful "executive mayors". A consultation on powers, which will conclude in January, hints vaguely that mayors will be "ambassadors and champions" for their area. Behind the retreat lies a belief that, in fiscally tough times, costs are better controlled from the centre. Plans for mayors have also clashed with schemes to create directly elected police commissionerswhich will be put to the public in a separate referendum next autumn. Open "primaries", in which mayoral candidates would be selected by the public, have been dropped as too expensive. Ms Stuart may want to strengthen local democracy, but she will first have to secure her party's nomination. That means winning a few thousand votes of local Labourites. Yet the experience of Britain's few existing mayors suggests there are ways of grabbing influence even when formal powers are lacking. Take Middlesbrough, a city in the northern Teesside conurbation. Its mayor is Ray Mallon, a controversial police chief turned local official who showed an early interest in zero-tolerance measures and was elected as an independent. "Robocop", as he is nicknamed, has since been re-elected twice. Mr Mallon is ostentatiously green (he drives an electric two-seater car) yet tough. Middlesbrough is full of security cameras attached to loudspeakers, which occasionally boom out warnings to miscreants. An aide describes Mr Mallon's forte as "banging heads gently together" to get things done. He has boosted the self-confidence of a town that is not always loved (it was recently voted the worst place to live in Britain, a charge to which Mr Mallon responded with some force). Mayors have power because they are perceived to be powerful. Sir Steve Bullock, previously a local Labour council boss

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64 Britain

The Economist November 12th 2011

~ who

was elected mayor in the south London borough of Lewisham, says he is constantly harangued: "If I go into a supermarket, people come up and tell me what's going wrong." Not all the early experiments have worked out well. A negative example is provided by Doncaster, in South Yorkshire. Its first elected mayor, a popular local sportsman, stood down in 2009 following criticism of local social services for failing to stop the maltreatment and murder of a child. He was succeeded by Peter Davies, who has fought councillors over budgets. The city is consulting residents on whether they wish to retreat from the mayoral model: a sign of the fragility of the institution when things go wrong. So it is by no means certain that Britain's cities will vote for mayors next year. In places like Newcastle and Manchester there is little enthusiasm for a Middlesbrough-type mayoralty. Local governments there are thought to be reasonably well-run, and few want upheaval. In some solidly Labour cities, the reform is derided as a "Tory" gimmick. Councillors in towns like Coventry are already campaigning against a change. There are reasonable doubts about how effective mayors can be without clear new powers. Sam Sims of the Institute for Government, a think-tank, notes that people are more likely to vote for mayors if they know local government will be reshaped as a result. Deloitte, a consultancy, worries that reform will lead to a mess of overlapping county, district and parish councils, local MPs and mayors. Elected mayors are an important step on the road to localism. They have proved bolder, more original and more accountable than appointed council leaders tend to be. Mayors will surely acquire more powers as people get used to them. But it will not be easy to persuade people to vote for a vague promise of civic reorganisation, without the powers to match. • Not everything is bigger stateside Local authority area population, m Proposed mayor referendums in 2012

0 0.2 0.4 0.6 0.8 1.0 Birmingham Leeds Sheffield Bradford Manchester Liverpool Bristol

American dty equivalent Detroit San Francisco

Las Vegas Fresno

Kansas, MO Oakland Miami

Wakefield

New Orleans

Coventry

Pittsburgh

Nottingham

Cincinnati

Newcastle

Newark, NJ

Sources: ONS; US Census Bureau

Uncontrolled borders

Waving them in

Still coming, still disliked Concern about immigration/race, % *

Immigration,

60

'000 600

50

550

40

500

A row over lax border guards conceals a bigger problem with immigration

30

450

20

400

HE Home Office is a politicians' graveT yard. Three of the current home secretary's five immediate predecessors left un-

10

350

der a cloud; a fourth thought it so awful that he broke up the department. For 18 months Theresa May has looked unassailable in her kitten heels, two-stepping deftly past the landmines of policing reform and immigration caps. But thanks to a brouhaha over Britain's border agency, UKBA, she was pondering the implications of a near-death experience as The Economistwent to press. The row began on November 3rd when it emerged that passport-control officials had been relaxing entry procedures at Heathrow airport and elsewhere to manage queues. They did not always open biometric passport chips or check details against a list of undesirables. The man in charge, Brodie Clark, and two others were suspended. Whether any dangerous folk were waved through is unknown, but it makes for a rousing political dogfight, studded with calls for Mrs May to resign. The home secretary says she authorised a trial of light-touch inspection for Europeans, including children travelling with their parents, to allow agents to focus on more suspicious people. She did not authorise treating other arrivals that way, she insists. UKBA's chief executive confirmed her account, saying Mr Clark had admitted to exceeding ministerial instructions. But immigration gaffes in Britain are never quietly forgotten. By the time Mrs May had blamed Mr Clark in the House of Commons and the Home Affairs Committee, Mr Clark had had enough. He resigned, saying that she had made his position untenable, and intends to sue for "constructive dismissal". Formed in 2008, when the Home Office was dismembered, UKBA has always been a mess. A big project to digitise information recedes expensively into the future. The Home Affairs Committee recently charged the agency with all kinds of slackness, including losing touch with over 100,000 immigration cases. However bad UKBA and the row over it may be, a more serious fight awaits. The Tories came to power promising to reduce annual net migration from around 2oo,ooo to the "tens of thousands". A steep rise in immigration spooked Britons a decade ago, and they have not calmed down much since (see chart). An online petition urging the government not to let Britain's

. .- .. ., , - , _ , 1

o ~~-r.-

1997 99 2001 03 Sources: Ipsos

MORI; ONS

05

07

09

11

*Citing it as one of the most important issues facing Britain, three-month moving average

population hit 70m by 2027, as it is currently expected to, attracted over 100,000 signatures in seven days, according to its sponsor, a lobbying think-tank called Migration Watch. The government has tightened work and study visas for non-Europeans. It is whittling away at family reunification rights, and plans to make it harder to settle permanently in Britain. But the numbers are not yet budging. Provisional figures show long-term immigration in the year to December 2010 at 575,000, about the same as before. Outflow was 336,000, less than the 427,000 it reached in 2008. Net migration was thus 239,000, 20% higher than the year before. It is likely that net migration will fall a bit as government measures are fully implemented. But the target of tens of thousands looks remote. Students, mostly from outside Europe, account for two-fifths of all immigrants. Most are the genuine article, now that many bogus colleges have been closed. Migration from EU countries cannot be cut and may even grow. One reason is that, as it becomes harder to bring in workers from other parts of the world, EU migrants may fill those jobs, keeping numbers up. This may be happening already. Net migration from eastern European countries, which reversed when Britain's economy collapsed, is rising sharply again, points out Carlos Vargas-Silva of Oxford's Migration Observatory. Single men are bringing their families: Polish women accounted for the biggest share of foreign-born mothers in 2010. Established communities will attract others. But that is a fight for the end of this parliament, when accounts are settled. For now, Mrs May is likely to stay, barring eyecatching exposes or economies with the truth. Until recently, she was a safe pair of hands. She is also a woman, and David Cameron is short of them. He lost one colleague a month ago; were Mrs May to follow the former defence secretary, Liam Fox, so quickly, it might raise questions about the prime minister's ability to run a cabinet, still less a country. And it is possible that Mrs May will turn out to have been in the right. •

The Economist November

Britain 65

12th 2011

London 2012

Fun and games

Toys and culture

Buy early, buy often Children already lobbying for tacky Christmas toys? It's nottheir fault

Not everyone loves the Olympics

T ONDON'S leisure industry hopes for a L bonanza next July and August, thanks to the Olympics. To lure hordes of visitors, a campaign marketing Britain abroad has been launched with the slogan "You're invited". But they may not come. When Britain won the right to host the Olympics in 2005, ministers promised a windfall not just for sport but for tourism. Previous hosts held similar hopes, and were mostly disappointed. Since the 1992 Barcelona games, hosts have seen a fall in foreign guests during each Olympics, as well as in the months before and after, says the European Tour Operators Association (ETOA), a trade body. In Beijing, hotel bookings in August 2008 were 39% lower than they had been a year earlier. The belief that a city will be expensive and chock-a-block with sports fans can deter visitors. Official advice this time reinforces that notion: Transport for London, which runs most of the capital's transit system, has asked locals to stockpile goods and stay at home to ease congestion. Fully 4.2m foreign tourists came to London in the summer of 2010, as well as 3m British ones. The government has belatedly acknowledged that it would be a shame to lose them. Speaking at a trade fair for the tourism industry on November 7th, Jeremy Hunt, the culture secretary, expressed confidence that Britain could "defy the tourism dip" other hosts have experienced. Early signs are not encouraging. A sample poll of tour operators by ETO A suggests 2012 bookings are a fifth lower than at this time last year; for the Olympic period they are even slower, in part because some hotels are demanding money up front. That does not mean the games will be a commercial disaster: Olympic organisers have already reserved a third of London's hotel rooms for athletes, officials, sponsors and the media. But hotels may not see the high demand-or high prices-they expect. Barcelona and Athens did not fill their 13,00016,ooo rooms. London has 125,000. London's proximity to other destinations normally lifts its tourist trade: it is Europe's most-visited city. But this may be a disadvantage when it comes to hanging on to Olympic spectators. Of the past three games, people stayed for longer in Sydney and Beijing than they did in Athens, which, like London, is a short-haul trip for many international passengers. In fact, most fans are likely to be local: British residents have bought 95% of the

"THE toy industry has always reflected adult culture," says Chris Byrne, an American toy-industry consultant. In the 1920s girls played with ironing boards because they expected later to iron their husbands' shirts. The first 1950s Barbie dolls had two careers: fashion model and bride. So what do British toy shops say about the state of the nation today? Good news first: the British are generous. Parents buy many more toys for their offspring than do their continental counterparts. Britain is Europe's biggest toy market, followed by France and Germany, according to Frederique Tutt, an

Or perhaps that one 3.5m tickets sold so far, reports the London 2012 Organising Committee. Since much of the population lives within a day's commute of the capital, many ticket-holders could bypass the city's other offerings. They are likely to spend money on some things, of course. "These people still have to eat," points out Miles Quest of the British Hospitality Association. Sensing weakness in London, Scotland's tourist board has revved up its marketing operation. But it, too, may crash into a hurdle. In Greece, the Ionian Islands and other tourist hotspots suffered even more during the 2004 Olympic slump than did Athens, reckons ETOA.

analyst at NPD EuroToys. British parents buy an average of 41 toys per year, which is almost a toy per week. In Spain, by contrast, children receive few toys outside the Christmas season. Less encouragingly, Britons seem highly susceptible to media conglomerates' marketing campaigns. Britain's toy market is similar to America's in favouring entertainment over education, says Gerrick Johnson, a toy analyst at BMO Capital Markets. About one-quarter of toy sales in Britain are licence-driven, which means they are based on characters from Disney films or television series such as the popular "Peppa Pig" and "Fireman Sam". The proportion in Germany is just 14%. German parents are bigger on engineering. Last year building sets accounted for13-4% of German toy sales compared with only 8.6% in Britain. Germany is the biggest European market for Lego, the Danish maker of colourful bricks. Mediterranean countries are more traditional. Dolls account for fully 16.8% of toy sales in Spain, compared with 9.7% in Britain and just 7.9% in Germany. Italians buy a disproportionate number of toys from small, local makers. UNICEF, a United Nations agency, slates British parents for encouraging "compulsive consumerism" in their children. Yet analysts think the British habit of piling children's bedrooms with junk is changing, thanks to the economic slump. Movie-related toys have not sold as well as expected recently, says Mr Johnson. And Lego has been thriving in Britain, as it has everywhere else. The firm's building sets are expensive, but they give parents lots of "play value", which means children play with them for a long time without getting bored. Determined not to be judged by medal tables alone, London will stage a cultural extravaganza around the Olympics. Yet the city's routine cultural offerings are far from scant-and some question whether the city really needs to sell its brand. The 2008 Beijing Olympics was a chance for China to display its wealth and prowess. Britain, by contrast, already has one of the best-developed tourist markets in the world. Yet the long-term benefit of hosting a slick and beautiful games may become apparent in the long run. The nation's boosters must be hoping that, even if they do not come next year, prospective tourists are at least watching from afar. •

66 Britain

The Economist November 12th 2011

Bagehot Why Britain has centrist politics I

MPs are wrong to grumble about a big shake-up of parliamentary boundaries

TISTEN to the opposition Labour Party, and a shake-up of BritLain's electoral map now under way-with so parliamentary seats for the chop, and hundreds facing redrawn borders-is an act of partisan "gerrymandering". Believe some disgruntled MPS, and the review threatens the very fabric of democracy, creating new seats that will cross county lines and other time-hallowed boundaries. Oddly, given that the review is a Conservative initiative, some of the loudest complaints come from Tory MPS. The grumblers should get out more. Some years ago, Bagehot was sent after 51 Texan Democrats who had fled their home state to wreck a legislative session and with it a scheme to carve a batch of safe (if weirdly-shaped) Republican seats from the congressional map. Pursued by arrest warrants, the runaways holed up at an Oklahoma motel, offering visiting reporters interviews, cigars and whisky. The Democrats won that round, but after more wrangling and a legal fight that went to the Supreme Court, Republicans mostly got their map. That's gerrymandering. This week, in contrast, Bagehot headed to Ludlow, a handsome market town in Shropshire, to watch a public hearing being held by the Boundary Commission for England. That independent body has been asked to draw up new constituencies with nearly identical numbers of electors each, a big change from the status quo (sister commissions exist for other bits of the British Isles). Nationwide, for various reasons, that change will probably favour the Tories more than other parties. But Ludlow's hearing, in a Victorian former school hall, was hardly partisan at all. Shropshire's only Labour MP, David Wright, came to appeal against a proposal to split his current seat in two, probably eliminating his majority. Mr Wright argued for a constituency drawn tightly around the county's largest town, the unlovely 1960s creation of Telford, surrounded by a second seat made up of villages and market towns. In psephologist-speak, he was arguing for a "doughnut": a solidly Labour urban seat within a Tory outer ring. Conservative speakers came to lobby for what election-wonks call a "sandwich": a pair of constituencies made up of urban, suburban and rural slices. They were taking a punt that one or both might return a Tory. Yet nobody could admit to pursuing party interests, for the Boundary Commission only considers appeals based on geography and the maintenance of "local ties".

The result was a festival of genteel special-pleading. Mr Wright said that plans to split Telford in two would separate the foundry that makes the cast iron for Aga ovens (a brand of posh cookers costing as much as a small car) from the factory that assembles them. Speakers from Telford's Labour-controlled council talked about its "urban heartland", as if it were the Bronx. In pursuit of their own interests, Conservative speakers portrayed the nearby River Wye as an almost impassable barrier crossed by only a few, narrow bridges, and fretted that one proposed seat would involve a lot of driving for its MP. From Much Wenlock, a pretty town full of pricey houses, came a plea not to be lumped in with grittier Telford. Nobody said it aloud, but this smelled of snobbery: Aga-owners not wanting to mix with Aga-makers. After each submission, the assistant commissioner-a grand London lawyer hired to oversee the public consultation-asked brisk questions and pored over bundles of maps. From outside came the reassuring tinkle of teacups, promising that a break neared. Later, party representatives denied they had been pursuing partisan goals. Well, maybe a bit, they admitted, but mostly their concern was preserving local communities. All believed absolutely in the commission's independence. This matters. Even at a time of deep hostility to politics, the British still have faith in avowedly impartial bits of the state, such as boundary commissions, public inquiries and judicial reviews. If the boundary review is causing unhappiness among politicians, that is largely because being an MP today is rather grim.

The dangers of safe seats Labour unhappiness is easily explained. The review is expected to cost it about 20 MPS, partly because under-sized seats in Wales and Scotland will be culled. The Liberal Democrats are also due to take a pasting. Yet-for all that Conservative bigwigs expect to lose just 13 or so seats-Conservative MPS are among the grumpiest of all. A senior Tory describes a mood of "angst and stress". Angst among Tory parliamentarians has two causes. First, a sense that constituency associations have a whip hand over MPs: the expenses scandal did for deference, grassroots activists have firm views on such issues as Europe (and use the internet to track how MPS vote), and after the review many MPS will need to woo new associations. Local activists are unfussed about current Conservative MPS having to fight over the best new seats. This is about Shropshire, says one Tory stalwart, not "some MP's career". Secondly, many Tory MPS distrust their leadership. David Cameron, the Conservative leader, has vowed that boundary casualties will be looked after. But the mood is so toxic that some right-wingers want him to put his pledge in writing, or to ditch the review altogether. Some MPS want ambassadorial appointments to be opened to seat-less Tories. With others hoping to be sent to the House of Lords, there is pressure to ditch a coalition pledge to Lib Dems to create a mostly elected upper house. Politicians should not push their luck. In Ludlow market, shoppers declared that they did not care how large new constituencies were, if a smaller House of Commons saved money. Being an MP is an insecure business just now. On balance, that is a good thing: safe seats feed extremism. For all the Westminster grumbling, British political debate still leaves room for a moderate middle, and not just deafening partisans. Quaint, impartial boundary commissioners can take much of the credit. • Economist.comfblogsfbagehot

67

International marriage

Herr and Madame, Senor and Mrs SEOUL

Research at last begins to cast some light on the extent, causes and consequences of cross-border marriages F SHAKIRA, a Colombian pop star, marIfootballer ries her boyfriend, the Spanish national Gerard Pique, the only unusual things about it would be that she is even more famous than he is and ten years older. Otherwise, theirs would be just a celebrity example of one of the world's biggest social trends: the rise of international marriages-that is, involving couples of different nationalities. A hundred years ago, such alliances were confined to the elite of the elite. When Randolph Churchill married Jennie Jerome of New York, it seemed as if they had stepped from the pages of a Henry James novel: brash, spirited American heiress peps up the declining fortunes of Britain's aristocracy. Now, such alliances have become almost commonplace. To confine examples to politicians only: the French president Nicolas Sarkozy is married to the Italian-born Carla Bruni and his prime minister Franyois Fill on has a Welsh wife, Penelope Clarke. Nelson Mandela is married to Graya Machel (from Mozambique). Denmark's new prime minister Helle Thorning-Schmidt is married to a Briton, Stephen Kinnock. And two leading ladies of Asian countries, Aung San Suu Kyi of Myanmar and India's Sonia Gandhi, are both widows from international marriages. In rich countries alone such unions

number at least 10m. International marriages matter partly because they reflect-and result from-globalisation. As people holiday or study abroad, or migrate to live and work, the visitors meet and marry locals. Their unions are symbols of cultural integration, and battlefields for conflicts over integration. Few things help immigrants come to terms with their new country more than becoming part of a local family. Though the offspring of such unions may struggle with the barriers of prejudice, at their best international marriages reduce intolerance directly themselves, and indirectly through their progeny. The mists over marriage So it is all the more disappointing that until recently so little has been known about these unions. Records are patchy. Some countries do not collect annual information about the citizenship of couples. Official figures may say nothing about a marriage if it takes place abroad (for example in the country of the immigrant spouse). Defining what counts as international is tricky too. A wedding of a local man and a foreign-born bride is easy. But the marriage of two foreigners in a third country sometimes counts and sometimes doesn't. Trickiest of all is how to treat the marriage

of a second-generation immigrant who has citizenship of a host country (say, the child of a Moroccan in France or a Mexican in America). If such a person marries anative Frenchwoman or an American, that usually does not count as international, even though it is an alliance across ethnic lines. Perversely, if he marries a girl from his parents' country of origin, that does count as international-but this is not a marriage across an ethnic divide and may indicate isolation not assimilation. Belatedly, answers to these questions of scale and definition are coming, chiefly thanks to the efforts of the International Union for the Scientific Study of Population (mssP), a professional association of demographers, and, especially, of DooSub Kim, a professor at Hanyang University in Seoul who chairs its panel on crossborder marriages. Global figures remain sketchy, but marriage patterns in Asia and Europe, at least, are becoming clearer. Some tentative, often surprising, conclusions are emerging. Asia is the part of the world where cross-border marriages have been rising most consistently. According to Gavin Jones of the National University of Singapore, 5% of marriages in Japan in 2008-09 included a foreign spouse (with four times as many foreign wives as husbands). Before 1980, the share had been below 1%. In South Korea, over 10% of marriages included a foreigner in 2010, up from 3.5% in 2000. In both countries, the share of crossborder marriages seems to have stabilised lately, perhaps as a result of the global economic slowdown. The country with the biggest share of such unions is Taiwan, where 13% of wives in 2009 were foreigners, about the same level as in 1998, but a

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The Economist November 12th 2011

68 International ~ big fall from

the peak in 2003, when 28% of all weddings involved a foreign-born wife. Chinese citizens are not considered foreigners in Taiwan and if you include marriages in which they are one of the spouses, the proportion is still higher. International marriages have played a significant role in modifying the ethnic homogeneity of all these East Asian countries. International marriages are common in much of Europe, too. Calculations by Giampaolo Lanzieri, an Italian demographer, show that in France the proportion of international marriage rose from about 10% in 1996 to 16%in 2009. In Germany, the rise is a little lower, from 11.3% in 1990 to 13.7%in 2010. Some smaller countries have much higher levels. Nearly half the marriages in Switzerland are international ones, up from a third in 1990. Around one in five marriages in Sweden, Belgium and Austria involves a foreign partner.

The Mamma Mia factor The rate seems to be rising fastest in Mediterranean countries: in Spain and Italy, cross-border marriages accounted for less than 5% of the total in 1995; by 2009, the share had reached 14% in Italy and 22% in Spain. Cyprus is a special case: no less than three-quarters of marriages there in 2009 were international (up from half in 1995). But that is because Venus's birthplace has a thriving wedding-and-honeymoon market. Many couples from abroad wed there. Such figures are based on wedding records. Another way of getting at the trends is census micro-data (ie, from detailed samples collected as part of the census). These have a wider coverage, are extremely precise, and go back decades, which is helpful. On the other hand, many countries do not provide them. Researchers from the Centre for Demographic Studies (Barcelona) and the Minnesota Population Centre have for the first time trawled through the censuses of more than so countries in every continent for people aged 25-39. In general, they find that cross-border marriages are rising in most places, but the most significant fact is the big difference between levels in rich and developing ones. In most developing countries, the share of men married to foreign women was less than 2% in 2000 (0.7% in Ghana and Bolivia; 0.2% in Colombia and the Philippines; 3.3% in South Africa). In contrast, three rich countries-America, Britain and Franceaccount for half the total in the sample. America alone has a third. Because it is so large, though, the share of international marriage remains low: only 4.6% of Americans were married to a foreigner in 2010, up from 2-4% in1970. Albert Esteve of the Autonomous University of Barcelona reckons that the total number of cross-border marriages among 25-39-year-olds in his sample was about 12m in 2000. The sample excludes several

countries with large numbers of such unions-Japan, Taiwan, Australia and Canada-so the grand total is certainly higher, probably 15m, possibly more. Compared with the very roughly soom marriages within that age group round the world, 15m may not seem like much. But it is more than it used to be and, in some countriessenders and recipients of foreign spouses alike-the growth in cross-border marriages is having a significant social impact. Everywhere, cross-border marriage rises with migration, but more slowly. According to Mr Esteve's figures, the correlation is roughly one international marriage for every two new migrants. That would seem to mean that half of new migrants are marrying into their host society and the other half (presumably) into their own communities. So a surge in immigration usually leads to only a more modest rise in cross-border marriages; the process is slower and more complex. Research into four European countries by Suzana Koelet of the Free University of Brussels and others confirms that international marriages have not risen as much as one might have expected in Europe. On her calculations, rates of marriages with a person from another European Union country have been flat in Belgium and the Netherlands since 2000 and shown only a modest rise in Spain. Marriage rates between Swiss and EU citizens have also not budged. True, marriages with foreigners have increased sharply in Spain-but that was because of a spurt of marriages with non-Eu citizens: Spain had huge immigration flows from Latin America during the 1990s and 2ooos. By implication, the closer integration that the EU is supposed to be bringing about seems to be having no discernible impact on the marriage choices of Dutch, Belgian and Spanish citizens. Why not? For part of the explanation, Ms Koelet points to the intriguing marriage patterns of the Swiss. The country has one of the highest rates of international marriage in the world (surpassed only by Liechtenstein, Luxembourg and Cyprus). Altared states Marriages in which at lea st one spou se is foreign Selected countries, 2010 or latest available,% 0

20

40

60

80

[JE CD]

Cyprus Switzerland Singapore Spain France Germany Tai wan *

110.21

South Korea Japan

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United States

c.===::.=.c=:...rGMl

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Sources: Gavin Jones; Giampaolo Lanzieri; Albert Esteve

*Wife only

But the Swiss "marry out" in particular ways. The German-speaking Swiss marry largely neighbouring Germans; the Francophone Swiss marry the French; Italianspeakers marry Italians. It is the same with Belgians: Flemish-speakers tend to marry Dutch partners, Walloons marry French people. Language, it appears, remains a persistent barrier to international marriage in Europe and the spread of English as a second language does not seem to have changed that. Asia is different. In Europe and America, marriage tends to follow migration. In Asia, people marry to migrate. Marriages in South Korea, for example, are often arranged by a broker in an unromantic process that takes two or three days and costs the Korean groom $2o,ooo-30,ooo. Similarly, Taiwan has many marriages between its male citizens and Vietnamese women. The growth began when Taiwanese companies started investing in Vietnam. Local men in such countries, Mr Jones argues from Singapore, look for foreign brides for two reasons. First because of the so-called "marriage strike" affecting some East Asian societies. In the richer countries of East and South-East Asia, like Japan, Singapore, South Korea and Taiwan, a third or more of local women are not marrying; and those who do wed late, at 31 or 32. This is causing some men to look to foreign shores for potential mates. The other reason-specific to a few Asian societies-is because a combination of traditional preference for sons and the availability of sexselective abortion skewed the sex ratio at birth 20 years ago, leaving too few nativeborn women now. South Korea is an example. In 1990, it had 117 boys born for every 100 girls. Men are looking abroad to plug the gap in their local marriage market. Hard noses, not soft hearts For their part, the young women, often from poor areas of China and Vietnam, are looking for economic opportunities. Marriage with a man from a richer country is seen as a means of advancement and a way of helping their families at home. In Asia, it seems, cross-border unions are products of distorted local marriage markets; in Europe, they are results of gaps in labour markets that encourage migration. In both parts of the world, diasporas play a role: as immigrants settle down they encourage friends and family from back home to follow in their footsteps. Many Asian men also seem to be looking abroad for wives in the hope that immigrant women will bear them more children. This indeed happens in Europe and America: the fertility rate of new immigrants is higher than average, though it reverts to the local mean within a few years. So at first, migration adds to the birth rate. Strangely, this higher initial fertility does not seem to happen in Asia, or at least not

~~

The Economist November 12th 2011 ~ in

South Korea. According to Kwang-hee Jun of Chungnam National University, non-naturalised immigrant women have on average just 1.08 children-even fewer than native Koreans, whose average is 1.79. This finding was a shock and a puzzle. Why are immigrants in South Korea behaving so differently from those in Europe and America? One explanation may be that the age gaps between husbands and much younger wives discourage large families. Another is that in the past decade, about 6o% of foreign brides have come from China, where the fertility rate is also low, especially among Chinese of Korean ethnicity. Jungho Kim of Ajou University also suggests poverty. Both spouses will usually work and may be unable to afford to bring up a child in a society where half of the cost of pre-school education comes from the household budget. Evidence for this comes from families with a Vietnamese-born bride: when they do have children, says Daniele Belanger of the University of Western Ontario, they send some of them back to be raised for a few years by grandparents in Vietnam, where schooling is cheaper. Victims or opportunists? Marriage between girls from poor countries and older men from rich ones are controversial. As Sang-lim Lee of the International Organisation of Migration centre in Goyang says, when men pay the brides' family "they tend to think they have bought a good. If it has a defect, they think they can send it back." It is certainly true that the men tend to be older, often much older. Doo-Sub Kim finds that Korean husbands are on average 17 years older than their Vietnamese-born brides. They usually have around three years' more education as well. One fifth of Korean husbands have been married before. All this is very different from the typical pattern in native Korean marriages. It is also true that some young women are victims of cruelty, neglect, physical abuse and trafficking. Women in strange countries are almost always vulnerable. A Vietnamese interpreter married to a Korean man complains that "if I run away here, my parents will be embarrassed in Vietnam." That, she explains, would leave her unable to return home, but with "no place to go here". The media in Vietnam tend to portray migrant brides either as victims of trafficking or people driven by desperate poverty to migrate. Children of international marriages in South Korea have more health problems than average. In Taiwan, they do less well at school-something that occurs in European countries, too. Yet this is not the dominant pattern, still less the sole one. International marriages often seem to work for the couple involved-at least if the longevity of their union is any guide. And they seem to have so-

International 69 cial benefits, as well as costs, for both receiving and sending countries. Though the gap in background, age and education between spouses in international marriages is greater than in those between compatriots, it does not seem to affect these unions' durability. Doo-Sub Kim plotted the time that cross-border marriages have lasted in South Korea against the couples' ages and educational backgrounds. Amazingly, the bigger the difference, the longer the marriage. It is hard to know why this should be. Maybe those who marry foreigners invest more in their marriages. Or maybe younger, poorer wives find it harder to leave. Vietnamese girls are seen in much of Asia as the paradigm of the submissive foreign bride. But a study of their role in Taiwan by Ms Belanger shows that many are married to men whose companies trade with Vietnam-and they are vital to the companies' future. As one man told her, revealingly: "I have six trusted subordinates. One is my wife. One is her younger sister. They will not betray me." Remittances to their families help keep the practice alive in Vietnam, even though many young men there dislike it and say they have been driven out of their villages by the shortage of brides and forced to migrate to Hanoi and Ho Chi Minh City. Similarly, marriage abroad is seen as so desirable by the Punjabi diaspora that the press in Punjab is full of advertisements offering to arrange marriages abroad. Not all international marriages in Asia

are those of poor brides in rich lands. In a "reverse migration" Japanese women from rich Tokyo have married into poor peasant families in South-East Asia-especially in Bali and Thailand-and settled down to live a more "authentic" rural life, perhaps as a way of escaping the strictness of Japanese family life. That same impulse may well be behind the surprising growth in the numbers of Japanese women married to Africans in Japan (probably as many as 3,300 in all). As one wife told Djamila Schans of Maastricht University, "I had doubts marrying a foreigner but he waited for me at the station every day. Sometimes even with flowers! A Japanese man would never do such a thing." Most demographic trends are irresistible forces. It is rare that government policy can make a big difference. But international marriage is sensitive to public policy. In the mid-2ooos, Taiwan's government, for example, took alarm at the number of foreign brides coming into the country. It did not slam the gates but started to wrap the marriage process in licensing and permits, insisting on better treatment of immigrant women. This reduced the number of foreign brides by more than half between 2003 and 2010. Malaysia also maintains an array of secular and religious permits which foreigners must get not only for marriage, but also for residence and work. It seems effective: less than 2% of all Malaysian marriages involve a foreigner, against almost 40% in neighbouring Singapore. Governments impose restrictions in the belief that cross-border marriages can destabilise their societies. Sometimes, their fears are understandable. In Taiwan, the share of international marriages doubled in five years. But such rapid change is highly unusual. By and large, marriage between people of different nationalities has grown more slowly than immigration. In the past few years, the increase in marriage has slowed further, probably reflecting global economic problems. International marriages are often attacked as exploitative, because they typically take place between an older richer man and a younger, less well-educated woman from a poor country. Terrible examples of abuse do exist. Yet the evidence suggests that international marriages often last longer than average and that migrant wives come to play important roles in their husband's host country. Marriage remains, for the most part, an institution that promotes economic improvement and personal happiness. It also tends to boost social assimilation-the main exception being when a second-generation immigrant weds a girl from a village his parents had left long before. Over the next few years, international marriage is likely to continue its quiet upward crawl. Governments should protect its victimsbut not prevent the process. •

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71

Also in this section 72 Tough times demand big ships 73 Diamonds are not forever 73 The Oppenheimers cash in 74 Sexual harassment 74 The Olympus scandal 76 What next for airline alliances? 76 Dynegy's unusual bankruptcy 78 Schum peter: Why firms go green

For daily analysis and debate on business and our weekly "Money talks" pod cast, visit Economist.comfbusiness-finance

State capitalism in China

Of emperors and kings

China's state-owned enterprises are on the march

"{"I JHEN China joined the World Trade VV Organisation (wTo) in December 2001, many people hoped that this would curb the power of its state-owned enterprises. Ten years on, they seem stronger than ever. President HuJintao can expect to hear about this at the Asia Pacific Economic Co-operation summit this weekend. Hillary Clinton, America's secretary of state, has warned stridently of the dangers of state capitalism. A Congressional report released on October 26th railed against the unfair advantages enjoyed by state-owned firms and lamented that China is giving them "a more prominent role". Indeed it is. In a new book called "China's Regulatory State", Roselyn Hsueh of Temple University documents how, in sectors ranging from telecommunications to textiles, the government has quietly obstructed market forces. It steers cheap credit to local champions. It enforces rules selectively, to keep private-sector rivals in their place. State firms such as China Telecom can dominate local markets without running afoul of antitrust authorities; but when foreigners such as Coca-Cola try to acquire local firms, they can be blocked (though this week China did approve Yum! Brands' bid to acquire Little Sheep, a Chinese restaurant chain). In the dozen or so industries it deems most strategic, the government has been forcing consolidation. The resulting behemoths are held by the State-owned Assets Supervision and Administration Commis-

sion (SASAC) , which is the controlling shareholder of some 120 state-owned firms. In all, SASAC controls $3.7 trillion in assets (see chart). The Boston Consulting Group (BCG) calls it "the most powerful entity you never heard of"; though it does not always get its way. Some state-owned firms have powerful friends and are hard to push around. In some ways, SASAC aims to modernise its enterprises. Peter Williamson of Cambridge's Judge Business School points approvingly to the steel industry. China was once littered with small, uneconomic steel firms; SASAC has urged them to merge, creating three "emperors" and five "kings". That, says Mr Williamson, means there are enough steel firms to foster competition at home; yet they are big enough

Vast power; puny profits China's state-owned enterprises': $trn

4

2003

04

Source: SASAC

05

06

07

08

09

10

to venture overseas. What the government's plan lacks, however, is any idea that private steelmakers might compete, in China, with the emperors and kings. According to the Congressional report, state-owned firms account for two-fifths of China's non-agricultural GDP. If firms that benefit from state largesse (eg, subsidised credit) are included, that figure rises to half. Genuinely independent firms are starved of formal credit, so they rely on China's shadow banking system. Fearing a credit bubble, the government is cracking down on this informal system, leaving China's "bamboo capitalists" bereft. Those who argue that state-owned firms are modernising point to rising profits and a push to establish boards of directors with independent advisers. Official figures show that profits at the firms controlled by SASAC have increased, to $129 billion last year. But that does not mean that many of these firms are efficient or well-managed. A handful with privileged market access-in telecoms and natural resources-generate more than half of all profits. A 2009 study by the Hong Kong Institute for Monetary Research found that if state-owned firms were to pay a market interest rate, their profits "would be entirely wiped out". One reason is that state firms must pursue the state's aims, which include many things besides making profits. David Michael of BCG observes that the government forces state firms to shoulder all manner of extra costs. For example, when coal prices shot up recently, the country's energy giants were not allowed to pass the hikes on to consumers. When the China Europe International Business School asked its senior alumni at state-owned firms about their biggest headaches, many grumbled about official meddling. Still, Mr Michael, who served as one of the only foreigners on China Mobile's ad-

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The Economist November 12th 2011

72 Business ~

visory board, believes SASAC deserves some praise. The group runs managementtraining courses, benchmarks firms against international standards and establishes codes of conduct. Following recent scandals involving Chinese firms overseas, it issued an edict in July restricting the use of derivatives by the main state-owned firms. And SASAC is now pushing the biggest of its charges to appoint boards of directors. Yet Curtis Milhaupt of Columbia Law School insists that such reforms are "not where the action is". In a new paper, he examines how exactly China's big state firms are controlled, and reaches troubling conclusions. Regardless of whether a stateowned firm is listed in New York, has an "independent" board or boasts a market-

minded chairman with a Harvard MBA, he finds that the strings always lead back to a core company that is in the tight clutches of SASAC. He thinks genuine market reform will come only when state firms venture abroad en masse and have to adapt to global norms. A recent ruling in Europe may prove a straw in the wind. Earlier this year, an attempt by Sinochem, a state-owned chemicals firm, to enter into a joint venture to make antibiotics with DSM, a Dutch firm, attracted the attention of the European Commission's antitrust authorities. They decided to scrutinise not just Sinochem itself but all of SASAc's empire. The deal was approved anyway, but this may have set an important precedent. •

Shipping

Economies of scale made steel SOMEWHERE ON THE SOUTH CHINA SEA

The economics of very big ships ABOARD one of the world's largest con1"\.tainer ships, moving almost imperceptibly through the seas off Vietnam, it's easy to appreciate the economies of scale that allow a T-shirt made in China to be sent to the Netherlands for just 2.5 cents. The Eleonora Maersk and the other seven ships in her class are among the biggest ever built: almost 400m long, or the length of four football pitches, and another halfpitch across. The ship can carry 7,500 or so 40-foot containers, each of which can hold 70,000 T-shirts. On the voyage your correspondent took, the Eleonora was carrying Europe's New Year celebrations: 1,850 tonnes of fireworks, including 30 tonnes of gunpowder. To move all this cargo from China to Europe in just over three weeks, the Eleonora boasts the largest internal-combustion engine ever built, as powerful as 1,000 family cars. This engine turns the longest propeller shaft (130m) ever made, at the end of which is the largest propeller, at 130 tonnes. Yet the ship is so automated that it requires a mere 13 people to crew it. Reassuringly, most captains prefer to take a few more. Maersk Lines, the world's biggest container-shipping company and owner of the Eleonora, is betting that, given the current economics of world trade, the only way to go is yet bigger. In February it announced an order for 20 even larger ships with a capacity of 18,ooo twenty-footequivalent units (TEus), the standard measure of container size. (The Eleonora can carry a mere 15,000.) The new ships will cost $2oom each. And judging by this year's order books, Maersk's example will

be followed by others. Singapore's Neptune Orient Lines has ordered ten vessels of 14,000 TEus; Orient Overseas Container Line has ordered ten of 13,000 TEUS. This is excellent news for South Korean shipyards (see pages 79-81). Most of these vessels will be designed for the Europe-Asia run-now the world's busiest trade route. Given the rising price of fuel, many shippers think they need huge ships to turn a profit. Fears of a renewed slowdown in global trade accelerate the rush to find economies of scale. Freight rates have plummeted in recent

Spot the journalist

months, thanks to weakening demand and an oversupply of container ships, many of them ordered in the optimistic years before 2008. Freight rates on the Europe-Asia run are now below $700 per TEU, less than half the peak a year ago. At this price, says Janet Lewis, an analyst at Macquarie, a bank, "It's hard for any container company to be making any cash." Recent financial results bear this out. On November 9th Maersk said its container business had lost $297m in the latest quarter. Neptune posted a third-quarter loss of $9rm, having made a profit of $282m a year earlier. Japan's "K" Line reported a loss of $239m on its containershipping unit in the fiscal first half. And things could get a lot worse. Companies are searching for new strategies to differentiate themselves from rivals, or merely to survive. Maersk has launched what it calls the "Daily Maersk" service on the China-Europe run, deploying 70 vessels to promise daily deliveries to Felixstowe, Bremerhaven and Rotterdam, the three main European container ports. The firm is hoping to deliver 95% of these containers on time, up from 8o% for its own service on that route. This would be far higher than the industry average of about 65%. If a container arrives more than a day late, Maersk pledges to compensate the customer. Orient Overseas, by contrast, is focusing on the quality of its cargo-handling. It charges more, for example, to ship perishable items, such as blood plasma. Given the stormy waters that may well be ahead, it seems likely that shippers will seek economies of scale not only from bigger ships but also from mergers. The industry is too crowded, many analysts believe. Smaller firms may soon be swallowed like containers vanishing into the hold of the Eleonora Maersk. •

The Economist November 12th 2011

Business 73 The Oppenheimers

Swapping gems for cash JOHANNESBURG

What next for South Africa's foremost mining family? OST people would be overjoyed to M pocket $5.1 billion. But Nicky Oppenheimer, the chairman of De Beers,

Diamonds

Betting on De Beers Can Anglo American revive the world's leading diamond miner? HE rewards for digging carbon out of the ground differ wildly. A tonne of T coal fetches around $120. A diamond for the same price would be so small you'd probably never find it in the first place. Anglo American, a big mining firm, struck a deal on November 4th at the loftier end of the market. It agreed to pay the Oppenheimer family (see box) $5.1 billion for their 40% stake in De Beers, the world's leading diamond miner, to add to the 45% that Anglo already owns. It looks a fair price; the diamond industry's prospects are sparkly. For a start, supply is tight. All the world's big deposits are thought to have been discovered already. Old mines are growing tired. Total annual output will probably fall. At the same time, demand is roaring in China, India and the Gulf, where the new rich love ostentatious adornment. By 2015 these countries could be buying as many diamonds as America, which currently accounts for two-fifths of global demand. To add to the cheer, demand is growing rapidly in America, too. Diamond prices have risen by over so% this year. De Beers, however, is no longer the diamond geyser it once was. In the 1990s it mined half the world's stones and controlled the sales of 8o%. But then shoppers started to worry about "blood diamonds" that might finance Africa's nasty wars. Tracing a gem's provenance is hard. So, to avoid the risk of bad publicity, De Beers decided to market only those it dug up itself. Its market share tumbled. Now it produces 35% of the world's diamonds by vol-

said that it was with a heavy heart that his family had decided to sell its remaining 40% stake in the world's biggest diamond miner to Anglo American, a mining behemoth. The deal marks the end of an era for South Africa's foremost mining dynasty. The Oppenheimers have been in the diamond business for more than a century, including over 8o years with De Beers. Nicky's grandfather Ernest settled in South Africa in 1902, having been posted to the diamond-boom town of Kimberley at the age of 22 as an agent for a London-based firm of gem traders. By 1917 he had set up his own mining company, Anglo American. A few years later he won control of De Beers, a diamond miner that had been founded in 1880 by Cecil Rhodes, a British-born colonialist. By the time Rhodes died in 1902, De Beers controlled 90% of the world's diamond production. Rhodes's immense fortune still pays for people like Bill Clinton to study at Oxford. Since 1929, when Sir Ernest (knighted for war services in 1921) took over as chairman, the Oppenheimers have led De Beers almost without interruption, massaging the price of diamonds by hoarding them and occasionally selling part of the firm's stockpile. The family has wielded political influence, too, mostly bankrolling liberal causes. Both Ernest and his son Harry served in South Africa's parliament: Ernest for 14 years in the run-up to the second world war, and Harry for nine years as a member of the

anti-apartheid opposition. Of late, however, the family's influence has waned. Some wonder whether Nicky and his son Jonathan have the same drive and acumen as their swashbuckling forebears. And Anglo American, the firm their family founded (and in which it now has a stake of 2%), moved its headquarters to London in 1999. Nicky Oppenheimer insists that the family will stay connected with South Africa: they are still based in Johannesburg. What will the Oppenheimers do with their new pile of cash? The deal will take months to complete, so they have time to ponder. Under its terms, they are barred from dabbling in diamonds for two years. But other possibilities abound. The family has two investment arms. One, called Stockdale Street Capital, invests largely in medium-sized firms in South Africa. The other, Tana Africa Capital, is a joint venture with Singapore's sovereign-wealth fund, Temasek, and invests in the rest of Africa. Among other things, it holds a stake in a Nigerian firm that sells powdered milk, and it plans to build up five to ten substantial firms over the next decade. At the moment, Tan a is focused on fast-moving consumer goods and agriculture, and to a lesser extent on building materials, health and education. The new money could go into any or all of these areas, says James Teeger, a family spokesman. And the Oppenheimers may also look at infrastructure and energy, two of the hottest businesses south of the Sahara. Nicky Oppenheimer is said to be furiously jetting around looking for shrewd places to inject his cash.

ume and faces far stiffer competition. Alrosa, Russia's state-backed diamond miner, now rivals it. And Anglo will have to compete for new mines with other giants, such as BHP Billiton and Rio Tinto, which between them dig 17% of the world's diamonds. Ambitious smaller miners, such as South Africa's Petra Diamonds, are also looking to stick their picks in. This may prove a problem. Anglo has not distinguished itself in the past decade. A plodding general miner, it may find it hard to haggle with the canny and highly knowledgeable dealers who are the prime customers for rough diamonds. At the same time governments, which typically control mineral rights, are driving ever-harder bargains. Botswana pockets around 8o% of the profits from its joint

venture with De Beers, which yields a whopping two-thirds of De Beers's sparklers. Botswana also has a pre-emption right over the Oppenheimers' shares, so it may yet increase its stake in De Beers from 15% to 25%. De Beers operates in some tricky countries: Angola is unstable and South Africa has politicians who would love to nationalise its mines. Anglo's recent strategy has been to mine in easier places; the De Beers deal may drag it deeper into quagmires. More competition means De Beers can no longer control prices the way it used to: by buying diamonds when markets are weak and selling when they strengthen. The Oppenheimers may have decided that De Beers is past its prime, and opted to turn their "glass with attitude" into cash. •

The Economist November

74 Business Sexual harassment

Nasty, but rarer

NEW YORK

Still a live issue in the workplace HREE women complained of unwantT ed advances from their boss at the National Restaurant Association. Two received financial settlements. Because the boss in question was Herman Cain, now a Republican presidential hopeful, this news has revived a long-running debate about sexual harassment in the workplace. The details of the complaints made in the settlements have remained private. A fourth woman who has alleged that Mr Cain groped her was not an employee at the time and did not receive any settlement. Mr Cain denies that he did anything inappropriate. "The fact that there has been a settlement does not by itself tell you there was any truth to the allegations," says Richard Simmons, an employment lawyer at Sheppard, Mullin, Richter & Hampton. Firms often pay off disgruntled accusers rather than go to court, since juries are unpredictable, damages can be steep and the publicity of a trial is always unwelcome. Conservatives think the deck is stacked against employers. Liberals disagree. Mr Simmons thinks sexual harassment is much less widespread in the American workplace than it was in the 1990s. The number of harassment cases tracked by the Equal Employment Opportunity Commission has risen, but this is probably because victims are more likely to report it. A Supreme Court ruling in 1986 made firms liable if they allow a "hostile environment" in which harassment is tolerated. This led to the near-universal adoption of codes of conduct, setting out how coworkers may interact and limiting how bosses may behave towards underlings. Industries such as carmaking and finance, which once produced big sexualharassment lawsuits, are less male-dominated than before, which may explain why they appear to have cleaned up their acts. (The vast majority of cases involve men harassing women.) The worst behaviour today tends to be in industries where women are a small minority, such as construction or fire fighting, or where workers are disproportionately young (fast-food restaurants) or too desperate to complain, says Michelle Caiola of Legal Momentum, which provides legal support for women. Lawsuits about gross misconduct have given way to lawsuits alleging discrimination on pay and promotion. Such cases typically hinge on different interpretations of statistics rather than

A bad day at the office differing accounts of what happened by the photocopier. Victims often are reluctant to complain, for fear of retaliation. In the past year, however, the Supreme Court has favoured victims in four cases alleging retaliation after various types of complaint (not just sexual harassment)-a rare instance of the current court ruling against business. American business is far from perfect, but it is generally agreed to be leading the way in tackling sexual harassment. Most other countries have a lot of catching up to do. It is only three years since a judge in St Petersburg, Russia, threw out a case on the ground that: "If we had no sexual harassment we would have no children." •

The Olympus scandal

Big trouble in Tokyo TOKYO

The camera firm admits to hiding losses T TOOK a while. But this week Olympus Ibeen attempted to answer a question that has making investors jumpier than a man with a scorpion in his trousers. Why did the Japanese camera maker shell out $1.3 billion in deals that had little to do with its core business and seemed unlikely ever to make a decent return? Olympus paid a $687m advisory fee relating to its purchase of Gyrus, a British medical-devices firm, in 2008. The fee was more than 30% of the purchase price, when 1% would have been more normal. It went to a firm in the Cayman Islands and another in New York; both are now defunct. Olympus also paid $773m for three

12th 2011

unprofitable firms (a cosmetics company, a maker of plastic containers and a wastedisposal business). It wrote off 76% of their value within a year. Why did Olympus's managers approve such unusual payments? On November 8th the company confessed that the deals were designed to hide losses on securities dating back to the 1990s. Olympus's new president, Shuichi Takayama, said that three Olympus executives were implicated. Yet only one, Hisashi Mori, a vice-president, was dismissed by the board. (He chose to remain as a director.) As for the other two, Olympus said that the corporate auditor, Hideo Yamada, "expressed his intention to offer his resignation", whatever that means. The other, Tsuyoshi Kikukawa, resigned as chairman after the scandal broke. But he remains on the board and, Mr Takayama says, still goes to work every day. Mr Takayama suggested that the three men "inherited" the practice of hiding losses from previous managers. The scandal first hit global headlines on October 14th, when Michael Woodford, a Briton who had recently taken over as Olympus's boss, was sacked. Mr Woodford had just told the board that the unusual payments merited investigation. The company says he was removed because of his inability to grasp Japanese corporate culture, despite his 30 years at the firm. Mr Takayama said that Olympus might have uncovered the improper activity without Mr Woodford. He also said that "no money flowed out" of the company and that its value remained unchanged. Investors are unconvinced. Olympus's shares fell 29% on November 8th, their daily limit. They are now So% lower than before Mr Woodford was ousted. The Tokyo Stock Exchange has placed the firm on a watch-list for de listing. Plenty of questions remain. How did the loss-hiding actually work? Since when has it been going on? How much money was involved? The company refuses to say until an independent panel concludes its investigation, says Mr Takayama. Mr Woodford calls on the entire board to resign, and for forensic accountants to be brought in urgently to do a thorough review. He says Olympus's underlying operations, especially its medical-devices business, remain sound. But he believes that the company's very survival is threatened by the ongoing uncertainty as to what has happened to its accounts. He also says he is concerned that the firm's Japanese shareholders have taken no action, and that the Japanese authorities have not contacted him in relation to investigating the scandal. Meanwhile, shares in Nomura, a big Japanese securities firm, plunged by15% on November 8th after the firm said that]apanese media reports that it might have been involved in the loss-hiding were "based on speculation and not on fact". •

76 Business Airline aLLiances

The airmiles-high clubs

The Economist November

12th 2011

Dynegy

Power play NEW YORK

A bankruptcy with a difference Three airline alliances cover most of the world-where do they go next? OR businesspeople who spend much F of their time in the air, the three global airline clubs-Star Alliance, oneworld and SkyTeam-are all about such goodies as frequent-flyer points and access to comfy lounges. For the airlines that belong to them, the main benefit is that the other members hook them up with lots of pas· sengers seeking connecting flights, helping them to fill their planes. Since the alliances started in the late 1990s, they have steadily signed up new members. Until recently SkyTeam, which includes Air France, KLM and Delta, was the laggard. But it has gained altitude by signing, among others, China Eastern and China Southern, two of China's big three carriers. Star Alliance, which includes Lufthansa, United-Continental and Singapore Airlines, remains the biggest, having signed up Air China, the third of the mainland's big three. Oneworld, which includes British Airways, American Airlines, Iberia and Cathay Pacific, will soon welcome aboard India's Kingfisher. Now there are few big network airlines left to be nabbed. The juiciest prize still on offer is LA TAM, a giant to be formed next year through a merger of Brazil's TAM and Chile's LAN, which will dominate the skies of South America. TAM now belongs to Star and LAN to oneworld, but regulators will force the merged carrier to choose. Star has already signed up two Latin American rivals, AviancaTaca and Copa, but it is not impossible to imagine it jilting either of these, if that were necessary to be allowed to admit LAT AM. Oneworld needs LAT AM even more: as the only alliance to lack a member in mainland China, it cannot afford to drop two BRICs. In India's big but chaotic market, oneworld is sorted, but Star and SkyTeam are said to be chasing Jet Airways. Star spent years negotiating with Air India, the deeply troubled flag-carrier, but suspended talks in July. The Arabian Gulf's three "superconnectors"-Emirates, Etihad and Qatar-are unsigned, but are growing so quickly that they see little need for allies. That leaves just a few independent carriers with long-haul networks. Virgin Atlantic is one: its bid to buy bmi, Lufthansa's moneylosing British offshoot, seems to have failed, with BA's parent company the likely buyer. The question is whether Virgin can continue in splendid isolation when all around it are in cosy co-operation. Somewhat like the European Union,

HEN a firm declares bankruptcy, W shareholders are typically wiped out and creditors seize control. On November 7th Dynegy, an energy firm, announced a more unorthodox kind of bankruptcy. Its bondholders and other lenders are likely to take a 10%haircut while shareholders, including Carl lcahn, a maverick billionaire, will retain full control of the firm. This is the latest twist in a remarkable saga. Dynegy, a Houston-based firm, has fallen on hard times since it almost bought Enron, its local rival, in 2001. After Enron imploded, Dynegy's shares plunged, soared and then plunged again after 2007, as the economic downturn and a boom in natural gas depressed energy prices. Facing a liquidity crisis, management sought a buyer. Late last year, a campaign by Mr Icahn blocked the sale of the company to Blackstone, a private-equity firm, which was willing to pay $5 a share. Mr Icahn, who now owns 15% of the shares, offered to pay $5.50. the alliances have "variable geometry": members do not have to join all initiatives, and non-members sometimes take part in selected activities. Each alliance has at its core a group of carriers which pool their flights in the huge transatlantic market. America's Department of Transportation has given these ventures immunity from antitrust prosecution. The European Commission has approved oneworld's transatlantic venture, with conditions, but is still investigating the other two. A report by London-based Aviation Economics

After this week's strange bankruptcy announcement, Dynegy's share price is trading around $3-40. Under the deal to exit bankruptcy, which enough creditors are expected to approve (despite the risk of a legal challenge), bondholders will take a loss to reflect the firm's current difficulties, but a smaller one than Dynegy's management had wanted. In return, management and shareholders will get one more chance to turn things around thanks to a new (but temporary) financial structure. Whether this will work depends largely on two things, says Julien Dumoulin-Smith, an analyst at UBS, a bank. First, will capital markets recover, allowing Dynegy to refinance its debt on better terms? Second, will the Environmental Protection Agency bring in tough new curbs on dirty fuels, turning Dynegy's investment in "clean" coal into a blessing rather than a burden? If not, Dynegy may find itself filing for a more traditional sort of bankruptcy. notes that the transatlantic ventures are a good source of profits in an otherwise hard market-but if they start to look too successful, regulators may get tougher. The alliances have encouraged their members to co-operate on such things as buying cabin interiors, to obtain better prices from suppliers. But progress is slow: only a handful of Star members are taking part in its project to buy aircraft seats jointly. A consultant to one of the alliances says he has spent two years trying to persuade its members to agree on a joint check-in desk at one airport. SkyTeam's boss, Michael Wisbrun, says even simple stuff like this saves a lot of money, so he is urging his member airlines to make it their priority. As the alliances struggle both to broaden and deepen further, they face being unpicked by their customers, as ever more of them build their own flight itineraries using online portals, which can result in big savings. Oneworld's boss, Bruce Ashby, says the alliances are aimed at offering seamless service to business flyers who care more about convenience than price. The trouble is, such passengers are also sensitive to the big variations that still exist between each alliance's member airlines. Those used to plush Asian and European business-class cabins are often dismayed when they transfer to their airline's American alliance partner, where the service is poorer and-horrors-the seats don't always convert to fully flat beds. •

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The Economist November 12th 2011

78 Business

Schumpeter I Why firms go green Despite governments' failure to put a price on carbon, more businesses see profits in greenery

HORTLY before the 2009 climate summit in Copenhagen, many companies got into green. The summit was expected to S lead to new regulations restricting greenhouse-gas emissions. UN

Dozens of chief executives came to see history being made and to be seen on the right side of it. But Copenhagen was a flop. Most firms turned their thoughts elsewhere. Only four bosses showed up at the next annual climate meet, in Cancun. Few are expected at this year's bash, which begins in Durban on November 28th. Alas, that represents a realistic assessment of the Durban summit's chances of delivering anything like the long-term certainty that businesses crave. Of 300 bosses of big global firms recently quizzed by Ernst & Young, 83% said they wanted to see alegally binding multilateral deal struck in Durban to update the ailing Kyoto protocol and help to put a price on carbon emissions. But only18% expect this to happen. The absence of a clear climate policy helps explain why, for example, investment in British clean technology fell from around $11 billion in 2009 to $3 billion last year. It would also suggest that any firm factoring a steep carbon price into its plans-as Shell does, assuming a notional price of $40 a tonne-should quietly lower it. Yet this is not the whole story. Despite the failures of the UN process and a tough economy, many firms are increasing their eco-friendly investments. Of Ernst & Young's respondents, 44% said their company's spending on sustainability-a woolly term that refers partly to the welfare of employees but mainly to green strategies-had increased since the 2008 financial crisis. Another 44% said that, unlike tumbling public spending on greenery, it had stayed the same. This is consistent with a discernible trend, argues Juan Costa Climent, Ernst & Young's head of sustainability. Many companies have found that, even with little carbon regulation, some sorts of green investment make commercial sense. Improved energy efficiency and waste management are obvious examples. With oil prices so high, small changes can save a lot of money, which is why companies that adopted ambitious emissions-reduction targets around the time of Copenhagen have tended to stiffen, not slacken, them. They include Walmart, which adopted energy-efficiency targets in 2005 and claims to be saving over $2oom a year on transport fuel alone. Tesco aims to be carbon-neutral by 2050 and claims to be saving flsom ($239m)

a year. According to the Carbon Disclosure Project (CDP), a watchdog that collects information on the emissions of over soo large companies, 59% of emissions-reducing investments made so far-mostly in energy efficiency or renewable energy-will pay for themselves within three years. The falling price of renewable energy is starting to offer firms another way to cut costs. A big advantage of solar and wind energy is that it is distributed: put a panel or a turbine on a factory roof and you have electricity to drive machinery. This makes it attractive to mining companies, which operate in inconvenient places where they cannot easily plug into a national grid. BHP Billiton and Rio Tinto are both investing in renewables. So is Alcoa, an aluminium producer, which is also attempting to measure its environmental impacts. This could provide a defence against future emissions regulations or perhaps help it grab green subsidies. In a recent survey of CDP's companies, 68% claimed to have made their global-warming strategy part of their core strategy, up from 48% last year. Given a surfeit of green PR bunkum, it is not easy to know whether they mean what they say. But if they are sincere, it is probably because they believe they must plan for a world in which water and other natural resources are increasingly scarce. Commodity prices are rising, and droughts seem increasingly common in fast-growing developing countries, including China and India. According to a recent survey by PWC, most bosses believe that resource scarcity is a bigger threat to their medium-term prospects than climate change more broadly. The companies making the most noise about resource constraints are, by and large, the ones already known for their greenery. Yet that is not necessarily a reason for cynicism. These firms include Coca-Cola, Unilever, Nestle and PepsiCo, all of which have big ambitions in developing countries and use a lot of water. Each firm's embrace of greenery has followed a similar pattern. At least partly in response to being attacked by green activists-including Coke for using HFC refrigerant gases, Pepsi for dumping plastic waste and Nestle and Unilever for their ties to palm-oil companies linked to tropical deforestation-all have been improving their environmental record for a decade or more. In the process, they appear to have become seriously convinced about the benefits of being green. More than just being seen to be green Cutting energy costs is only part of the story. A world of scarcity will create new opportunities for money-making: by developing products that use fewer valuable resources, for example, or which allow users to use less. "We know what the future looks like," says Gavin Neath, Unilever's head of sustainability. "We know water will be very scarce, we know that energy prices will be much higher, we know sanitation will be ghastly in increasingly crowded urban areas." He may or may not be right, but Unilever is certainly putting its money where his mouth is. It has started selling products in Asia specially designed for that resource-constrained future, including detergents that clean well at relatively low temperatures and can be rinsed off using relatively little water. In a forthcoming report, the McKinsey Global Institute, a think-tank, will argue that using energy and resources more efficiently could save the world $2.9 trillion a year by 2030, and massively curb emissions. It could also make clean firms a lot of filthy cash. • Economist.comfblogsfschumpeter

79 of $31,750, calculated on a basis of purchasing-power parity (PPP), compared with $31,550 for the EU. South Korea is the only country that has so far managed to go from being the recipient of a lot of development aid to being rich within a working life. For most poor countries, South Korea is a model of growth, a better exemplar than China, which is too vast to copy, and better, too, than Taiwan, Singapore or Hong Kong. All three are richer than Korea but all are, in different ways, exceptions: Singapore and Hong Kong are city states, while Taiwan's disputed sovereignty makes it sui generis. South Korea has not merely grown fast. It has combined growth with democracy. Though its spurt began under a military dictator, Park Chung-hee, for the past 25 years the country has had a vibrant parliamentary system. Korea scores the same as Japan in the democracy tally kept by Freedom House, a think-tank in Washington, DC. No other Asian country does as well. At the same time Korea has combined growth with equity. Between 1980 and 1997, its Gini coefficient, a measure of income inequality, fell from 0.33 to an exceptionally low 0.28, before rising back up during the 1997-98 Asian crisis. In 2010, the level was 0.31, a bit worse than Scandinavian countries, a bit better than Canada.

What do you do when you reach the top? SEOUL

To outsiders, South Korea's heroic economic ascent is a template for success. But now it has almost caught up with the developed world it must change its approach crisp autumn morning in Seoul, IbyTandIStheaa Cheonggyecheon hopeful fisherman sits dreaming stream as the world bustles happily by. Glass skyscrapers rise behind him housing the capital's new financial district. The shopfronts at their base are among the swankiest in Asia. Office workers, families and schoolchildren amble past. Busking fills the air. The water tumbles past plum trees and willows. Twenty years ago, this background would itself have seemed a dream for anyone foolish enough to be trying to fish the Cheonggyecheon. Its waters, dirty and

hidden, were trapped beneath a roaring highway; its surroundings were a slum of sweatshops, metal bashing and poverty. The reclamation of the Cheonggyecheon, one of the great urban-regeneration projects of the world, has about it the air of a dream achieved. So, to a large extent, has the Korea through which the stream flows . In 1960, in the aftermath of a devastating war, the exhausted south was one of the poorest countries in the world, with an income per head on a par with the poorest parts of Africa. By the end of 2011 it will be richer than the European Union average, with a gross domestic product per person

A model that worked Now Korea can add resilience to its roster of achievements. It was walloped during the global financial crisis, but recovered faster than any other rich country. Between June 2008 and February 2009, Korea lost 1.2m jobs. South Korea's relatively open financial system made it vulnerable to the volatility in world markets, a vulnerability that continues. This September, foreigners withdrew over 1.3 trillion won ($1.1 billion) from the stock market and the currency slumped 10%. Yet in 2010, GDP grew by 6%. This year's expansion is likely to be 4%. The unemployment rate is now a covetable 3%. Some of the recovery is the result of Korea's happy dependence on China: it exports more capital goods to China relative to the size of its economy than anyone else, even Germany. But this is only part of the explanation (which is just as well given China's slowdown). The government also initiated a public-works scheme that is mopping up over 2% of the labour force. It introduced an old-age pension and began, then expanded, an earned-income tax credit. All this from President Lee Myung-bak, who was once chief executive officer of Hyundai Construction and is widely assumed to be excessively friendly to big business. Korea's relentless convergence towards America's standard of living (see chart 1 on next page) has barely missed a beat. China's dollar GDP per person would have to grow at 7.5-8% a year for 20 years to reach the heights Korea has already scaled. If the

~~

80 Briefing South Korea's economy

I

The Economist November 12th 2011

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year and America's at 2.5%, Korea would overtake America (in PPP terms) only a few years later. To keep growing that impressively, though, Korea will need some new tactics. And it will need to develop them from scratch. When a country or a company is playing catch-up it can look at what others are doing and do it better_ This Korea has done welL Hyundai has outcompeted Toyota in the market for reliable, efficient, cheap cars. Korea's shipyards have beaten everyone through economies of scale. All change But this way of doing things works only when others have blazed a trail before you. As you join the ranks of the richest, you run out of beaten track to follow. Your economy comes to depend more on innovation and on learning from your own mistakes than on improving on the successes of others. The South Korean model of 1960-2010 remains an example for developing countries; but Korea itself now needs something new. The Korean model had four distinctive features: a Stakhanovite workforce; powerful conglomerates; relatively weak smaller firms; and high social cohesion. All these are either coming under strain, or in need of reassessment, or both. South Koreans lay great store by education and hard work. They put in 2,200 hours of work a year, half as much again as the Dutch or Germans. Their reaction to the 2008 slump was to work harder stilL During the 2009-10 recovery, reckons Richard Freeman of Harvard University, Korea had the second-largest increase in hours worked in manufacturing, after Taiwan. And the quality of labour has been even more important than the quantity. Along with Finland and Singapore, Korean schools regularly top international comparisons of educational standards, such as those run by the Organisation for Economic Co-operation and Development (OECD), a rich-country club. Korea spends a larger share of GDP on tertiary education than any rich country other than America. Given relatively low wages, this superbly

educated workforce is hard to beat. But with Korea already top of the league tables, it is harder to generate further jumps in income from big increases in hours and skills. Indeed, the immediate problem is merely to maintain its excellence. According to Yeong Kwan Song of the Korean Development Institute (Km), a think-tank, companies are starting to worry that graduates are emerging from university with the wrong skills. On some estimates, half of recent graduates are failing to find full-time jobs and are going into further study or part-time employment. So while general education remains good, some industrial skills may be declining. One way to boost the skilled labour force might be to have rather more people working rather fewer hours. The extra people would be women, often highly educated ones. Quite a lot of Korean women stay at home-the participation rate for women aged 25-54 is only 62%, the fourth-lowest in the OECD-even though they are usually better educated than men. In almost all rich countries, the best-educated women are more likely to work than their less-educated sisters. Not in South Korea. Shorter hours might encourage some of these skilled women into the workforce. So might a change in attitudes to schooling. The job of supervising a child's education falls to women, which is one of the reasons why relatively few women have jobs. This does not mean that they have a lot of children instead. Korea has a fertility rate of 1.2, one of the lowest in the OECD. This is in part because those good educations make having children a pricey proposition. An unusually large part of the spending that makes Korean education so good is private, not public. The government spends just under 5% of GDP on education, slightly below the rich-country average. Families add an extra 2.8% of GDP on top of that, easily the highest rate in the OECD. At universities, family spending is three times that of the state. And families spend an estimated 8% of their household budgets on after-hours programmes for each child, an investment which explains the effort mothers put into making sure it pays off. If you have three children, their after-school activities alone could swallow up a quarter of the household budget. The power of conglomerates. Much of South Korea's miracle has been the work of big conglomerates, or chaeboL Barry Eichengreen of the University of California, Berkeley, argues that they are "among the most technologically and commercially progressive agents in the Korean economy". Samsung Electronics, for instance, one of 83 constituent parts of the Samsung empire, sells more smartphones than Apple. Korea's shipyards have just started work on a new class of container ships called the triple E-class which are easily the largest container ships ever built

(Maersk, the ships' buyer, says the three Es refer to economy of scale, energy efficiency and environmental cleanliness; simpler just to see them betokening EEEnormity). Korea's large companies employ slightly less than a quarter of the workforce and produce more than half the country's output. Chaebol-alikes exist round the world, from Carlos Slim's Group Carso in Mexico to Lee Ka-shing's holdings in Hong Kong. The surviving chaebol have proved resilient. During the 1997-98 crisis, some chaebol's debt-to-equity ratios soared to over sao%; half of them went bust and conglomerates were widely seen as a drag on the economy. Now, those that came through the time of trial have returned to profitability and respectable debt ratiosbut their success still has a downside. After the founding fathers The chaebol system has proved prone to fraud, dodgy accounting and illegal political contributions. Many of the companies depend to an unhealthy degree on a founder or his family. About half the managers of Samsung's firms used to work in the chairman's secretariat-and thus directly for the founder or his son-and owe their promotion to the associated patronage. As with any family business, the moment of greatest danger is when the leadership passes to the next generation. Samsung passed this test in 1987 when the founder handed over to his son, Lee Kun-hee. Now Mr Lee's son, Jay Y. Lee, has been appointed chief operating officer of Samsung Electronics and a new transition looms. If Mr Lee the third has business acumen, fine. If not, the whole country could suffer_ Moreover, there are signs that the chaebol may be stifling innovation and entrepreneurship. They have proved expert at applying and improving existing technology, even the high technology of touchscreen smartphones. But except in some internet businesses and computer gaming, South Korea has few start-ups or cuttingedge technology firms. It lacks nationwide venture-capital businesses, says Hasung Jang, the dean of Korea University's Business School, because each chaebol has one of its own. The firms snap up the best and

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and turn them into company men. Mr Jang compares the conglomerates to light-hogging trees in a forest: their canopy may be impressive, but it is hard for anything to grow underneath. Koreans perceive fewer opportunities for entrepreneurship than any of their peers in rich countries except Japan, according to an annual survey by the Global Entrepreneurship Monitor, set up by the London Business School and Babson College, Massachusetts. As South Korea moves towards the technological frontier, such attitudes will have to change. Innovation is not going to come if everyone shelters from risk in the chaebol. Weak small firms. There is a huge productivity gap between Korea's export-oriented chaebol and small and mediumsized firms (SMES) which dominate services. Value added per worker in small firms is less than half that in large ones. SMEs' operating profits were 4.5% of sales in 2007, compared with about 7% for large firms. Small firms spend about half as much on research and development as large ones per unit of sales and borrow far more relative to assets. Over time, their performance seems to be getting worse. Korea, in short, has first-world manufacturing exporters and third-world services.

Coddled, not coping There are several reasons for the mismatch. Small firms are crowded out of markets for people and skills by the chaebol. And because chaebol pay scales often rise according to years in service, they squeeze wage bills by firing older workers, with the service sector working as a recycling system for surplus labour. Small firms have also been coddled by the government. Korea maintains various entry barriers to shelter mom-and-pop stores from competition. Government support to SMES rose from under 6 trillion won in 2008 to 10 trillion in 2009. Public credit guarantees rose from 33 trillion won in the Asian crisis to almost 6o trillion won in 2009. Last year, the government "requested" banks to roll over their loans to small firms. Randall Jones of the OECD argues that all this help has made SMEs less, not more, efficient, and damaged competitiveness. The richest economies are switching into services that in Korea are dominated by small firms which cannot compete. Social cohesion. Korea's equal distribution of income is changing. Judging by the relationship between the richest and poorest tenth, Korea is becoming more unequal than it used to be. Worse, the growing number of poor people is disproportionately elderly. In other rich countries, people between 66 and 75 are no more likely to be poor than the population as a whole. In Korea, they are three times as likely to be poor. This is all the more worrying because the low birth rate means the

Briefing South Korea's economy 81 country is ageing more rapidly than any other rich country. In 2009, people over 65 were outnumbered ten to one by the working-age population. By 2050, there will be seven over-65s for every ten working-age adults. Disproportionate old-age poverty would have a huge impact on the social backing for policies designed to foster growth. Korea's equitable income distribution used to provide a sense that society as a whole was benefiting from breakneck catch-up. But discontent is rising both about inequality and about the role of the chaebol, producing growing disenchantment with both main political parties. The recent election for mayor of Seoul produced an upset win for a left-wing anti-establishment maverick. It is proving hard to resist the trend towards inequality because of another basic feature of Korea's economic model: total tax revenues are just 26% of GDP. Taxes are especially low on labour, a choice designed to boost work and foreign investment. But as a result, social spending is low (n%); public spending on family benefits is exceptionally low (less than a quarter of the rich-country average); and the tax-benefit system is the worst in the OECD at reducing inequality and poverty. Korea's taxbenefit system reduces poverty by only 18% (compared with what it would have been without the benefits). Sweden's taxbenefit system cuts its poverty rate by 8o%. Korea, argues Mr Jones, needs to increase taxes and social spending in order to reduce poverty and inequality. One reason it is reluctant to do this is because it is afraid of the impact on jobs. Its changing demography also suggests caution in expanding the social safety net too fast or far, as it will be used ever more over the decades to come. And then there is the ever-present imponderable: the possible need, at some point, to finance the horrendous costs of reunification with destitute North Korea

Not to be left behind

when that state collapses. That would make the vast expense of unification in Germany pale into insignificance. At some point in the future Korea may need all the room for future fiscal expansion it can get. A bridge to the future The problems of the South Korean model should not be allowed to obscure either its achievements or its continuing strengths. True, over the past 40 years annual GDP growth has declined from about 10% to 4-5% (see chart 2 on previous page). Business investment has halved from over 30% of GDP in the mid-1990s to 17% in 2010-but that is still 5o% over the OECD average. Further declines in growth seem likely. That is not surprising. As Kwanho Shin of Korea University and Dwight Perkins of Harvard show, every country's growth starts to ebb as its income reaches about $1o,ooo a year. South Korea has kept going longer than most. If it can increase public spending a little to reduce inequality and poverty, boost its labour supply by encouraging more women to work and avoid compromising its educational standards and penchant for hard work, then it should be well placed to pull ahead of Europeans and catch up with America, too. South Korea has long been a model for outsiders. President Kennedy's chief economic adviser, Walt Rostow, wanted to use it as a testing ground for his theories about stages of economic growth. But Koreans do not see themselves as a blank slate, or as a new world power. They stress a long legacy of openness and innovation. Before the wars of the 2oth century Korea was a bridge between the more closed worlds of China and Japan. It developed movable metal type two centuries before Gutenberg; its last imperial dynasty benefited from checks and balances more extensive than in its Chinese prototypes. The more Korea brings these qualities of domestic innovation to the fore, the better its chances of blazing a new trail for itself. •

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Drought warning

With the debt crisis worsening, trouble is in store for the neighbours AS THE rich world lurches from one crisis

.t"\. to the next, a consolation has been that emerging economies, which account for about half of world output, have been growing quickly. Even the wretched euro zone has a few racy emerging markets nearby. Turkey has on occasion rivalled China, with GDP growth of around 9% in 2010. Poland's was the only economy in the 27-strong European Union to avoid recession in 2009. Sadly, euro misery seems to love company. A deep recession in the currency zone would leave few countries unscathed, even in fast-growing emerging Asia. For developing economies closer to home, the euro zone's banks may be the main route by which the suffering spreads. These banks are under pressure to meet higher capital-ratio targets as part of a deal made last month to "save" the euro. Lenders may choose to cut loans rather than raise equity, which would dilute existing shareholders (including bank executives). Europe's banks are owed $3-4 trillion by emerging economies, $L3 trillion of which has been lent to eastern Europe, according to the Bank for International Settlements. Many have subsidiaries in the region. If banks choose to sacrifice foreign lending to concentrate on business at home, it could choke the supply of credit. In a speech on November 8th, Mark Carney, the new head of the Financial Stability Board, a club of international regulators, gave warning about the damaging ef-

fects of European bank "deleveraging" on the world economy. Already Germany's second-largest bank, Commerzbank, has said it will suspend new lending outside its home market-although it made Poland, where it has a subsidiary, an exception. The current-account balance is a rough guide to which countries are most vulnerable. On that basis, Asia is generally a safer place than eastern Europe, where several countries run large current-account deficits, and so rely in part on fresh loans from big European lenders. Turkey looks at risk: the IMF puts its deficit at 10% of GDP this year. Poland has a biggish deficit, although

I

Exit signs Currencies against the dollar %decrease since May 2011

25 20 15 10

Hungarian forint Polish zloty S. African rand Mexican peso Turkish lira Romanian leu Czech koruna Indian rupee Russian ruble Bulgarian lev Sources: Bloomberg; IMF

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Commerzbank's pledge suggests its credit line to rich Europe may be more solid. Hungary is in surplus but it still has a financing hole to fill, says Gillian Edgeworth of UniCredit, because it has IMF loans to pay off and because foreign banks have been slowly withdrawing from it. Investors have been spooked by the government's rows with its IMF rescuers and by a plan to cap repayments on Hungarians' foreign-exchange mortgages. Greece's banking troubles are a threat to economies in south-east Europe. A drying up of foreign bank credit would also put downward pressure on the currencies of countries that rely on foreign capital, making it trickier for them to cut interest rates to stimulate their economies. Some emerging markets have already seen their currencies drop in recent months (see chart). A big sell-off in September, since partly reversed, was a warning of future trouble, says StephenJen of SLJ Macro Partners, a hedge fund. There is an irony here. As the euro zone's trouble spots, such as Italy, struggle against the constraints of a currency union, some developing countries (and a few rich ones, such as Japan and Switzerland) have long grappled with the problem of managing floating exchange rates. Brazil imposed a tax on the flightier sorts of foreign capital to stop the real from appreciating too much. In a similar vein Turkey initiated a range of unorthodox measures late last year to curb capital inflows and relieve the upward pressure on its currency, the lira. To cool a credit boom, the authorities forced banks to hold more cash reserves and put ceilings on property loan-to-value ratios as alternatives to raising interest rates (which might attract yet more footloose money). Turkey's central bank also intervened in currency markets to hold down the lira.

~~

84 Finance and economics ~

Now a different set of problems looms. Fearful of inflation, which has risen to 7.7%, in part because of the weaker currency, the bank has recently reversed tack and sold some of its foreign-currency reserves to prop up the lira. Since its reserves are quite modest, Turkey may have to keep interest rates fairly high to defend its currency and maintain external financing, which would increase the chances of a hard landing. A cheaper currency should, in principle, boost exports and curb imports, narrow the current-account deficit and so reduce the amount of fresh borrowing needed from abroad. But the inflation that comes

The Economist November with higher import prices will temper the competitive gain from a cheaper lira; and euro-zone recession will hurt exports. Europe's banks are not the only source of foreign capital for Turkey, Poland and the rest. Purchases of bonds and stocks by foreign investors ("portfolio inflows") are important, too, and have held up surprisingly well, says Ms Edgeworth. Rich-world investors have been keen on exposure to emerging markets because of low yields at home. But weakening currencies would mean losses on such investments, which could slow-or reverse-portfolio flows. That in turn would further depress curren-

12th 2011

cies, reinforcing a vicious cycle. A few policymakers are alive to the risks. Mr Carney suggested European banks should be required "to meet at least part of their requirements by raising private capital" rather than being able to do so entirely by deleveraging. The IMF is also sounding warnings. Erik Berglof of the European Bank for Reconstruction and Development has called for a second "Vienna Initiative", a successful 2009 pact to keep bank loans flowing to eastern Europe. But the pressure on the euro-zone is now far greater than it was back then, so the nearabroad is less of a priority. •

Buttonwood I A new EU plan to shoot the messenger

EWARE Italian government debt. RisB ing yields increase the country's financing costs and make it harder for the administration to balance its- We interrupt this column for a message from the European Commission. With Italy being advised by the International Monetary Fund, negative opinions about its bonds are not helpful. The publication of this article is not permitted. Thankfully, the EU has not decided to censor The Economist. But a European Commission draft paper on credit-rating agencies does propose that, in some circumstances, they should be barred from changing their sovereign ratings. Let us be clear what that means. A credit rating is an opinion about the likelihood that a borrower will repay its debts. The issuers of these opinions are largely based in America, a land where free speech is constitutionally guaranteed. (Fitch has dual headquarters in New York and London, although its majority-owner is a French investor.) Even if the EU could get away with this censorship, what purpose would it really serve? At a crucial moment the agencies would have to declare that they were unable to provide a rating of the country, as clear a signal to the markets as a downgrade itself. The authorities are worried that a ratings downgrade might cause a downward spiral, making it more difficult to rescue an embattled sovereign. But there are other trigger points. To take one example, on November 9th a surge in Italian bond yields prompted demands from clearing-houses for more collateral from those using this debt as security. The attitude of the commission also suggests a certain paranoia that European sovereign issuers are being treated unfairly by ratings agencies. The reverse is the case. French ten-year bonds trade on a

yield more than a percentage point higher than their German equivalents, even though both share a AAA rating. An analysis by Exotix, a research group, found that peripheral European nations have ratings six notches higher than emerging economies with similar financial conditions. The commission's paper is part of an ignoble tradition of "shooting the messenger". Other examples include curbs on short-selling and a determination to crack down on credit-default swaps, a form of insurance against default. The ratings agencies have their flaws. They failed badly in the subprime boom and the big three outfits-Moody's, Standard & Poor's and Fitch-have a dominant market position. But where the draft paper tries to deal with competition, it goes about it in a cack-handed manner. Take the proposal to force the rotation of ratings agencies, which could lead to big debt issuers changing their provider every year. Since many issuers are rated by more than one agency, this would lead to phenomenal turnover. The principle of "Huggins's turn" would mean agencies would not really be competing at all. The Association

of Corporate Treasurers, which represents borrowers, worries that forced rotation of agencies would lower the quality of the analysis. Then there is the crazy idea that agencies cannot rate securities in which their leading shareholders have an interest. That would mean, presumably, that Moody's could not rate any of the bonds owned by the companies in the Berkshire Hathaway group, its leading shareholder. Every time Warren Buffett made a buy or sell decision, Moody's would have to withdraw a rating. Furthermore, if competition is the aim, why do the guidelines suggest that agencies should have their methodologies "preapproved" by the European Securities and Markets Authority (ESMA), their new regulator? That sounds like a way of imposing uniformity rather than allowing competing views to flourish. If all these rules were pushed through, there would be a serious breakdown in the business of rating European debt, not a helpful development when the continent is already too dependent on its banking system for finance. The suspicion is that these proposals are designed to make room for a new European ratings agency which would be more sympathetic to the continent's needs. This agency-let's dub it Panglosswould follow European "cultural norms". When it comes to French debt ratios, say, it will add two and two and make three. Perhaps Europe will stumble down this road of self-deception and force its domestic investors to follow suit. But it won't fool the international investors it needs to buy its bonds. The draft paper should get a D rating for desperation and disingenuousness. Economist.comfblogsfbuttonwood

86 Finance and economics Too big to fail

The Economist November 12th 2011 Networking and pay

Fright simulator

Contact sports Women are worse than men at turning networks to their advantage

NEW YORK

How to deal with a collapsing bank under the Dodd-Frank rules

FALL the questions unleashed by the Global, a broker, bankruptcy of 0 the most important is whether America is MF

prepared to deal with a bigger collapse, on the scale of another Lehman Brothers. The Dodd-Frank reform law creates an alternative to letting a systemically important firm go bankrupt, known as "resolution". But it also prohibits bail-outs: shareholders and creditors must bear losses. The Economist simulated the failure of a global bank at its Buttonwood Gathering on October 27th in New York (a video can be seen at economist.com/simulation). Larry Summers, a former treasury secretary and once Barack Obama's top economic adviser, was joined by five other exofficials and a prominent bank lawyer to play the parts of officials at the Treasury, the White House and regulatory agencies on a Friday afternoon in April 2013. The group was confronted with a teetering, $1 trillion bank-holding company called New Jefferson. Without their intervention, it would not open on Monday, an event guaranteed to send markets into free fall. The participants soon found their options narrowing. There was no prospect of a private consortium propping up New Jefferson, as had happened with Long Term Capital Management, a hedge fund, in 1998. Improvements to derivatives markets since then have made it easier for banks to sever ties to a troubled counterparty. Bankruptcy, the "Lehman-was-really-fun-let'sdo-that-again option", as Mr Summers put it, was rejected, despite its political appeal. That left Dodd-Frank's resolution authority.Jay Powell of the Bipartisan Policy Centre, a think-tank, who developed much of the simulation, said remarkably few market participants know that the law prohibits bail-outs, virtually guaranteeing that some creditors will take losses. As that realisation dawned, many may rush to shed exposure to a troubled bank, and perhaps many banks. Panic might ensue. John Dugan, a former comptroller of the currency, played the role of chairman of the Federal Deposit Insurance Corporation (FDIC) and said resolution actually made four options possible. First was outright liquidation, tantamount to bankruptcy. Second was receivership: New Jefferson would be split into a good "bridge bank" with the soundest assets and secured creditors, and a "bad bank" with impaired assets and unsecured creditors. The FDIC would run the bridge bank until it found a

N THE rarefied world of the corporate Iment board, a good network matters. Recruitoften involves word-of-mouth recommendations: getting on a shortlist is easier if you have the right connections. New research suggests men use contacts better than women. Marie Lalanne and Paul Seabright of the Toulouse School of Economics measure the effect of a network on remuneration using a database of board members in Europe and America. They find that if you were to compare two executive directors, identical in every way except that one had 200 ex-colleagues now sitting on boards and the other 400, the latter, on average, would be paid 6% more. For non-executives the gap is14%.

Old boy in the chair buyer. But like a melting ice cube, the bank's franchise value would rapidly shrink as depositors, counterparties and staff all left. Both options were rejected. The third option was to sell the bridge bank to another big bank. The combined entity would reopen for business on Monday morning, providing maximum continuity to creditors, customers and counterparties and minimum contagion. But it came laden with problems: a massive, new too-big-to-fail bank would come into being which would require waivers on Dodd-Frank's 10% ceiling on any firm's share of total financial-system liabilities, and on various capital requirements. The fourth option, recapitalisation, would convert the claims of unsecured creditors to equity in the bridge bank, much as occurs during a prepackaged Chapter n bankruptcy filing. This too had problems: sorting out the claims could take

The really juicy finding concerns the difference between the sexes. Among executive-board members, women earn 17% less than their male counterparts. There are plenty of plausible explanations for this disparity, from interruptions to women's careers to old-fashioned discrimination. But the authors find that this pay gap can be fully explained by the effect of executives' networks. Men can leverage a large network into more senior positions or a seat on a more lucrative board; women don't seem to be able to. Women could just have weaker connections with members of their networks. "Women seem more inclined to build and rely on only a few strong relationships," says Mr Seabright. Men are better at developing passing acquaintances into a network, and better at maintaining a high personal profile through these contacts. Women may, of course, also be hurt by the existing dominance of men on boards and a male preference for filling executive positions with other men. But a tendency to think of other men first will be amplified if talented women don't stay on the radar. Interestingly, there is only a marginal pay difference between men and women when it comes to non-executive directors, and no difference in the effectiveness of their networks. It is possible that this reflects pressure for "gender quotas" on corporate boards. Women are able to find their way onto shortlists for lowerpaid, non-executive positions. But that's not where the real power lies. a week or more, reviving the melting-icecube problem. Bondholders who woke up to find themselves stockholders might sell their shares, and the shares of any other banks, aggravating contagion. Although the "officials" found none of the options appealing, they ultimately chose recapitalisation while keeping the door open to a sale. (The complexities of co-ordinating with other countries, a subject of new international standards released this month by the Financial Stability Board, were glossed over.) All were very aware that the straitjacket of DoddFrank might make contagion unavoidable. That does not necessarily make it a bad law. Mr Summers compared it to a prohibition on paying ransom, which makes kidnappings harder to resolve but also, hopefully, less probable. "By restricting bail-outs, you're making New Jeffersons less likely," he said. •

In the United States, insurance coverages are underwritten by individual member companies of Zurich in North America, including Zurich American Insurance Company. Certain coverages are not available in all states. Some coverages may be written on a non-admitted basis through licensed surplus lines brokers. Prior results do not guarantee a similar outcome. Risk engineering services are provided by Zurich Services Corporation.

88 Finance and economics

The Economist November

Rice

Asia's rice bowls

Paddy power Top rice exporters, tonnes, m, 2010-11

I Rice ~reduction, tonnesvJ 0

4

How serious will the impact of the Thai floods be on Asian tables? N ASIA kingdoms are said to rise and fall with the shifting price of rice. So the continent's rulers presumably ought to be worried by the effects of disastrous floods in Thailand, the world's biggest exporter of the white grains (see chart). Last year Thailand provided about a third by volume of all internationally traded rice-around 10m tonnes. Thailand's government reckons that some 5m-6m tonnes (nearly a fifth of the country's total production) might have been destroyed by the deluge. Some analysts say that the damage could be even more severe. Pessimists worry that Thailand's exports could be cut by 3m-4m tonnes. With the world trade in rice expected to hit over 33m tonnes in 2011 this could take around 10% out of the market. If the same thing happened with oil or wheat the results would be calamitous. But the nature of the rice market means that the consequences may not be as severe. Rice is a resilient crop, and the floods may not do as much damage as some fear. Although rice is a staple for half the world's population, international trade is small compared with the 451m tonnes that will pop out of the ground in the 2010-11 growing season. Only about 7% of the total crop hits global markets, compared with 20% or so for wheat. Politics and tastes mean that rice is mainly consumed where it is grown. Rice is such a vital foodstuff in Asia-some 90% is grown and eaten there-that policies aim at self-sufficiency. Domestic markets are usually heavily regulated and protected. It is one of the most politicised of commodities, according to Concepcion Calpe of the Food and Agriculture Organisation. Moreover rice comes in many varieties: longgrain, short-grain, sticky, fluffy and so on. Consumers want their customary sort, not an unfamiliar rice from far afield. The result is that many rice-eating countries are detached from the price swings in global markets, according to Darren Cooper of the International Grains Council, a research body. Others aim to be. China, the world's biggest producer at around 130m tonnes a year, is largely self-sufficient. The Philippines, the world's biggest importer, plans to cultivate all its own rice by 2013. What's more, it has been an excellent year for rice crops on the whole. Droughts in Arkansas, America's main rice-growing area, have hit the crop: exports will be closer to 3m than 4m tonnes this year. But

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bumper crops in India and Pakistan should help offset a shortfall in Thai exports. The excellent harvest in India convinced politicians, once fearful of food inflation, to lower protectionist defences. The government lifted an export ban on white rice in September, allowing 2m tonnes to be exported before Thailand's floods. Indian traders, worried that the decision will be reversed, have quickly sold almost all the allowance at rock-bottom prices. This has proved good news for African countries, which import around 10m tonnes annually, a third of the global trade. The floods will have some impact. Thailand's benchmark rice is currently fetching around $630 a tonne, roughly what it cost at the start of September. Credit Suisse thinks prices might hit $700 before the end of the year. More gloomy forecasters say that it could even top $Boo. But kingdoms will not totter. •

Private equity

Fee high so dumb

Some buy-out firms' fees have gone up HE high fees that private-equity firms T charged in the boom, typically 2% of the assets they oversee (the "management" fee) and 20% of the upside (the "performance" fee), are harder to pocket now. Investors have been bearing down on these fees for the past two years. Even big firms are reportedly caving in, particularly for those writing large cheques. But one type of fee has bucked the trend. A new study by Dechert, a law firm, and Preqin, a research outfit, finds that "deal" fees, which portfolio companies have to pay to private-equity firms for various services, actually rose in 2009-10, in

12th 2011

spite of all the hullabaloo around lower charges. Transaction fees, which buy-out firms charge firms when they buy them (and yes, you did read that right), went up by at least 25% on average for 2009-10 deals that were $500m or larger, compared with deals done between 2005 and 2008. Deals between $500m and $1 billion, for example, had an average transaction fee of L24% of the deal amount in 2009-10, compared with 0.99% in 2005·08. "Monitoring" fees, which portfolio companies pay their private-equity owners each year for advisory services, also went up. Deal fees essentially enable buy-out firms to get paid twice to do their job-first by investors and then by their portfolio companies. They even charge fee s when they exit investments. When Nielsen, a market-research firm, went public earlier this year it had to pay around $101m to its seven private-equity owners to end their "advisory" agreements. Absurdly, some private-equity firms even charge portfolio companies fees for helping them refinance their debt-when they're the ones to pile on leverage in the first place. Why would deal fees be on the rise? Given that investors won't let them raise their management fees, and in many cases they're still a long way from earning performance fees, it could just be that deal fees are one of the remaining sources of cash for buy-out firms. If so, their future may be shaky. Already some firms like Warburg Pincus don't charge them because it hurts the morale of their firms' management, who don't like being milked. "It's been part of our pitch to investors that we don't do deal fees," says]oseph Landy, one of Warburg Pincus's two bosses. Investors themselves may actually be behind the rise in fees, however. Many complain about private-equity firms keeping deal fees for themselves. "Transaction fees are a thorn in my side; monitoring fees are a knife in my head," one executive at a pension fund moaned at a conference last year. Investors say private-equity firms should turn over all the fees to them or use the money to offset the management fee. For funds raised this year around 83% of transaction fees are being distributed to investors, up from 70% for funds raised in 2009. If private-equity firms are turning over more of their deal fees to investors, they may have been hiking them so they can keep some for themselves. It is strange, however, that more investors aren't just calling for the elimination of deal fees, rather than their redistribution. One cynical private-equity executive says it's because of the way some investment staff at pension funds are paid. In some instances, recouped deal fees appear to boost returns, increasing their own compensation. It sounds like just the sort of trick they might have picked up from private-equity firms. •

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90 Finance and economics

The Economist November

12th 2011

Economics focus Exports to Mars I

Official statistics probably exaggerate global current-account imbalances CONOMISTS are constantly urging governments to adopt policies that would reduce global imbalances-which, in crude terms, means that China should slash its current-account surplus and America its deficit. Yet they ignore the biggest imbalance of all: the current-account surplus that planet Earth appears to run with extraterrestrials. In theory, countries' current-account balances should all sum to zero because one country's export is another's import. However, if you add up all countries' reported current-account transactions (exports minus imports of goods and services, net investment income, workers' remittances and other transfers), the world exported $331 billion more than it imported in 2010, according to the IMF's World Economic Outlook. The fund forecasts that the global current-account surplus will rise to almost $700 billion by 2014. Are aliens buying Louis Vuitton handbags? Are little green men bagging the best sunbeds by the hotel pool? The more down-to-earth explanation is that the global surplus reflects statistical errors. Either the current-account deficits of countries such as America are being understated or the surpluses of countries like China are being overstated, and by a rising amount. The puzzle is compounded by the fact that the world ran a persistent current-account deficit for at least three decades until 2005. In 2001 the deficit was equivalent to o.s% of global GDP, but by next year the IMF's forecasts imply that the surplus could hit a record 0.8% of GDP (see left-hand chart). That turnaround exceeds the increase in China's current-account surplus over the same period. Indeed, the global "surplus" now exceeds China's. A statistical black hole of this scale raises questions about the IMF's forecast that global external imbalances will rise over the coming years. It expects China's current-account surplus to double in dollar terms between 2010 and 2014. A forecast increase in China's surplus ought to mean a bigger deficit elsewhere. Yet the fund also expects the rest of the world combined to run a rising surplus (this includes a big drop in America's deficit). What is going on? Past studies by the IMF concluded that the global deficit in the 1980s and 1990s was largely due to the underreporting of foreign-investment income by rich countries and the under-recording of freight receipts. But over the past decade, the "deficit" on investment income has diminished, partly because governments have cracked down on tax evasion and partly because interest rates have fallen. An IMF study in 2009, by Marco Terrones and Thomas Helbling, concluded that the biggest cause of the switch from a global current-account deficit to a surplus was mismeasurement of services. International trade in financial and legal services, insurance and consultancy is tricky to measure, and exporters are easier to identify than importers. For instance, law firms involved in cross-border deals are usually quite large, whereas most clients' spending on their services is relatively small (though it may not seem that way to the clients). Exporters are thus more likely than importers to exceed the threshold for inclusion in the surveys used to track trade in services. Since that report, however, measurement errors in merchandise trade have jumped and now match those in services (see right-hand chart). Transport lags can cause annual global exports to exceed imports when trade is growing rapidly because goods in transit in December are counted as exports by China, say, but are not counted as imports by America until]anuary. But this cannot account for the scale of the recent rise in the statistical discrepancy because growth in trade has slowed since 2007. Another possible explanation posits that the surge in the glo-

E

bal discrepancy broadly coincides with both the explosion in vertically integrated businesses, where firms locate different stages of production in different countries, and the increase in China's trade. A rising share of trade consists of parts, semi-finished goods and final products moving across borders between parent companies and their foreign subsidiaries. In 2009 intrafirm trade accounted for half of America's imports. Transfer pricing used by multinationals to shift profits around the globe may distort trade figures. Much of this mispricing of exports and imports should cancel out, but probably not all. More science, less fiction Overinvoicing of imports and underinvoicing of exports by American multinationals trying to reduce their tax bills would mean that America's true current-account deficit is smaller than officially reported. That would increase, not reduce, the global discrepancy. But under- or overinvoicing of trade within international firms is also used to dodge capital controls. A decade ago firms in emerging economies often reported exports at less than their value or imports at more, to shift money out of a country like China. In recent years, however, China's booming economy and the expected appreciation of the yuan mean that exporters now have more incentive to overinvoice exports in order to bring money into the country. If so, official figures may overstate the surplus of China and other emerging economies. To understand whether global imbalances really are widening or not, you need to know where the errors lie. Rich countries' trade statistics tend to be more reliable than those of emerging economies, where data collection is less developed. If more of the mismeasurement is in the emerging world, the total currentaccount surplus of emerging markets is probably much smaller than that officially recorded. Zhiwei Zhang, an economist at Nomura, estimates that measurement errors caused by underrecorded profits of foreign firms and capital flows disguised as trade flows may have inflated China's current-account surplus by 3-4 percentage points (last year's surplus was 5% of GDP). The good news is that international concerns about global imbalances may be much less pressing than many think. The bad news is that conventional balance-of-payments measures are clearly less reliable in a world of rising intra-firm trade and complex supply chains. That matters because dodgy statistics lead to policy mistakes. Governments should clean the figures up. •

I

Astronomical errors World current-account balance, % of GOP By type of transaction

Total F'CAST

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93

Also in this section 94 What dinosaurs ate 94 The James Webb space telescope 96 A close encounter with an asteroid 96 Updating the Rorschach test

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

What ate dinosaurs?

Old crocs LAS VEGAS

Even in their heyday, dinosaurs were not quite as dominant as popular myth makes them out to be NE answer to the question, "What ate dinosaurs?" is, obviously, "Other dinosaurs." Theropod predators like Tyrannosaurus and Allosaurus loom large in the imagination of every lover of prehistoric monsters, and their animatronic fights with the likes of Diplodocus and Stegosaurus are the stuff of cliche. Science, though, tries to look beyond the obvious, and at this year's meeting of the Society of Vertebrate Palaeontology, held in Las Vegas, some of the speakers asked whether the top predators of the Mesozoic era really were all dinosaurs. Their conclusion was "no". Another group of reptiles, until recently neglected, were also important carnivores. And it is a group that is still around today: the crocodiles. That the past role of crocodiles (or, strictly, crocodilians, since they came in many sizes and shapes, not all of which resemble the modern animals) has been underestimated was suggested a few years ago by Paul Sereno. Dr Sereno, a palaeontologist at the University of Chicago, uncovered a crocodile-dominated ecosystem from about 1oom years ago (the middle of the Cretaceous period), in what is now north Africa. Besides water-dwelling giants similar to (though much bigger than) to day's animals, he found a range of forms including vegetarians and species that ran on elongated legs-more like dogs than crocodiles. That discovery has prompted other fossil hunters to look elsewhere. As a result, even the well-studied

O

rocks of North America are revealing that dinosaurs did not have it all their own way in the ecosystems of the Mesozoic-as Stephanie Drumheller of the University of Iowa and Clint Boyd of the University of Texas at Austin explained to the meeting. The Cretaceous equivalent of zebra and antelopes-the victim species in every wildlife documentary about the dramas of the African savannah-were herbivorous dinosaurs called ornithopods. Frequently, these were taken by theropods. But not always. When Ms Drumheller and Mr Boyd examined the bones of juvenile upperCretaceous ornithopods dug up in Utah they saw marks on one skeleton that looked suspiciously like those modern crocodiles inflict when biting and tearing at their prey. On examining these marks more closely, they found a crocodilian tooth stuck in one of them. Crocodile tears It was not a large tooth. Its size suggests the

animal which made it was no more than a metre and a half (about s feet) long. Such a predator would have been unable to take on an adult ornithopod. Nevertheless, this tooth is the first unarguable proof that crocodilians did indeed snack on dinosaurs. Moreover, it helps to confirm suspicions that the other crocodile-bite-like marks that Ms Drumheller and Mr Boyd have discovered really are what they look like. By combining that with an analysis of the whole site, the two researchers argue

that what they have discovered is a dinosaur nesting ground that was being raided by crocodilians. Such suspicions have been aroused before. Other sites in Utah are known to be dinosaur nesting grounds, since eggs are found there. Crocodilian bones frequently turn up at such sites. Ms Drumheller and Mr Boyd, however, seem to have nailed the connection down. Juvenile dinosaurs, at least, were indeed the prey of crocodilians. But what about adults? More than mere morsels To investigate that question, Martin Lockley at the University of Colorado, Denver, and Spencer Lucas of the New Mexico Museum of Natural History and Science, turned to one of the most famous fossil phenomena on the planet-the dinosaur freeway that runs through Colorado, New Mexico, Kansas and Oklahoma. This collection of tracks, scattered over several sites of the same age along the coast of an inland sea, is thought to mark an ancient migration route. The traces of more than 1,380 individual animals can be distinguished. Most, but not all, were ornithopods. Some were small carnivorous dinosaurs-the sort that might pick off young stragglers in the way that the crocodilians identified by Ms Drumheller and Mr Boyd did. But there is, Dr Lockley and Dr Lucas realised, something missing from the picture. When they looked for traces of big predatory dinosaurs, they found none. That is ecologically absurd. Unless, of course, the top predator of the system-the one that could hunt down adult ornithopods-was not a dinosaur at all. And, when Dr Lockley and Dr Lucas re-examined the tracks they found that that was exactly what was going on. Instead of theropod footmarks, they found those of crocodilians. More than a quarter of the places where the dinosaur freeway sur-

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The Economist November

94 Science and technology ~ faces

have yielded signs of crocs. And they were big: sometimes more than four metres long. That is certainly large enough to take on an adult ornithopod. Such megacrocs, then, could easily have acted as top predators in this ecosystem. But that does not completely explain the absence of theropod tracks. Modern migrating herbivores fall victim to many sorts of carnivore: big cats, wolves and hyenas, to name but three. The marshy conditions of the dinosaur freeway (the reason its footprints formed, and have survived) may, though, have favoured crocodilians over predators that had evolved on drier land. In that sort of environment even a big theropod would constantly have been looking over its shoulder. Perhaps the real reason why they did not plant their footprints on the dinosaur freeway is that they might have ended up as prey, as well. •

Astronomy

Throwing money into space A shiny new telescope is crowding out NASA's other science missions HE space telescope, an orbiting T observatory launched in 1990 by NASA, America's space agency, has been Hubble

one of that agency's most successful missions since the Apollo moon shots in the 1960s and 1970s.It has produced a string of scientific achievements: confirming that most galaxies have a black hole in the middle; providing a front-row seat for the collision, in 1994, of a comet with the planet Jupiter; and helping to uncover the strange fact that the expansion of the universe seems to be accelerating. But beyond the science, it has also been a public-relations hit. Its beautiful images have introduced a generation to the wonders of astronomy. So in 2002, when the agency considered plans for a successor that would study the universe in infra-red, rather than visible light, would be ready to fly in 2010 and would cost just $2.5 billion, saying "yes" was easy. Nine years later, NASA is regretting that decision. The ]ames Webb space telescope (JwsT), as the new machine is called, is still in the workshop, and its launch date has been set back repeatedly (2018 is the latest official estimate). Its cost has gone up to $8.8 billion, a figure that, if history is any guide, could rise still further. Which would be embarrassing at the best of times, but with public-spending cuts looming and NASA's budget flat for the foreseeable future, it is causing real strains. In July, irritated by the JWST's rising costs, the House of Representatives tried to cut $1.9 billion from NASA's budget for next

12th 2011

What dinosaurs ate

The belly of the beast LAS VEGAS

A chance discovery from China suggests some dinosaurs lived in trees

l 'l THAT dinosaurs ate is, of course, a VV question as interesting and illuminating as what ate dinosaurs (see previous story). In the case of one particular dinosaur, Microraptor, the matter was addressed in a presentation to the annual meeting of the Society of Vertebrate Palaeontology by Jingmai O'Connor of the Institute of Vertebrate Palaeontology and Palaeoanthropology, in Beijing. Microraptor (see photograph) is one of many small, feathered dinosaurs found in what is now China that were alive during the Cretaceous period more than 66m years ago. Being feathered, it and its kind were cousins to birds. The actual split between the two groups, though, had happened much earlier, during the Jurassic period (the first known bird is Archaeopteryx, from1som years ago), and by the late Cretaceous there were many species of bird around. What Dr O'Connor and her colleagues have found is the remains of one of those birds, of an as-yet-unidentified species, in the stomach of a specimen of Microraptor. That is interesting. Discovering direct evidence of what a fossil animal ate, rather than having to infer it from details such as the shape of its teeth, is always valuable. But the find's true significance is a small detail of the prey's anatomy: the third toe of its foot. The size of the prey's third toe is important because, among birds, long third toes are helpful for grasping branches and perching in trees. Indeed, the trait is so useful for arboreal life that it is used by many avian palaeontologists to decide whether newly excavated species of fossil birds lived in trees or on the ground. And the last meal of this particular specimen of Microraptor did, indeed, have a long third toe. That elongated toe suggests to Dr O'Connor that Microraptor, too, was year, in an attempt to have the project cancelled. On November 1st, after lobbying from the telescope's defenders (particularly the American Astronomical Society), the Senate passed a bill that restored the telescope's funding. But it is not just politicians that are restive. Astronomers have long worried that the ballooning costs of the telescope would affect NASA's other science projects. Officially, the space agency will say only that other missions will be delayed, but there are fears that some could be cut completely. One potential sacrifice is

arboreal, and hints that its feathers may have helped it to move through an environment where hops, jumps and flaps between branches were a regular part of its daily activity. Whether the first birds evolved from arboreal or terrestrial ancestors is a matter of lively debate among palaeontologists. A fossil formed so long after birds emerged does not, in truth, shed much light on that debate. But it does suggest feathers may have helped promote life in the trees, even for creatures that could not actually fly. WFIRST, an infra-red space telescope intended for launch in 2020. This is designed to probe the nature of "dark energy", which is thought to be responsible for the quickening expansion of the universe that Hubble helped bring to the world's attention. A string of other, smaller projects could suffer as well. The telescope's advocates say junking it now would be a false economy. Most of the hardware has already been built, so cancelling it, they argue, would mean throwing all that away. And they play on fears that America is in danger of losing its ~~

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96 Science and technology ~ pre-eminence

in high-budget "big science", following the closure earlier this year of the Illinois-based Tevatron, the second-most-powerful particle accelerator in the world. The JWST, if it does eventually fly, would surely do some spectacular science. The size of its mirror-25 square metres, as against Hubble's 4-s-and the location of its orbit far from the reflected light of Earth will allow it to study some of the earliest (and therefore faintest) events in the universe, including the formation of the first galaxies. It will also help with the search for extrasolar planets. Hubble, of course, was also late-and around $2 billion over budget. It was lampooned after its launch when a wonky mirror meant that its images were blurred almost to the point of uselessness, and a mission by the Space Shuttle to fix the problem cost hundreds of millions of dollars. Given its subsequent record, few now begrudge the cost. With all that in mind, NASA will press on with the JWST, at least for now. All that remains for America's astronomers to do is pray that their favourite mission is not one of those delayed, or even cancelled, to keep the new telescope on track. • Asteroid 2005-YU55 AT 23:28 Greenwich Mean Time on November 8th an asteroid by the name of 2005-YU55 whizzed within 324,600km (201,700 miles) of Earth: an astronomical hair's breadth. 2005-YU55, which is 400 metres across, is a regular visitor to the Earth's neighbourhood, and this approach was its closest for 200 years. But have no fear, there is no risk of collision, at least for the next century or so (forecasting much beyond that is tricky). Instead, astronomers were delighted by the opportunity to peer at the thing. Radars scanned it (the image below is one result) and telescopes tracked its path. The next close encounter with an asteroid is not expected until2028, when a rock called 2001-WN5 will come nearer still.

The Economist November 12th 2011 The Rorschach test

A few blots in the copybook An old psychological test gets a revamp T SOUNDS like voodoo. But the RorIone's schach test, in which elements of somepersonality can be deduced, its pro-

Some Rorschach diagnoses do seem to stand up, though. People who report seeing representations of passivity or helplessness in the blots are thought to have a dependent personality, meaning they rely on others to satisfy their needs. Some of the studies Dr Meyer looked at did indeed find that people who produce such responses are more likely to request guidance in a classroom, ask an experimenter for help when solving puzzles, or hold on to a guide when they are blindfolded. And responses in which a viewer synthesises several elements in an inkblot to show

ponents claim, by his description of what he sees in a series of inkblots, has been used for 90 years, and is still going strong. The original test was devised by Hermann Rorschach, a Swiss psychiatrist, in 1921. It involved someone (usually a psychologist or psychiatrist) asking someone else to look at ten inkblot images. In each case, the interlocutor inquires of the viewer, "What might this be?", notes the response and attempts to draw conclusions. The question has always been, of course, how reliable the connection is between the response to the blots (generally, people, animals or objects) and the alleged diagnosis. Over the years, many experiments have been done to test the link. Now Gregory Meyer of the University of Toledo and his colleagues have reviewed the data. Their results, which form the basis of a new manual* on the topic, suggest the inkblot test does have real power. But Dr Meyer also rejects some of the traditional claims made on its behalf. Dr Meyer's study is areview of 1,292 papers that report experimental attempts to link Rorschach responses with personal- You see what?!! ity traits that have been established by other means. His main con- how they are interrelated do seem to be clusion is that some of the ways the test correlated with intellect; such responses has been used are, indeed, useless. He pro- are found most often in people who also poses, for example, axing the alleged con- score highly on an unrelated psychological nection between reporting mirrored im- assessment, the Wechsler Adult Intelliages in a blot and the viewer's level of gence Scale. egocentricity. He would also get rid of the Dr Meyer disposes, too, of one perenniidea that if a viewer focuses on the details al criticism of the Rorschach test-that it is of an image rather than the broader pic- culture-dependent. Studies in numerous ture, then he is likely to have an obsessive countries come to broadly the same conpersonality. A third traditional interpreta- clusions. A qualified thumbs-up, then, for tion that does not pass muster, in Dr Mey- inkblots. Perhaps the biggest threat to the er's view, is the suggestion that when a test is that no one uses fountain pens any viewer sees things in a blot that the exam- more, and so inkblots themselves have iner thinks do not resemble the blot, that more or less become things of the past. • indicates impaired perception, which can lead to a diagnosis of psychosis. Dr Meyer *"Rorschach Performance Assessment System ", by would not get rid of this altogether. But he Gregory Meyer, Donald Viglione, Joni Mihura, Robert Erard, Philip Erdberg and Fabiano Miguel. R-pas.org. $99 thinks the idea needs to be recalibrated.

97 Also in this section 98 Russia and the West 98 Jim Thompson in Asia 99 Jeffrey Sachs on America 99 Leonardo in London 100 American art in Arkansas

Prospero, our online blog on books, arts and culture, appears every day. For analysis and debate, visit Economist.comfculture

History of diplomacy

Dealing with the enemy George Kennan invented the American post-war policy of "containment" of the Soviet Union. His biography, 30 years in the making, fills in the detail HREE decades ago George KennanT former American ambassador to Moscow, multilingual diplomat and conceptualiser of "containment", the heart of his country's foreign policy towards the Soviet Union-agreed to allow an American cold-war historian, John Lewis Gaddis, to serve as his biographer. Kennan had decamped from public service to the Institute for Advanced Study in Princeton more than 20 years earlier and was already 78 years old. When he began giving Mr Gaddis interviews and stacks of personal papers in 1981, their understanding was that the biography would appear in the presumably not-too-distant future after the elder man's passing. Decades of interviews later, Mr Gaddis, who is now 70, had become accustomed to his students "speculating sombrely about which of us might go first". Even Kennan felt sorry for "poor John"; in 2003 he lamented the "serious burden" of his own "unnatural longevity". It was only in 2005, when death finally claimed Kennan at the age of 101, that Mr Gaddis could begin thinking about publishing this longawaited biography. The extraordinary length of the book's gestation meant that much changed between conception and publication. Had it appeared in the mid-198os, the context would have been cold-war stalemate; in the early 1990s, celebration; a decade ago in 2001, concern about terrorism. Because

George F. Kennan: An American Life. By John Lewis Gaddis. Penguin Press; 784 pages; $39.95 and £30

"George F. Kennan: An American Life" finally arrives in the uneasy year of 2011, its context is economic misery and questions about the future of American dominance in international affairs. Mr Gaddis is unequivocal on this topic. He told the New York Times in 2004 that "American imperial power. .. has been a remarkable force for good, for democracy, for prosperity." He has also expressed his admiration for the former presidents, Ronald Reagan and George Bush junior, and their versions of "grand strategy", a topic he now teaches at Yale University. All of these developments have naturally given rise to much speculation. Could Mr Gaddis, who admits that he speaks no foreign languages, get on top of the mountain of material and do credit to such an international polymath? Would his own views emerge along with Kennan's? The 784page answer to both these questions is yes. Mr Gaddis has mastered the sources that came his way over the decades. The resulting biography is engaging and lucid. The first half of the book almost has the sweep of a novel. Readers join Kennan in Germany as the Nazis rise; in Norway in 1931 as the awkward young man meets the parents of his fiancee, to whom he would

remain married for 73 years; in the Soviet Union in 1933 as he establishes the first American embassy; in Czechoslovakia as Adolf Hitler arrives and the world descends into another war; and back in Moscow again in 1945 when he receives skincrawling personal compliments from Joseph Stalin on his Russian language skills. The chapter detailing Kennan's breakthrough-achieved by redesigning American foreign policy at a stroke, via his 5,oooword "Long Telegram" from Moscow to Washington, DC, in 1946-is particularly gripping. As he himself put it: "My reputation was made. My voice now carried." Before this, Kennan was a promising young officer in the American foreign service; after it, he joined the top ranks of American strategists. His arguments convinced the Truman administration that efforts to continue wartime co-operation with Russia were fruitless. America should recognise the Soviet Union as a new kind of enemy, one seeking to destroy "our traditional way of life". Rather than fighting a conventional war, America would need to contain Soviet hostility firmly and consistently over the long term. As America resisted Moscow more and more, Kennan felt it was crucial that his country maintain the "health and vigour of our own society" and not become a garrison state. After the "Long Telegram", Kennan returned to Washington and founded the State Department's influential Policy Planning Staff. But, according to Mr Gaddis, his prestige had peaked by 1948. After that, Kennan became increasingly sidelined for opposing what he judged to be excessive militarisation of his containment strategy. Yet he continued to condemn overly militarised policies for the rest of his life. Kennan took particular offence at the attitude of the Reagan administration, which he viewed as "simply childish, in ex- ~~

The Economist November 12th 2011

98 Books and arts ~

cusably childish, unworthy of people charged with the responsibility for conducting the affairs of a great power in an endangered world." Nor did the end of the cold war change his mind. In 1992 Kennan made a point of stating that "nobody 'won' the cold war". It had been a long, costly tragedy, "fuelled on both sides by unreal and exaggerated estimates of the intentions and strength of the other side." Mr Gaddis disagrees. He closes his study by condemning Kennan for having "blinded" himself to the fact that, in Mr Gaddis's opinion, Reagan brought Kennan's "strategy to its successful conclusion". If Kennan were alive, he would probably still disagree, and not without reason. If the elder man's concern for the costs of bellicose foreign policy, rather than the younger man's enthusiasm for imperial exercise of American power, had dominated the last decade, it would have made for a sounder grand strategy. In ways that this biography seems not entirely to appreciate, Kennan's far-sighted opposition to American over-militarisation makes his personal career history less gripping than his legacy. • Russia and the West

Slip and slide Change or Decay: Russia's Dilemma and the West's Response. By Lilia Shevtsova and Andrew Wood. Brookings Institute Press; 260 pages; $49.95

HIS book, says Mikhail Gorbachev, the T former Soviet leader, in a foreword, "is different, and deserves to make an impact". The first is certainly true. It takes the form of a lengthy series of exchanges between two old friends: Lilia Shevtsova, a Russian who works for America's Carnegie Endowment in Moscow, and Sir Andrew Wood, a former British ambassador there. Their subject is the relationship between Russia and the West, still neurotic and plagued with misunderstandings 20 years after the Soviet collapse. Why do so many Russians feel threatened, betrayed and disappointed by the West? Some there see it as a flawed paradigm of human rights, free elections and the rule of law. Others find it a self-righteous bully. Ms Shevtsova politely bemoans a "failure of imagination" in the West. Too comfortable with the old bipolar world, it splurged cash when it should have imposed conditions, was stingy when it should have been generous and naive when it should have been tough. Tolerance for Boris Yeltsin's faults opened the way for the rigged elections and crony capitalism

Jim Thompson

Boat against the current The Ideal Man: The Tragedy of Jim Thompson and the American Way of War. By Joshua Kurlantzick. Wiley; 253 pages; $25.95 and £17.99

E WAS the Jay Gats by of Bangkok: rich, charming, glamorous and endlessly hospitable, but with something mysterious in his background. The mystery only deepened with his death. On Easter Sunday in 1967 Jim Thompson left the cottage where he was on holiday in the Cameron Highlands in Malaysia, apparently for an afternoon walk. He vanished. Despite a huge conventional search operation (followed by more exotic efforts involving psychics and a Gurkha parachuted into Cambodia), no trace was ever found of him. A library'sworth of conspiracy theories has never explained his disappearance. The secret in Thompson's background-and source of many of the conspiracy theories-was of the spooky variety. He was an agent for the oss, the precursor to the CIA, posted to SouthEast Asia at the end of the second world war. He befriended anti-colonial forces in Thailand, Cambodia, Laos and Vietnam. This was both a personal inclination and his mandate as a spy. The organisation, according to Richard Harris Smith, its biographer, had some "recurrent themes: democratic, social, progressive reform". Thompson felt betrayed by America's rejection of these ideals in favour of alliances with anti-communist forces, however corrupt and undemocratic. Joshua Kurlantzick, now at the Council on Foreign Relations, portrays him as on the losing side in a battle in post-war Washington, as McCarthyite frenzy turned American foreign policy into a "with-us-or-against-us" crusade against communism. As a result, in Indochina, and in Thailand itself, America usually found it was on the side of the bad guys. Complex nations were grotesquely simplified for the voters back home and the boys sent to fight abroad. President

H

of Vladimir Putin's ex-KGB regime. Her interlocutor's realism is an excellent foil for this idealistic approach. European and American leaders, he argues, were "stumbling about in the dark". For all their faults, it would have been unrealistic to expect much more of them. Mr Yeltsin's rule did not inevitably presage Mr Putin's. New failures come in for scrutiny too. America in 2009 "reset" relations with the

Kennedy deliberately mispronounced Laos as "Lay-os", lest Americans think he wanted to go to war with a small bug. After government service, Thompson built up the Thai silk business that bears his name and collected artefacts to adorn the Bangkok house which is still on the tourist itinerary. He became a fierce critic of America's policy in the region. This mattered since he was, in the 1960s, "the best-known private citizen in South-East Asia". The Kennedys, the Eisenhowers, Truman Capote, Somerset Maugham and "nearly every prominent royal or heiress in Europe"; they all came to dinner chez Jim when they graced Bangkok. Perhaps Thompson was subject to a contract killing by business rivals in Bangkok. He ended up betrayed both by his own country, America, from whose east coast upper classes he hailed and whose ideals he cherished, and by his adopted home, Thailand, to whose welfare and culture he had devoted himself. The book fails, though, to explain why Thompson was so fascinating. It tells of his talents, knowledge, contacts, wit and urbanity, but it does not convince. He remains an elusive, insubstantial figure, if a very sad one, summed up by a journalist who knew him:" At the end, these foreigners realise they have no home."

regime in Russia, bringing some gains but sacrificing (in the authors' eyes) Western moral credibility. They rightly decry the unhealthily close ties of some European politicians to their counterparts in Russia. The debate coins useful and vivid terms. Ms Shevtsova's description of the "imitation partnership" between Russia and the West is acute. So is Sir Andrew's description of the West as a simultaneous

~~

The Economist November 12th 2011 ~ magnet,

threat and rebuke to Russia. Herecasts the West's message to Russian oligarchs wanting to immigrate: "give me your rich, your sated, yearning to breathe safe." A sharp insight concerns asymmetry. Russian leaders obsessively search for slights, weaknesses and plots in the world outside. Traffic the other way is scant. Ms Shevtsova notes how few Russians realise that the world is "fed up with our problems". Both see bleak views ahead. Ms Shevtsova believes that the elite's misrule is demoralising society and could "bring Russia down in flames"; Sir Andrew says that the "smell of danger is in the air". Their joint conclusion likens Russia to a theatre: the play is over but the actors will not leave the stage and keep trying to win attention for what has become a plotless rigmarole; the audience feels trapped, bored and frustrated. Reading the book is like being an eavesdropper as two companions take a long country walk. They chew over great mutual concerns, sometimes with gentle teasing, mostly helping each other over intellectual obstacles, pondering the way ahead and the lessons of the path already taken. The effect is intimate but a touch claustrophobic. One begins to hunger for some other views, even if less elegantly and sympathetically expressed. •

Jeffrey Sachs on America

Homeward bound The Price of Civilisation: Reawakening American Virtue and Prosperity. By Jeffrey Sachs. Random House; 336 pages; $27. Published in Britain as 'The Price of Civilisation: Economics and Ethics after the Fall". Bodley Head; £20 EFFREY SACHS is an American economist best known for his prescriptions for economically diseased poor countries. The country he now considers most in need of his diagnostic gifts is his own. "Something has gone terribly wrong in the us economy, politics, and society in general," Mr Sachs writes in "The Price of Civilisation". American politicians are the stooges of corporations, he says. And American voters have been tranquillised into obesity by saturation advertising. Such sentiments would appear unremarkable if spouted by an Occupy Wall Street protester. But Mr Sachs, a professor at Columbia University, is a respected, mainstream macroeconomist. Mr Sachs catalogues the familiar problems that beset the American economy: unemployment stuck at 9%, an exploding budget

J

Books and arts 99 deficit, America ceding technological leadership to China, poorly educated American children. But this is not principally a work of economics. Mr Sachs blames America's problems on politics. In the 1960s, southerners began to desert the Democratic Party and Republicans began to build an insurmountable congressional barrier to more activist government, which Mr Sachs deeply regrets. He despises Barack Obama's Democratic Party almost as much as he does Ronald Reagan's Republicans: "On many days it seems that the only difference between the Republicans and Democrats is that Big Oil owns the Republicans while Wall Street owns the Democrats." He is particularly scathing of the "revolving door" between Mr Obama's administration and Wall Street. The convergence between the parties, says Mr Sachs, has led to policies that systematically favour capital over labour, keep tax rates low on footloose multinational corporations and starve government programmes that benefit the poor and the unemployed. This, he claims, flies in the face of popular will: he cites polls that find the majority of Americans favour more activist government and higher taxes on the rich. Mr Sachs's analysis can be doctrinaire and one-dimensional, but it is almost always grounded in solid economics. Capital, he argues, has prospered more than labour during the era of globalisation. And America's per head GDP is inflated by spending on an inefficient health-care system and the armed forces. Mr Sachs's prescriptions are also admirably precise: the federal government should spend an additional o.s% of GDP on worker training and the same again on early-childhood development; the top tax rate should be raised to 39.6%, which, neatly enough, he says, would raise the equivalent of o.s% of GDP. Mr Sachs's political analysis is less persuasive than his economics. Americans may tell pollsters they want the rich to pay more tax, but they would also prefer the government to cut spending rather than raise taxes. He vastly overstates the similarities between the Democratic and Republican Parties. On most issues they are growing apart, not closer together. He favours the creation of a third political party, "Alliance for the Radical Centre" to the left of the Democrats. This seems naive: a new party of the left, if it ever came into being, might split the Democratic vote and thus elect more Republicans. No matter. Mr Sachs places his hopes not in the ageing baby-boomers who hold power today but the "millennials", whom he says are more liberal, more tolerant and more ethnically diverse. They are the occupiers of Wall Street, full of passion but searching for an agenda. Mr Sachs's "The Price of Civilisation" would serve nicely. •

Leonardo in London

Deciphering the da Vinci code A new show offers a rare opportunity to compare Leonardo da Vinci's paintings

CIENTIST, engineer, musician and great artist, Leonardo da Vinci is the archeS typal Renaissance man. This undisputed genius, who lived to be 67, was also one of history's most accomplished underachievers. He started many projects he did not finish; he accepted commissions he never began; his many planned treatises remained just notes. Only 18 of his paintings survive. Half of them are included in a show that opened on November 9th at London's National Gallery; making this the most important da Vinci display ever. The artist was born near Florence in 1452 and went to Milan at the age of 30. Luke Syson, the show's curator, has come to believe that the freedom da Vinci enjoyed there as court painter to Ludovico Sforza, Duke of Milan, was the key that unlocked his genius. Mr Syson's contention that Leonardo's great breakthrough came in Milan and not later in Florence, as has generally been accepted until now, has captivated curators, collectors and museum directors who have been generous in loaning works to the show; from the Vatican, Prague, Cracow, Paris and the Royal Collection. All the pictures on show were painted during da Vinci's 18 years in Milan. Never has it been possible to see so many of da Vinci's paintings together. There are also some so drawings, including the monumental "Virgin and Child with Saint Anne and Saint John the Baptist" (sometimes called "The Burlington House Cartoon"). ~~

100 Books and arts ~

The one picture missing from this period is "The Last Supper", which is painted on a wall. This work, which is badly damaged, is represented here by a large photograph and a near-contemporary (though far inferior) copy. In pages from a notebook da Vinci's slanted "mirror" writing describes the guests at a dinner. With a novelist's interest in detail, he carefully observed the shrug of one man's shoulders, the position of another's hands, the scowl on one face and the frown on yet one more. The exhibition is arranged thematically; in addition to "Beauty and Love", there is also "Character and Emotion" and "Body and Soul". The visitor quickly comes face to face with the portrait of Cecilia Gallerani, also known as "The Lady with an Ermine" (pictured previous page). Although the image is familiar from reproductions, the radiance of the painting is surprising. Further along is an unfinished, yet searing, "Saint Jerome". For the first time, both versions of "The Virgin of the Rocks", one the National Gallery's own and the other belonging to the Louvre, are shown together. The two versions hang at opposite ends of the long exhibition space. The more one looks at the two pictures, the more visible are the differences between them; the strangely formed rocks in the Louvre's version create a protective atmosphere, whereas in the National Gallery's painting the rocks seem quite eerie, contributing to the overall sepulchral feel of the work. As a philosopher and scientist, da Vinci strove to understand what he observed in his close studies of nature. Art was an expression of his thoughts. "The Lady with an Ermine" shows the Duke of Milan's teenage mistress in a fashionable red gown, its slit sleeves revealing a pale underdress. Da Vinci, always fascinated by knots, carefully details the way the black ribbons are tied on Cecilia's left sleeve. Her right arm is in shadow. The ties on that sleeve are sketchy. The artist has taken into account his observation that visual acuity declines in the dark. The brain fills in necessary information. The sketchiness of the right sleeve helps bring the portrait to life, creating what Walter Pater, a 19th-century British essayist and art critic, described as a "reality which almost amounts to illusion". Da Vinci would sometimes spend years thinking about a single painting. Mr Syson hopes visitors to the National Gallery will, in turn, look long and hard at these works. Advance tickets for entry to the end of the year had sold out by the opening day. The show does not close until February sth 2012, but advance tickets for its final weeks are going fast. Meanwhile, the only way to get in now is to queue for one of the sao tickets being held back for sale each morning. The security checks are elaborate, but the wait is well worth it. •

The Economist November

12th 2011

American art museums

A hinterland beauty BENTONVILLE , ARKANSAS

Moshe Safdie and some intelligent curatorial work have produced a rural gem HE Ozarks are America's least appreT ciated mountain range. Lacking the majesty of the Rockies, the breadth of the Appalachians or the mournful grandeur of the Cascades, there they sit, somewhere in the middle of the country, south of the Midwest, north of the south, east of the mountainous west. They have long drawn fishermen and hikers; until now, however, art fanciers have had little reason to visit. That changes with the opening of the Crystal Bridges Museum of American Art on November nth. With12o acres (48.6 hectares) of forests and gardens and long hiking trails connecting it with downtown Bentonville, Crystal Bridges is not just in but also of the Ozarks. Its patron, Alice Walton, is the scion of the Ozarks' first family: her father, Sam Walton, opened a discount store called Wal-Mart in nearby Rogers, Arkansas, in 1962. Today Walmart (which officially went hyphenless in 2008) is America's largest private employer. The Walton Family Foundation gave the museum a $1.2 billion endowment and Ms Walton and the museum have been on something of a buying spree for several years. The museum is not simply Ms Walton's own private collection. Like Nancy Aldrich Rockefeller she has been the driving force behind its creation. Ms Walton has long spoken of wanting to bring art to a region that has little of it, and in that ambition she has without question succeeded. Though admission is free thanks to a $2om bequest, the

From Walmart to waLL art

museum sells membership; roughly 4,600 of the s,ooo memberships have been bought by Arkansans. Crystal Bridges takes its name from Crystal Spring, which flows on the grounds, and from the multiple bridges around which the museum is designed. The architect is Moshe Safdie, best known for his half-brutalist, half-playful Habitat 67 complex in Montreal. Crystal Bridges comprises several discrete but linked structures that meander around and above two spring-fed reflecting ponds, a design that Mr Safdie says is meant to echo the surrounding topography. Much of the museum's roofing is copper, which currently has the umbral hue of the foliage around it-the leaves dying in autumn, the copper brand newbut which will of course gradually darken, turning a deep rust red and then dark brown before taking on the familiar light green patina in years to come. And just as the buildings nestle into and hug their surroundings, with few right angles, so the roofs arch and swoop and fall, mimicking the region's mountains. Trees surround the museum; as they grow they will enshroud it with leaves in full summer and expose it in winter. Crystal Bridges does not look like a traditional]apanese structure, but something of the Japanese aestheticsimplicity and cleanness of design, reverence for nature, the impulse to build in harmony with rather than atop the natural world-pervades it. The museum's collection manages to be both thorough and surprising. Those who wish to see works by major American artists such as Winslow Homer, Thomas Hart Benton and Robert Rauschenberg will not be disappointed. But Don Bacigalupi, the museum director, says that in building a collection at this late date he looked at "identifying new scholarship and new research that led us toward artists and moments less well discovered". That has inspired a particularly strong focus on women in American art-as patrons, subjects and creators. Janet Sobel, who made drip paintings several years before Jackson Pollock, gets her due. Among the museum's first-rate collection of portraits, nothing exceeds Dennis Miller Bunker's sombre, haunting image of Anne Page (pictured left); and in its contemporary galleries Alison Elizabeth Taylor's marquetry "Room" is, like the museum itself, a chamber of wonders in an unexpected place.

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We promote democracy. ad ance development and celebrate dtverSit We are the Commonweal h -an association of S4 member coun nes who share he common values of peace, secunty and sustarnable developmen

Political Affairs Officer rng 111 e Democracy Section of our Polr al Affairs OiviSIOO. you will manage and coo1d•nate aa res to promo e democracy; partiCtpa e ·n electoo observaron a iVI •es· and provide advice and support to senior o ICers. Wi a degree ltl polr Kal science. m ernattOOal relat1ons or srmilar. you must ha~ sound exper eoce 111 he area o democratiC processes and t~ltutJons

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Economic Adviser Responstble for a tng forward e Sl-oe ana 's wor on ftnanctng for developmen issues tncluding sovere1gn deb • r form of he rn erna tonal aid archr ecture and 111nova rve mance I~ developmen also you will moor or and assess developmen s rn he glob.ll economy and con nbu e to G20 policy develapment It's a challengrng role demandrng a pos ·gradoa e degree wrth a s rong quantrtatrve or economic element and a mt of tlls rncludrng substan ral economiC analysts, advrce formulauon and finanong for de~lopmen experreoce gatned a semor managemen IMI Wlthrn a go~rnment. tO erna ronal financialrnstrtutton or research orgamsatton. The closrng date for applicatiOns o et her role is 14 December 2011. Bo posruons are based '" c n al London and all apphcants must be able to opera e effe wely n our mul•·cul ural se ung and be a na tonal o a Commonwealth country To apply, pease VlSt www.thecommonwealth .org

www.thecommonwea lth.org The Economist November 12th 2011

Appointments

103

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NATIONAL INSTITUTE OF FOOD TECHNOLOGY ENTREPRENEURSHIP AND MANAGEMENT (An Autonomous Organisation und r Ministry of Food Processing Industries, Government of India) 3rd Floor, AMDA Building, 716, Stri Institutional Area, August Kranti Marg, New Delhi-110049, India

NATIONAL INSTITUTE OF FOOD TECHNOLOGY ENTREPRENEURSHIP AND MANAGEMENT (NIFTEM) Is being H I up as an apex world class lnatltuta of global atandards In Food Science & Technology und r the gls of MOFPI.

NIFTEM MANDATE NIFTEM would work as- Sector Promotion Organisation/ Business Promotion Organisation of the food procnslng sector. MaJorobjecll es of NtFTEM are given as: I. Wor no as a - One Stop Solution Pro der to all the problems of the sector. 11 Working lor - Skill Development and Entrepreneurship Development lor the sector hi Facilitating bus ness Incubation SBIViCBS with Its ultra modem pilot plant lor processmg of trults and vegetables. dauy, meat and gramprocess tog lv. Conducttng Frontier Area Research lor development or the Sector. v Developing orld class managerial talent with advanced knowho in food science and technology. 111 Provid ng mtellectual bac tng lor reoulahons which wru govern food safety and qualrty and at the same time foster mnovalion. vii. Funct on no as a owledge repository on vartous

aspects of food processing such as product tnforma on, productton and processing techno ogy, market trends, safety and quality standards, management practJces among others. vth Wor1ang lor upgradabon of SME food processing clusters Promoting cooperation and networking among existing Ins Mlons wtthln lndla and as well as th International bod' s. The lnslitut• will commence its act Illes tram 2011-12. Applications are Invited I r t e post ot Ass stint Protusors from those 'II o are u~eptlonally bright and motivated 1111 an establ shed record of adependent h h -uallty research and committed to ttachlnoand resear~h~

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• AcademicFreedom tn pedagogy, Research and pubt ca11ons • SllbSlanbal SWt up GJant for starting Researob Projects • Uberal book grants to the lacutty to update lhelr knowledg • Exposure to the lnterna onal AcademiC Seminars and Cool rences • R irnbursemeotofmembershl)ll torProf lonalbodi • Rewards & Incentives tor pu icatkln of academic & n:h papers n reputed In rnatlonal joumal • career AdVancement Scheme (CAS) etc • Freedom to ta up Consuttancywor Otherbene ta nclude: • Accommodation- resider! ediCaf Coverage IS pes r • P«Mden Fund, Gmulty and P nSlOn benefi as per lUes, L Tra Concession, SabbatiC8lleave and otherlmes as per ru Transpon facility orfamthes/chi ren/PayPro tionetc For DetailS regarding eligibility, Required Areas or Specl3iilalion. JOb descrip on. pay sea • downloading of pphcatlon lo1111 and procedures etc., pi vistl our webs I~ n n m.ac.ln • Vfdaoconferent fAg option may be nlended tor IIY IW ng U d atH tro Outsldtlnd a.

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CENTRAL BANK OF NIGERIA VACANCY ANNOUNCEMENT EXTERNAL ADVERTISEMENT FOR SOME POSITIONS IN THE CENTRAL BANK OF NIGERIA The Cen ral Ban o Nigena !CBN), w1th Head Office '"AbuJa has as tts VISIOn "To be one o the mos efftcten and effec ive of the world 's central ban s tn promo mg and sus aintng econom1c developmen " In furtherance of he VISton, he Central Ban ts see tng quahfted. s tiled and htghly motrv ed individuals to f1ll venous postttons tn he Econom•c Policy Team • Head Macro-Prud nttal Analysts • Santor Economists • Pnnctpal Economts s The tdeal cand1date for these pos1 iOns mus be Ntgenan nat•onals wtth establtshed trac records m academ•a. Banking or Consultmg tn the relevan tndus ry For detads of reqUirements or each posltlon and o pply, VIS www.cbn.gov.ng/careers/jobs/ Thts JOb vacancy closes on Tuesday, 6th December, 2011 a 5.00 pm e Cen ral Ban tS an equal opportuntty employer. Ouahf1ed emale candidates are s rongly encouraged to apply

Sign ed :

Managem ent

The Economist November 12th 2011

104

Appointments

Call for Pre-Selection: Companies

Call for Pre-Selection: Consultants

The ~D fuocjecJ 111

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Travel VACANCY ANNOUNCEMENT HEAD OFTHE NATIONAL WINE AGENCY OF GEORGIA The Ministry of Agriculture of Georgia is announcing an opening for the position of the Head of the National Wine Agency. Hours: Full-time Location: Tbilisi, Georgia Salary: Commensurate with required experience and qualifications Responsibilities: Execute Georgian wine promotion strategic planning and budgeting processes; Supervise priority directions identification process for the industry; Lead the policy proposals and target programs development processes for the industry; Supervise the programs for the promotion of the Georgian wine on the export markets; Coordinating the investment projects support team; Supervise the capacity building programs for the wine specialists and industry players; Coordinate the information systems' development process for the industry; Lead the process of the value chain studies and market analyses development for the industry. Qualifications: Graduation degree ; At least five years experience in an executive management position; In particular experience with strategic management and thinking; Experience in facilitating formulation of development programs and projects; Experience in leading and managing complex tasks; Highly proficient in English (knowledge of the other languages is an asset); Team building and analytical skills.

WALDHAUS SILS a fa mily a ffair sine!! 1908

Taking history into the future 2011-2012 winter season: December 16 to April15 2012 summer season: June 14 to October 21 Sils· Maria • 6 miles from bustling St. Moritz: An unspoiled and peaceful alpine VIllage amidst gleaming lakes + impressive moun a1ns . And above it all this remarkable + historic hotel. family owned and managed ever since 11 opened in 1908. Grand , but friendly and relaxed: children very welcome! Great hiking, skiing and much else . Free pi ckup a St. Moritz train sta ion.

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If you meet the requirements, please send a cover letter and a detailed CV in English no later than November 30, 2011 5:00pm (GTM +4). Please ensure that you quote the position in the subject line and that CV includes names and contact details of 2 referees. Email: [email protected]

The Economist November 12th 2011

Tenders

Appointments

MM

STUDY TEAM FOR THE PAPUA NEW GUINEA DEPARTMENT OF EDUCATION

IF NOWLEOGE ISTHE CO MOM WEALTHOF HUMANKIIIO ... ~ ~ llrough educatoo IS at the ~ Commotlw ofl.eamfl (COl) This ergovemmentalageocywase1e byQxnl000'1118aln IQls ol ertvnelt 10 eraxrage ~ of ~n oo;J aoo cistance edoca oov.l!dge. reswces a"ld techooklges COl opEJafes oo the r-emise thai~ L'l 1o RlNdJallreedom aro 1o matard emoomt ~ Smce COl. began operaOOns 11 1!189 has cxWd Of el1harced tumos ot~ 119 prtwJams 11 more !han coonm has lfliue«:ed

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Readers are recommended to make appropriate enquiries and take appropriate advice before sending money, incurring any expense or entering into a binding commitment in relation to an advertisement. The Economist Newspa per Limited shall not be liable to any person for loss or damage incurred or suffered as a result of his/her accepting or offering to accept an invitation contained in any advertisement published in The Economist.

The Economist November 12th 2011

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To advertise within the classified section, contact: United Kingdom Martin Cheng- Tel: (44-20) 7576 8408 [email protected]

United States Beth Huber- Tel: (212) 541-0500 [email protected]

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Asia David E. Smith -Tel: (852) 2585 3232 [email protected]

106

Tenders AGJENCIA KOSOVARE E PRIVATIZIMIT KOSOVSKA AGENCIJA ZA PRIVATIZACIJU PRIVATISATION AGENCY OF KOSOVO

Moratorium Notice Pursuant to applicable laws of the Republic of Kosovo, and in accordance with article 50 of the Law On the Reorganization and Liquidation of Certain Enterprises and their Assets Law No 04/L-035 that entered into force on 26.10.2011 (the Law), with respect to the Decision of the Special Chamber of the Supreme Court of Kosovo, No. SCR-05-001 dated 09.03.2006, and the subsequent Decision of the Special Chamber of the Supreme of Kosovo, No. SCR-05-001-ROOS, R009 and R011, dated 19.05.2011, the Privatisation Agency of Kosovo (the Agency) publishes this notice in relation to Trepca Core Enterprises and Trepca Other Enterprise (see list below): A. Effective from 8th of November 2011 all actions, proceedings and acts of any kind aimed at determining the validity of, enforcing or satisfying any Claim or Interest with respect to the Enterprises mentioned in this notice, or their Assets, shall be suspended and shall only continue with the permission of the Special Chamber of Supreme Court of Kosovo on Privatisation Agency Related Matters (the Court) . B. Such suspended actions, proceedings and acts shall include, but not be limited to, any action, proceeding or decision, including any judicial action, proceeding or decision: 1) concerning the collection, recovery or enforcement of a claim for debts, taxes, penalties or obligations of any kind; 2) concerning the creation , recognition , modification, increase, perfection, registration or enforcement of any claim or Interest against or to the Enterprise or any Asset of the Enterprise; 3) any act to realize, seize, or sell any pledged or mortgaged or otherwise encumbered asset or to exercise ownership or control over any Asset of the Enterprise; and 4) regulatory proceedings or actions with regard to the prevention of or remedy for any violation of the regulatory provisions, rules or decision , to the extent that these involve monetary claims against the Enterprise. C. As of 8th of November 2011 , the Privatisation Agency of Kosovo shall serve as the Administrator of the Enterprises listed below. The Agency shall serve in that capacity throughout the reorganization process. D. In accordance with Article 17 of the Law, the Privatisation Agency of Kosovo will publish within the next three hundred and sixty (360) days another notice (the "Claims Deadline Notice") that will provide details on the method for filing Proofs of Claim and Proofs of Interest and establishing the deadline for the filing of such Proofs of Claim and Proofs of Interest. E. Only Registered Creditors, as determined in the Law shall be afforded an opportunity to vote on a Reorganization Plan for the Enterprise. F. The rights and interests of creditors are protected under Part IV of the Law. Article 17.2 of the Law contains the obligations of the Administrator to mail a copy of Claim Deadline Notice to any person who has previously informed the Agency or the Court in writing of a claim or an alleged interest against the Enterprises below or their assets . Article 17.10 of the Law provides for the obligation of the Administrator to notify the person who has submitted a proof of claim or a proof of interest, of any objection the Administrator has thereto within ninety (90) of such submission or such additional time as may be allowed by the Court. Pursuant to article 19 of the Law the Administrator shall set a date for the Initial Creditors Meeting that is no earlier than thirty (30) days and no later than ninety (90) days after the Claims Deadline. Upon a request by the Administrator, the Court may extend the time period for holding the Initial Creditor's

Meeting by thirty (30) additional days. Under article 20 of the Law a Creditors Committee shall be appointed by the Court during the Initial Creditors Meeting. The Creditors Committee shall be comprised of a group of Persons that may reasonably be regarded as representative of all creditors. The Creditors Committee shall include two (2) of the Employee Representatives and at least three (3) but not more than seven (7) of the other non-employee creditors who have timely filed Proofs of Claim with the Administrator on or before the Claims Deadline. Pursuant to Article 22 of the Law within nine (9) months after the date of publishing the Claims Deadline Notice, the Administrator shall prepare a proposed Reorganization Plan and shall submit such plan to the Creditors Committee. Within thirty (30) days after the submission of the Administrator's proposed Reorganization Plan, any Qualifying Creditor or Qualifying Group of Creditors that plans to prepare and submit an Alternative Reorganization Plan shall provide the Creditor's Committee, the Administrator and the Court with a "Notice of Intent to Submit an Alternative Reorganization Plan. For the full text of the Law please see: https://gazetazyrtare. rks-gov. net/Documents/Ligj i%20per%20 Riorganizimin%20e%20Ndermarrjeve%20te%20Caktuara%20 (anglisht).pdf List of enterprises subject to this Notice:

Trepca Core Enterprises consisting of: (a)SOE Mines and Flotation Stantrg/Stari trg (NSh Minierat dhe Flotacionet Stantrg -DP Rudnici i Flotacija Stari trg) Fi 690/89, (b) SOE Mines and Flotation, Kisnica and Novo Brdo, Pristina (NSh Minierat dhe Flotacionet Kishnica dhe Novo Berdo Pristina- DP Rudnici i Flotacija, Kisnica i Novobrdo Pristina), (c) SOE Trepca Mines and Flotation Kopaonik, Leposavic (NSh Minierat dhe Flotacionet Trepca Kopaonik, Leposavic - DP Trepca Rudnici i Flotacija Kopaonik, Leposavic) Fi 804/89, (d) SOE Lead Metallurgy, Zvecan (NSh Metalurgjia Plumbit Zvecan- DP Metalurgija Olova Zvecan) Fi 684/89, (e) SOE Zinc Metallurgy, Mitrovica (NSh Metalurgjia Zinkut, Mitrovice -DP Metalurgija Cinka, Mitrovica) Fi 983/90, (f) SOE Chemical Industry, Mitrovica (NSh Industria Kimike, Mitrovice-DP Hemijska lndustrija, Mitrovica), (g) SOE Trepca Battery Industry, Mitrovica (NSh Industria Akumulatoreve Trepca, Mitrovice- DP lndustrija Akumulatora Trepca, Mitrovice) Fi 697/89, (h) SOE Trailer Factory, Mitrovica (NSh Fabrika e Pajisjeve Perpunuese, Mitrovice - DP Fabrika Procesne Opreme, Mitrovica) Fi 683/89, (i) SOE Trepca Energy, Zvecan (NSh Trepca Energjitika, Zvecan - DP Trepca Energetika, Zvecan), (j) SOE Trepca Institute, Zvecan (NSh lntituti Trepca, Zvecan - DP Trepca lnstitut, Zvecan), (k) SOE Trepca Trans, Zvecan (NSh Trepca Trans, Zvecan -DP Trepca Trans, Zvecan), (I) SOE Electro- auditing Center, Mitrovice (NSh Qendra llogaritare, Mitrovice -DP Elektro Racunarksi Centar, Mitrovica), (m) SOE Trepca Komerc, Mitrovica (NSh Trepca Komerc, Mitrovice -DP Trepca Komerc, Mitrovica) Fi 669/89, (n) SOE Trepca Standard, Mitrovica (NSh Standard Trepca, Mitrovice -DP Trepca Standard , Mitrovica) Fi 666/89, (o) SOE Trepca Laboratory, Zvecan (NSh Laboratori Trepca, Zvecan-DP Trepca Laboratorija, Zvecan) Fi 762/89, (p) Trepca Health Medicine Institute, Zvecan (Mjekesia e Punes, Zvecan -Trepca Medicina Rada, Zvecan), (q) Trepca Bank, Financial Institutions, Zvecan (Banka Trepca, lnstitucion Financiar, Zvecan -Trepca Banka, Financijska lnstitucija, Zvecan) Fi 85/77 dhe Fi 705/89, (r) Assets Protection, Zvecan (Mbrojtja Prones, Zvecan - Zastita i osiguranje Zvecan) together with an entity referred to as "RMHK Trepca" (Kombinati Minearave, Metalurgjik, Kimik Trepca - Rudarsko Metalurski Kombinat Trepca) Fi 881/89, and Trepca Other Enterprises consisting of: (s) PTP Proleter, Leposaviq. Privatisation Agency of Kosovo, Legal Department, Tel: ++381-38-500-400 e-mail to [email protected], www.pak-ks.org

The Economist November 12th 2011

Tenders

107

BID NOTICE UNDER OPEN INTERNATIONAL BIDDING

Privatisation and Utility Sector Reform Programme Ministry of Finance Planning and Economic Development

Invitation for Bids Technical Advisory Services for the Concession of Assets of Kilembe Mines Limited (KML) Procurement Number: PUSRP/SRVCS/11/12-00024 1.

The Privatisation Unit (PU) of the Ministry of Finance, Planning and Economic Development is implementing a programme of Reform and Divestiture of the Public Enterprise Sector. The PU has allocated funds to be used for Technical Advisory Services for the Concession of Assets of Kilembe Mines Limited.

2.

The PU now invites sealed bids from eligible bidders for the provision of the services mentioned above.

3.

Bidding will be conducted in accordance with the open bidding procedures contained in the Government of Uganda's Public Procurement and Disposal of Public Assets Act, 2003 , and is open to all bidders from eligible countries.

4.

Interested eligible bidders may obtain further information from the Procurement office, PU and inspect the bidding documents at the address given below at 8(a) from 08.30 to 17.00 hours, Monday to Friday except public holidays

5.

A complete set of Bidding Documents in English may be purchased by interested bidders on the submission of a written application to the address below at 8(a) and upon payment of a non-refundable fee of USD 500 (United States Dollars Five Hundred Only) The method of payment will be cash to the PU Accounts office on 2nd Floor, Communications House. The bidders shall be issued with a copy of the document upon presentation of a receipt of payment.

6.

7.

There shall be a pre-bid meeting on the date indicated in the proposed procurement schedule below at 9. Bids clearly marked "Technical Advisory Services for the Concession of Assets of Kilembe Mines Limited - PUSRP/ SRVCS/11/12- 00024" must be delivered to the address below at 8(c) at or before 3.00 PM on 13th January, 2012. All bids must be accompanied by a bid security of UGX. 30,000,000.00 (Uganda Shillings Thirty Million Only) or US$ 10,000.00 (United States Dollars Ten Thousand Only). Late bids shall be rejected. Bids will be opened in the presence of the bidders' representatives, who choose to attend at the address below at 8(d) at 3.15 PM on 13th January, 2012

(a)

8.

Address documents may be inspected at: The Procurement Office, Privatisation Unit, 2nd Floor Communications House, Plot 1 Colville Street, P.O. Box 10944, Kampala, Uganda.

(b) Address documents will be issued from: The Security Registry, PU, 2nd Floor Communications House, Plot 1 Colville Street Kampala, Uganda. (c)

Address Bids must be delivered to: The Security Registry Privatization Unit (PU) 2nd Floor, Communications House. 1 Colville St. Kampala, Uganda. Tel: (256-414) 705600/1. Fax: (256-41) 342-403. E-mail: [email protected] Attention: The Director, Privatisation Unit.

(d) Address of Bid Opening: The PU Committee Room, 2nd Floor, Communications House. The planned procurement schedule (subject to change) is as follows:

9.

Activity a.

Publish bid notice

Date 8th November, 2011

b. Pre-bid Meeting

6th December, 2011 at 3:00pm

c. Bid Closing

13th January, 2012

d. Evaluation Process

16th Jan- 24th Feb, 2012

e.

Display & communication of best evaluated bidder notice

27th Feb- 15th March, 2012

f.

Contract Award & Signature

30th March, 2012 Director, Privatisation Unit

The Economist November 12th 2011

.

108

. . .

.

Economic data Current-account balance

Budget balance

Interest rates, %

latest 12 months, $bn

%of GOP 2011 t

%of GOP 2011 t

10-year gov't bonds, latest

-3.2 +3 .9 +2 .3 -1.9

-9.1 -1.8 -8.3 -8.8

%change on year ago

Gross domestic product _ _ _ _ _ _,la"' . te,s.,_ t _ _:gtr*

2011 t

United States China Japan Britain

+1.7 +9 .0 -0.5 +0.9

~~
+1.6 +9.1 -1.1 +0.5

03 03 02 03

___ ±?:£tg_ _

Euro area Austria Belgium France Germany Greece Italy Netherlands

+2.5 +9 .5 -2.1 +2.0

Industrial production latest +3.2 +13.2 -4.0 -0.7

Sep Oct

Sep Sep

Consumer rices Unemployment latest 2011 t rate*, % +3.9 +5.5 nil +5.2

Sep Oct

Sep Sep'

+3.1 +5 .4 nil +4.3

+9.0 +6.1 +4.1 +8.1

Oct

2010 Sep Augtt

-469.9 +303.2 +150.0 -40.9

02 02111 Sep 02

1.95 3.71 0.98 2.17

6.34 77.7 0.63

6.63 82.8 0.62

_:tL4_ .±.2.1. ___ ±.?:l ~!!.L _:!:.3.1. ~P_ _+b.9_ __+.z:u~ --- -2l~ ~ -- .:?:.2. ___ -.£Q_ __ xn ____ _l.Q.? ___ .l:.QQ. _

0.74 0.73 0.74 0.73 Oct 0.74 0.73 Oct 0.74 0.73 oct 0.74 0.73 Oct 0.74 0.73 Oct 0.74 0.73 Oct 0.74 0.73 ~~n____ ~ ]_tg_ _ _!Q,_6_ .±_0.:§. ___ ..:11._~_ .±_3_,.Q.QE! _ _+~0__ _!.2_b §2~ ---±<J~ ~g-- ~~ --- -,£; ~ -- .2·~ ---- _Q..?j ___ QJ~ Czech Republic +2.2 02 +0.3 +2 .0 +2 .5 Sep +1.8 Sep +1.9 +7 .9 Oct -7.102 -2 .9 -4.5 3.42 18.7 18.0 Denmark +1.8 02 +4.1 +1.4 -2.0 Sep +2.8 Oct +2.6 +4.2 Sep +21.5 Aug +5.4 -3.9 1.93 5.48 5.44 Hungary +1 .5 02 -0.2 +1 .4 +3 .0 Sep +3.6 Sep +3 .7 +10.8 Augtt +3.2 02 +0.7 +1.2 8.19 229 200 Norway -0.4 02 +1.5 +0.7 +4.2 Sep +1.4 Oct +1.4 +3.2 Aug'' +54.1 02 +12.9 +13.1 2.50 5.72 5.90 Poland +4.3 02 na +4.0 +7 .8 Sep +3.9 Sep +4.0 +11.8 Sepll -25.2 Aug -5 .6 -6.0 5.76 3.24 2.84 Russia +3.4 02 na +4.3 +3.9 Sep +7 .2 Oct +8.9 +6.0 Sepll +86.3 03 +4.9 -1.5 4.73 30.6 30.7 Sweden +4.9 02 +3 .6 +4.2 +4.8 Sep +2.9 Oct +2.8 +6.8 Sepll +35.0 02 +6.4 +0.2 1.62 6.67 6.78 Switzerland +2.3 02 +1.4 +1.9 +2.3 02 -0 .1 Nov +0 .5 +3 .0 Oct +86.1 02 +12.2 +0.8 0.84 0.91 0.97 Turkey +8 .8 02 na +5.6 +3.8 Aug +7.7 Oct +5 .9 +9 .l.J ulll -75 .1 Aug -10 .0 -1. ~ 9.60 1.79 1.42 Australia +1.4 02 +4.8 +2 .0 -3 .3 02 +3 .5 03 +3 .4 +5 .2 Oct -33.5 02 -2.2 -2.6 4.21 0.98 1.00 Hong Kong +5.1 02 -2.0 +5.8 +2.0 02 +5.8 Sep +5.0 +3.2 Septt +14.3 02 +4.2 +1.8 1.21 7.77 7.75 India +7.7 02 na +7.9 +4.1 Aug +10.1 Sep +6.8 +10.8 2010 -46.2 02 -3.7 -4.9 9.04 50.2 44.3 Indonesia +6.5 03 na +6.5 +3.9 Aug +4.4 oct +5.7 +6.8 Feb +3.6 03 +0.7 -1.2 3.91 ttt 8,890 8,890 Malaysia +4.0 02 na +4.5 +2 .5 Sep +3.4 Sep +3 .3 +3.1 Aug +30.3 02 +10.4 -5.6 2.85 ttt 3.12 3.09 Pakistan +2.4 2011.. na +2.4 +6 .8 Aug +10.5 Sep +12.1 +5.6 2010 -0.2 03 nil -5.9 13.13 ttt 86.3 85.4 Singapore +5.9 02 +1.3 +5 .0 +12 .8 Sep +5.5 Sep +4.6 +2 .0 03 +51.3 02 +17.7 +0.3 1.50 1.29 1.29 South Korea +3.4 03 +3 .0 +3.9 +6.8 Sep +3.9 Oct +4.4 +3.1 Oct +24.4 Sep +2.4 +1.5 3.75 1,117 1,110 Taiwan +3.4 03 nil +4.4 +1.6 Sep +1.2 Oct +1.6 +4 .3 Sep +38.3 02 +8.4 -2.7 1.34 30.1 30.2 Thailand +2.6 02 _:0.8 +2.5 -0.5 Sep +4.2 Oct +~2_ +0.4 Jun +15.8 Sep_ _ +4.1 -2. 'L _ 3.51 30.7 29.6 Argentina +9.1 02 +10.2 +8 .5 +4.3 Sep +9 .9 Sep• .. +9 .6 +7 .3 Q211 +1.1 02 -0.4 -1.4 na 4.26 3.96 Brazil +3.1 02 +3.1 +3.6 -1.6 Sep +7.3 Sep +6.5 +6.0 Sepll -48.0 Sep -2.2 -3.0 11.11 1.76 1.71 Chile +6.8 02 +5.7 +6.7 +5.2 Sep +3.7 Oct +3.3 +7 .4 Augttll +1.4 02 -0 .5 +0.6 2.38ttt 500 481 Colombia +5.1 02 +8.5 +5.0 +9.5 Aug +3.7 Sep +3.4 +9.7 Sepll -10.6 02 -2 .7 -3.5 3.63 ttt 1,922 1,861 Mexico +3.3 02 +4.5 +3.4 +3.1 Aug +3.2 Oct +3.5 +5.7 Sepll -8.9 02 -1.6 -2.5 6.01 13.5 12.3 ~~~e.!!t __ ±?,?_ tg_ __ .!:l_a_ _±2~ ___ ±} J._ Ji:!~_+J].J...QEt _ _±2§.:.4_ __+~~o~ ---+1.2~~ -- .±§,Q_ ___ -2., L_ __ _£.~ !.!!_ ___ .2·~ ----~ Egypt +0.3 02 na +0 .6 -1.8 02 +8.2 Sep +13.3 +11.8 02 11 -2.8 02 -3 .2 -9.7 6.36 ttt 5.97 5.75 Israel +3.5 02 +3 .5 +4.3 +2.6 Aug +2.9 Sep +3 .4 +5 .5 02 +2.5 02 +0 .4 -2.4 3.64 3.72 3.65 Saudi Arabia +6.7 2011 na +6.7 na +5.3 Sep +5.0 na +75.3 20tolll +25.5 +13.9 na 3.75 3.75 South Africa +3 .0 02 +1.3 +3 .1 +5 .6 Aug +5.7 Sep +5 .0 +25 .0 0311 -10.7 02 -4.1 -5 .2 7.74 8.02 6.90 +1.6 +3 .5 +1.9 +1.7 +2.8 -7.3 +0.8 +1.6

02 02 03 02 02 02 02 02

+0.6 +2.7 nil nil +0.5 na +1.2 +1.0

+1.6 +3 .0 +2.3 +1.6 +2.9 -7 .5 +0.6 +1.7

+5.3 Aug +5 .6 Aug +4.0 Jul +4.4 Aug +5.7 Sep -2 .1 Sep -2.7 Sep +1.5 Aug

+3.0 +3.8 +3.6 +2.3 +2.5 +3.0 +3.4 +2.6

Oct

Sep

+2.6 +3 .0 +3.3 +2.2 +2.4 +2 .9 +2.7 +2 .3

+10. 2 Sep +3 .9 Sep +6.7 Sepll +9.9 Sep +7.0 oct +16 .5 Jut +8.3 Sep +5.6 Septt

-85.6 +11.2 +7.0 -63.5 +193.7 -30.1 -81.9 +66.0

Aug 02 Jun Aug Sep Aug Aug 02

-0.6 +2 .9 +1.4 -2.5 +5.0 -9.6 -3.7 +7 .3

-4.0 -3 .6 -3.8 -5.8 -1.7 -9.1 -3.7 -3.8

1.73 3.04 4.37 3.19 1.73 27.95 7.51 2.17

*%change on previous quarter, annual rate. tThe Economist poll or Economist Intelligence Unit estimate/forecast. tNational definitions §RPI inflation rate 5.6 in September. **Year ending June. tt Latest 3 months II Not seasonally adjusted.

" Centred 3-month average. *'*Unofficial estimates are higher. ttt oollar-denominated bonds.

Ill Estimate.

The Economist November 12th 2011 Markets

United States (DJIA) China (SSEA) Japan (Nikkei 225) Britain (FTSE 100)

%chan~

Index Nov 9th 11,780.9 2,644.7 8,755.4 5.460.4

Dec 31st 2010 one in local in $ week currency terms -0.5 +1 .8 +1.8 +0.8 -10.1 -6.5 +1.3 -14.4 -10.7 -0.4 -7.5 -5.7

~'!!d.!.(~~rs.!J ___ ll..m J _ ~L _

...:.9.:£ _ -11&

Euroarea (FTSE Euro 100) 731.4 -1.6 -18.3 -17.2 Euroarea(DJSTOXX50) 2,249.4 -1.9 -19.5 -18.4 Austria (ATX) 1,923.2 -0.7 -33.8 -32.9 Belgium (Bel20) 2,077.2 +0.3 -19.4 -18.4 France (CAC40) 3,075.2 -1.1 -19.2 -18.2 Germany (DAX)* 5,829.5 -2.3 -15.7 -14.6 Greece (AthexComp) 767.1 +2.9 -45.7 -45.1 Italy (FTSE/MIB) 15,071.8 -1.3 -25.3 -24.3 Netherlands (AEX) 294.4 -1.3 -17.0 -15.9 Spain (Madrid SE) 835.6 -3.1 -16.8 -15.7 Czech Republic (PX) 904.2 -0.1 -26.2 -26.3 Denmark (OMXCB) 340.0 +3.8 -20.4 -19.3 Hungary (BUX) 16,195.6 -4.0 -24.1 -31.1 Norway (OSEAX) 436.9 +2.0 -10.2 -8.7 _!1lland (~~) ---- ~·~11 - ..:1..£.. _ :1.5.1 _-ll:§. Russia (RTS, $terms) 1,512.9 -0.9 -14.3 -14.5 Sweden (OMXS30) 946.7 -1.9 -18.1 -17.4 Switzerland (SMI) 5,607.9 -0.1 -12.9 -10.4 Turkey (ISE) 56,180.2 +0.8 -14.9 -27.0 Australia (AllOrd.) 4.406.2 +3.6 -9.1 -9.8 Hong Kong (Hang Sen g) 20,014.4 +1.4 -13.1 -13.1 India (BSE) 17,362.1 -0.6 -15.3 -24.6 Indonesia (JSX) 3,857.4 +2.5 +4.2 +5.6 Jia~~a_Q<~E.L ___ _1 .~~ - .±1l _ ...:.1.1 _ ~.Q Pakistan (KSE) 11,957.3 +1.8 -0.5 -1.3 Singapore (STI) 2,858. 7 +0.8 -10.4 -10.8 South Korea (KOSPI) 1,907.5 +0.5 -7.0 -5.5 Taiwan (TWI) 7,561.9 -0.5 -15.7 -18.2 Thailand (SET) 967.8 +0.2 -6.3 -8.0 Argentina (MERV) 2,676.4 -0.5 -24.0 -29.2 Brazil (BVSP) 57,549.7 +0.4 -17.0 -21.5 Chile (IGPA) 20,574.7 +0.3 -10.5 -16.2 Colombia (IGBC) 12,781.7 -1.9 -17.5 -17.6 Mexico (!PC) 36,553.9 +2.3 -5.2 -13.5 Venezuela (IBC) 110,876.7 +2 ..2_ +69. 7 n..2_ Egypt (Case30) 4.417.5 +0.6 -37.6 -39.3 Israel (TA-100) 994.2 -0.1 -18.9 -22.8 Saudi Arabia (Tadawul) 6,215.7* nil -6.1 -6.1 South Africa (JSEAS) _20017.0 -0.6 -0.3 -17.8

Economic and financial indicators 109

I

Global business barometer Global business sentiment is worse now than on the eve of the financial crisis in 2008, according to The Economist/FT survey of over 1,500 senior executives, conducted by the Economistlntelligence Unit. Just 14% of those polled expect business conditions to improve over the next six months. Overall confidence, measured as the balance of executives who think the global economy will improve against those who expect it to worsen, plunged from a bullish 19 percentage points in May to minus 39 in October. In September 2008 a similar survey put confidence at minus 37 points. On the topical question of the future of the euro zone, one in five businesspeople thinks the currency union will split.

Balance of respondents expecting global business conditions to improve, 2011, percentage points May

-

60

July 40

20

October - 0 + 20

40

Western Europe Latin America Overall* Asia Eastern Europe North America *Includes Middle East and Africa

Source: The Economist/FTsurvey

Other markets

The Economist commodity-price index

%change on Dec 31st 2010 Index one in local in$ Nov 9th week currency terms United States (S&P 500) 1,229.1 -0.7 -2.3 -2.3 United States (NAScomp) 2,621.7 -0.7 -1.2 -1.2 China (SSEB, $terms) 255.8 +0.1 -19.1 -15.9 Japan (Topix) 749.4 +1.5 -16.6 -13.0 !!!~~-m:_s!!!~~t_!OQ.l _ 2§~ - ~ ·i.. _ :l3.1 _·lE-~ World,dev'd (MSCI) 1,180.6 -0.7 -7 .8 -7.8 Emerging markets (MSCI) 980.0 +0.3 -14.9 -14.9 World, all (MSCI) 301.7 -0.6 -8.8 -8.8

2005=100

~~~~u~~~L - ~~- ~~ - ~.l - ~1 EMBI+ (JPMorgan) 600.5 +0.4 Hedge funds (HFRX) 1,124.7' +0.3 Volatility, US (VlX) 36.2 +32.7 CDSs, Eur (iTRAXX) t 183.0 +4.8 CDSs, NAm (CDX) t 129.5 +3.3 Carbon trading (EU ETS) € 9.9 +3 .9

+8.9 +8.9 -7.6 -7 .6 +17.8 (levels) +74.9 +77 .1 +52.1 +52.1 -30.2 -29.3

*Total return index. !Credit-default-swap spreads, basis points. *Nov 2nd. ' Nov 7th Sources: National statistics offices, central banks and stock excha nges; Bloomberg; CBOE; CBOT; CMIE; Cotlook; Darmenn & Curl; EEX; FT;HKMA; ICCO; !CO; ISO ; Jackson Rice; JPMorgan Chase; NZ WoolServices; Thompson Lloyd & Ewart; Thom son Reuters; Urner Barry;WSJ; WM/Reuters

Nov 1st

Nov 8th*

%change on one one month year

Dollar index __ _)!Eo£ _ _ .!?~3- _ _:+-Q} __ .:§.~ £212£ _ ___ _?2§:2._ _ _ lQ~8__ _:+-h_O__ ~-l Industrials All. . _167..0 16~ .9 -0 .8 .. . -1~-9 _.Nfa t 193_.5 1_8?._2_ . ... .~!i.-.8 ~.w-.o -14.9 Metals 155.6 157.8 +2.5 Sterling index All items 212.8 -2.8 -8.6 213.7 Euroindex All items 170.3 169.5 -1.1 -8.1 Gold 1 701.8 1 795.0 +7.9 +26.7 1 Reroz West Texas Intermediate +12 .9 +11.9 $ Eer barrel 91.4 96.9 ~l_i!er~s-

.....

*Provisional !Non-food agriculturals.

Indicators for more countries and additional series, go to: Economist.comfindicators

Philip Gould Lord Gould of Brookwood, architect of New Labour, died on November 7th, aged 61 HEN Philip Gould was fighting oeW sophageal cancer in the last three years of his life, he found different strategies to deal with it. One was to talk toother people, discussing how they coped with the pain, the fear and the night terrors. Another was to write about it in the Times, describing with searing frankness his morphine-induced hallucinations and the choking tubes in his throat. Another was to draw up a grid on which he recorded every pill he took and every session of chemotherapy. He called the cancer "Adolf", which made him a thin, grinning, untidy Churchill. A friend once asked him how his latest scan was looking. "OK", he replied, adding, as only an obsessive pollster could, "but all within the margin of error." Each of these tactics he had used before, but for a totally different purpose: to bring the Labour Party back to power in Britain after years in the post-war wilderness. In 1985 he started to talk to ordinary people about politics, discovering that many thought of Labour as "a shiver of fear in the night", a party of the shadows; and he kept checking the pulse of the country with focus groups ever afterwards, sometimes more than once a day. He wrote too-long memos that described in shocking detail what was wrong with the party and what was needed to put it right,

bouncing into Downing Street even in the years of triumph to keep the troops sharp and the "switchers" onside. And he ran five election campaigns by setting out for every day of the fight, on a grid in a "War Book", the issues to be raised and the ads to be aired, all with the aim of keeping Labour dominant for the rest of the 2oth century and well into the 21st. This was his life's work. He seemed to have been born Labour, believing unswervingly in compassion, community and the equal worth of all men, and born too "a nutcase" about politics, planning campaigns at the age of six. Very quickly he preferred canvassing round his native Waking to studying in school, but found he was not in easy territory. Labour's heartland lay in the industrial north; the lower middle-class workers of southern, suburban Waking did not see it as their party. The unions troubled them. Talk of nationalisation or unilateralism seemed crazy. They wanted to see hard work rewarded, and scroungers punished; they wanted to feel safe, but free of the nanny state. This new electorate, the voice of late 20th-century Britain, was expertly understood by Margaret Thatcher and her advisers. Mr Gould quickly determined that, though he would not be a politician-he was always a behind-the-scenes man, losing papers and

coats in the wings-he would remake the Labour Party for these people, who were just like him. He met brick walls. His degree came late, and his accounts were always precarious until he married, at 34, Gail Rebuck, soon head of Random House. From the moment he set up his political consultancy in a spare bedroom in 1985, Peter Mandelson (later Tony Blair's spin doctor) encouraged him, but few others did. Labour had reached its lowest post-war ebb in 1983, taking 28% of the vote. Though it now adopted Mr Gould's consumerfriendly slogans ("Putting People First") and his new red-rose logo, the old policies remained, and the party kept losing. In both 1987 and 1992 voters still distrusted Labour on taxes and feared "the loony left". Mr Gould could not get the notion of New Labour taken seriously until the rise of two politicians as hungry to modernise as he was, Gordon Brown and Tony Blair. He found Gordon warmer than Tony, whose intensity made him uneasy; but the eager new party leader connected with voters in a way that defied rational explanation. "How're we doing?" he would ask, constantly needing and relishing the Gould array of focus groups and non-stop polling. By 1994 this had become a formidable machine, honed by Mr Gould's observations of the Clinton campaign two years earlier. He learned then what a War Room was, as "raging" James Carville directed operations: each moment plotted, and every attack met with instant rebuttal. Mr Carville's war cry became his own: "Follow me if I advance, kill me if I retreat, avenge me if I die." Fired up to the point of thinking and loudly talking strategy morning, noon and night, he drove New Labour to win in 1997 by a landslide, and then to win twice more. A higher purpose Another man might have felt satisfied. He never was, and went on living the stressfilled adviser's life much longer than was good for him. He saw that New Labour's arc was over by 2010, and that yet another permutation of the party had to appear. During its hegemony, he thought, Labour had not really articulated what its core values were or what it was for. Too busy adjusting to what voters wanted, it had not governed with a sense of higher purpose. Interviewed near the end, in his sunny villa by Regent's Park, he felt he could apply some of those conclusions to himself. Wrapped up in dragging his party into the modern world, he had failed to measure fully the love of his wife and the forbearance of his family. He had also failed to grasp the larger point of his own life: not merely to take Labour from defeat to victory, but also to prove how powerful the human spirit could be, faced with death. •

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