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6 The world this week Leaders 9 Mitt Romney America's next CEO? 10 India's identity scheme The magic number 11 Executive pay Bosses under fire 11 Natural disasters The cost of catastrophes 12 Scotland's referendum Clarity, please On the cover Mitt Romney Looks Like winning the Republican nomination. His party could do worse: Leader, page 9. He is stiLL an enigma to Republican voters-and the rest, pages 24-26. South Carolina beckons, page 27. His career says a Lot about how American business has changed: Schumpeter, page68

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Volume 402 Number 8767 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, Beiji ng, Berli n, Brussels, Cairo, Chicago, Hong Ko ng, Jo han nes burg, Los Angeles, Mexico City, Moscow, New Delhi , New Yo rk, Paris, Sa n Francisco, Sao Pau lo, Si ngapore, Tokyo, Washington DC

Letters 14 On oil, the Republicans, the East India Company, suicide, Belgian beer, the rich Briefing 24 Mitt Romney Towards the coronation United States 27 New Hampshire's primary Mitt Romney marches on 28 The recovery and the election That 2004 feeling 29 Guantanamo No way out 29 Harsh Laws Another one in the net 30 Rebalancing America's forces Downgrading Europe 32 Lexington Obama and Iran The Americas 35 Brazil's trade policy See king protection 36 Iran and Latin America Brothers in arms? 37 Colombia's former para militaries Criminals with attitude 37 Lima's metro The train leaves at last

Asia 39 India's UID scheme Reform by numbers 40 Malaysian politics The end of Sodomy 2.0 41 Chinese air pollution Clearing the air? 41 Abductions in Sri Lanka Murky business 42 Australia's aborigines Occupied land 43 Banyan Letthem eat yellowcake Middle East and Africa 44 Nigeria Aspreading insurgency 45 South Africa Disappointment 46 Israeli politics Shaking the kaleidoscope 46 Egypt's religions Nervous Christians 46 Rwandan history Shifting the blame 47 Tunisia Ideology v practicality 47 Syria and Russia Wait and sea Europe 49 Europe's economies Afalse dawn? 50 Germany and the euro Unhappy new year 50 French tourism Boney-park 51 Greek woes The Mediterranean blues 52 Albanians in Greece Heading home again 53 Charlemagne Denmark and the EU Britain 54 Scotland's referendum If at first you don't succeed 55 Executive pay Money for nothing? 56 Terrorists and historians Deathly archive 56 No-frills hotels Room without a view 57 Bagehot Edonomics

India How an ID scheme could help India's poorest peopleand serve as a model for other countries leader, page 10. Opposition to the scheme, page 39

Executive pay Britain is a case study in how politicians miss the point when they try to "fix" executive pay: leader, page 11. Bosses' pay levels are driven by globalisation . Moves to link pay and performance need to recognise this, page 55

Scotland's independence The referendum should ask one question: in or out? Leader, page 12. Wrangling over the terms of the vote, page 54

~~

Contents continues overleaf

4 Contents

The Economist January 14th 2012

International 58 Video and human rights Visibility before all 59 Baby names Thanks, mum

Kodak and Fuji Why is Kodak at death's door while Fujifilm , its old rival, is thriving? Page 63

Natural disasters The rising cost of catastrophes, and how to limitthedamagetheydo : leader, page 11; briefing, pages 60-62

Briefing 60 Natural disasters Counting the cost of calamities Business 63 Technological change The last Kodak moment? 66 Carrefour Bread, cheese, new boss? 66 Golden parachutes Rip-cord economics 67 Brands in China Fakes lose favour 68 Schumpeter Romney the revolutionary

69 70 71 71 72 72 73 74

China's property market The downturn will benefit stateowned developers, page 69

Finance and economics China's property market Marriages and mergers Buttonwood The euro's descent European bank capital By hook or by crook Reviewing the crisis The Lo down After Hildebrand Damage control Taxing golf Putters aflutter Japan's trade balance Seeing red Free exchange The politics of economics

Sdence and technology 76 Military technology Magic bullets 77 Mathematical ecology Spot check 77 Leap seconds Their time has come 78 Bed bugs A new debugger

Books and arts 79 The haj on show Journey of faith 80 El sistema in Venezuela Music man 81 Prosecuting al-Qaeda Atricky business Business books quarterly 82 Setting a price on the future The mathematics of markets 83 Wall Street analysis Mike Mayo's memoir 83 Global marketing Local heroes 84 World changers Headbanging 84 Job interviews Application 92 Economic and finandal indicators Statistics on 42 economies, plus a closer look at our Big Mac index Obituary 94 Ronald Searle How to be Toppin Art

Next week We publish a spedal report on state capitalism. The crisis of Western liberal capitalism has coindded with the rise of a powerful new form of state capitalism in emerging markets, says Adrian Wooldridge Pri ndpal commercial offices: 25 StJames's St reet, London SW1A 1H G Tel: 020 7830 1000 Boulevard des Tranchees 16 1206 Ge neva, Switzerland Tel: 41 22 566 2470 750 3rd Ave nu e, 5th Floo r, New York, NY 10017 Tel: 1212 5410500 60/ FCentral Plaza 18 Harbour Road, Wanchai, Hong Kon g Tel: 85 2 2585 3888 Other commercial offices: Chicago, Dubai , Frankfurt, Los Angeles, Paris, San Fran cisco and Singapore

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6

Politics

A row broke out between Pakistan's military leaders and its government after Yo usaf Raza Gilani, the prime minister, criticised the army chief of staff for participating in a public judicial inquiry. The military responded with a strongly worded statement warning of "serious ramifications". Mr Gilani also sacked his defence secretary. Meanwhile, America resumed drone missile strikes on Pal
A court acquitted Anwar Ibrahim, the leader of Malaysia's main opposition party, of sodomy charges (homosexuality is still illegal in Malaysia). The trial had dragged on for two years and was seen by many as an attempt by the government to discredit Mr Anwar, who was cleared by the supreme court of similar charges in a previous case. Myanmar set the date of April 1st for by-elections in the lower house of parliament. Aung San

Suu Kyi, whose National League for Democracy party boycotted the 2010 general election, will contest a seat from a constituency near Yangon. The number of seats being contested in the byelections will not pose a threat to the government's dominance of parliament. Walking it As expected, Mitt Romney won the New Hampshire primary by a huge margin, leaving the other Republican presidential candidates in his wake. Rick Santorum, who did well in Iowa, placed a lowly fifth. Jon Huntsman, who had pinned all his hopes on a good showing, came third. William Daley stepped down as Barack Obama's chief of staff, after just a year in the job. Mr Daley's appointment was broadly welcomed at the time as a positive move that would help repair the White House's strained relations with business (Mr Daley is a former commerce secretary), but he struggled amid last year's rancour over the budget. Mr Obama's new chief of staff is Jacob Lew, his budget director. Living in violent times Against the backdrop of an increase in sectarian strife, strikes and disturbances spread across Nigeria as people protested against a cut in fuel subsidies that, since the new year, has doubled the cost of petrol. South Africa's ruling African National Congress celebrated its 10oth anniversary with a jamboree on January 9th in Bloemfontein, where it was founded.

In his third televised address since protests began in Syria in March, President Bashar Assad blamed the unrest on foreign powers trying to de stabilise the country and vowed to crush "terrorists", whom he blamed for two recent suicidebombs in Damascus. Over 100 people were killed in a spate of bombings across Iraq. Many of the attacks were

aimed at Shia Muslims. One killed 48 on a pilgrimage to the holy city of Karbala. The attacks raised fears of a new wave of sectarian violence following the withdrawal of all American troops at the end of last year. As tension rose between Iran and Western governments trying to stop its nuclear programme, an Iranian scientist who worked at a uraniumenrichment plant was killed by a car-bomb in Tehran. It was the fourth such attack since 2010. Iran blamed foreign governments, but America condemned the bomb attack, and said it "had absolutely nothing to do" with it.

Iran's president, Mahmoud Ahmadinejad, visited Venezuela, Nicaragua, Cuba and Ecuador in his fifth Latin American trip since 2005. On the eve of his arrival the United States expelled Venezuela's consul in Miami, who was alleged in a television programme to have joined Iranian diplomats and Mexican hackers in a cyber-plot against America. Venezuela called the allegations "lies".

Daniel Ortega was sworn in for a third term of doubtful constitutionality as Nicaragua's president in a ceremony attended by other Central American presidents but boycotted by the country's opposition. Contrary to their initial diagnosis, doctors who performed an operation on Argentina's president, Cristina Fernandez, to remove her thyroid gland said that she did not have cancer. She is expected to return to work soon.

Warning signs General Ilker Bas bug, a former chief of staff in Turkey, was arrested in Istanbul on suspicion of coup-plotting. A few days later Turkish prosecutors opened an investigation into statements made by Kemal Kilicdaroglu, leader of the main opposition party. Amid growing concern over authoritarianism in Turkey, the Council of Europe, a human-rights watchdog, said the country's judicial system failed to safeguard the rights of defendants.

Mario Monti, Italy's prime minister, said that his government's reform efforts needed to be matched by measures from the European Union and Germany, such as a lowering of interest rates. After meeting Mr Monti Angela Merkel hinted that Germany might be prepared to boost the eurozone bail-out fund. At the first of what will be many meetings between the pair this year, Angela Merkel and Nicolas Sarkozy said that the strategy of forcing austerity on euro-zone countries needed to be complemented by measures to boost growth. But they provided little detail. Mr Sarkozy called again for an EU agreement to impose a tax on financial transactions, which is opposed by Britain.

A war of words erupted between David Cameron, the British prime minister, and Alex Salmond (above), the first minister of Scotland. Mr Cameron said that Mr Salmond's plan to hold a referendum on Scottish independence should be held sooner rather than later, and that it should contain a simple in-orout question. Mr Salmond told him to butt out.

~~

The Economist January 14th 2012

Business Philipp Hildebrand resigned as chairman of the Swiss National Bank amid a political furore over currency trades carried out by his wife last summer, weeks before the central bank set a ceiling for the Swiss franc, and questions over whether he had prior knowledge of the transactions. It is thought that Mr Hildebrand's wife made a substantial profit from the franc's subsequent depreciation, but Mr Hilde brand insists that she had not been aware of the SNB's impending intervention in the currency market. Nomura's ambition to turn itself into a global player in investment banking suffered a setback when its most senior foreign banker stepped down. Jesse Bhattaljoined the Japanese broker after helping to negotiate the deal through which it bought Lehman Brothers' Asian businesses during the 2008 crash. Nomura has incurred hefty costs from incorporating the business. Its share price was the second-worst performer on the Nikkei index last year, after Tokyo Electric Power. Royal Bank of Scotland, which is still owned by the British taxpayer, confirmed it was cutting an extra 3,500 jobs in investment banking.

The world this week 7

quarter of the liquidity provided recently by the European Central Bank in the form of cheap loans. Looking better US employment Annual change, m

2007

08

09

10

11

Source: Bureau of labour Statistics

The unemployment rate in America fell again, to 8.5% in December. Last year American employers createdL6mjobs, the most since 2006 but a long way short of the 8.7m that were lost during the recession and after. Germany's G DP grew by 3% last year, according to a first estimate. But the economy may have contracted slightly in the fourth quarter. Chinese imports rose by 11.8% in December, compared with the same month in 2010, the slowest pace of growth in two years (though demand for copper, iron ore and other commodities remained strong in China's industrial factories).

China's trade surplus in 2011 fell to $158 billion, the smallest it has been since 2005.

whistle-blowing chief executive who was sacked for his efforts, is to sue the company.

More Rolls-Royce cars were sold in China last year than anywhere else, according to BMW, which owns the luxury carmaker. Rolls-Royce sold a record 3,538 vehicles worldwide, the most since 1978. Bentley, Aston Martin, Lamborghini and other upmarket carmakers have also reported a surge in sales in China.

Samsung said operating profit for the last quarter of 2011 would top $4.5 billion, the South Korean company's biggest quarterly profit to date, boosted in large part by its popular Galaxy smartphones. One casualty of Samsung's success appears to be HTC; the Taiwanese smartphone-maker reported its first slide in profit for two years.

Computing wares soft Infosys spooked investors by lowering its outlook for the year. The Indian IT-services giant, and an emerging-market bellwether, blamed uncertainty in Europe, its second-biggest market. Global spending on IT is expected to grow by 3.7% in 2012, according to Gartner, a consultancy, almost half the rate in 201L But in western Europe the market is set to decline by 0.7% this year.

Olympus commenced proceedings for damages against current and former directors whom it accuses of neglecting their duties in an accounting scandal. The Japanese company's biggest claim is against Tsuyoshi Kikukawa, who resigned as chairman in October. Michael Woodward, the

Bristol-Myers Squibb said it would buy Inhibitex for $2.5 billion, the second big takeover in under two months of a drugs company specialising in treatments for hepatitis C. Not so sweet Hostess Brands, the maker of Twinkies and assorted other goodies, filed for bankruptcy protection. The baking company cited the high costs associated with the pension and medical benefits it provides to its workers, 83% of whom are unionised. It wants the unions voluntarily to accept "dramatic change" to the agreements, or else it will ask for court permission to reject the deals. Other economic data and news can be found on pages 92-93

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Fitch said it would probably downgrade its A • credit rating on Italy's sovereign debt, and warned that the country "is the front-line" of the euro-zone crisis. The yields on Italian tenyear government bonds this week remained around 7%, which is thought to be unsustainable over the long term. Italy hopes to sell some €440 billion ($560 billion) in bonds and Treasury bills this year. The share price of UniCredit, Italy's biggest bank, fell further as it pushed ahead with a huge rights issue. European regulators want UniCredit to raise an additional €8 billion in capital by June. Italian banks have soaked up around a

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9

America's next CEO? Mitt Romney looks like winning the Republican nomination. The party could do worse HE Republican primaries T are meant to last six months, allowing all so states to have their say in the nomination of a candidate to take on Barack Obama in November. Amazingly, they may be all over only days after they started. On January 1oth, a week after his victory in conservative Iowa, Mitt Romney trounced his six opponents in liberal New Hampshire, winning nearly twice the share of his nearest rival (see page 27). The polls predict a victory for him in South Carolina on January 21st, and another in Florida on the 31st. Even if the race staggers on beyond that, he has raised as much money and built a bigger organisation than the rest of the Republican field combined. Barring an upset, Mr Romney is likely to win the nomination. The polls suggest that, should he do so, he has a real chance of ousting a president who has squandered much of his standing with the political centre. But he has a lot of work to do. At the moment many Americans find him a bit of an enigma: a flip-flapper on some big issues, wooden in public, and a committed member of one of the world's odder religions. None of that is entirely unfair, but it is exaggerated and incomplete (see pages 24-26). At his best, Mr Romney should be able to offer America a competent centre-right alternative to Mr Obama (and drag the latter back towards the ignored middle). But he must do a better job than he so far has of capitalising on his advantages and mitigating his weaknesses. Paint it grey Start with the advantages. The most important fact about Mr Romney is that he is a non-ideological man who did something that America needs a lot more of. In 2002 he was elected to govern Massachusetts, normally a Democratic stronghold. He passed a version of health-care reform that is at once his proudest achievement and his biggest liability. Back then a system based on obliging everyone to buy private health insurance was a conservative idea, and Mr Romney did a good job of working with a hostile legislature to get it passed. (Today, his party viscerally opposes Mr Obama's health reforms, which are closely modelled on Mr Romney's; such are the twists of politics.) He also turned round Massachusetts's finances, just as he had earlier righted the Salt Lake City Winter Olympics. Mr Romney needs to make these successes count for more than they have so far. Once the primaries are over, and America's independents rather than the Republican Party faithful become the electorate to win over, he may be able to. Second, Mr Romney has something that the president and his Republican rivals sorely lack: business experience. For 25 years he made himself and the management consultancies BCG and Bain a lot of money by making companies more efficient which, yes, sometimes means firing people, but also drives economic growth (see page 68). So far, Mr Romney has done a poor job of defending himself against attacks which are really aimed at the creative destruction which is the es-

sence of capitalism itself. He says he created a netwo,ooo jobs during his time at Bain. That figure is impossible to prove, but he could do more to argue that the benefits outweigh the costs. His task has not been helped by disgraceful attacks from fellow-Republicans on corporate restructuring. Third, Mr Romney seems sure-footed. It is hard to think of a single misstep in this campaign. He may be wooden, but no scandal has ever attached to him. His family life is impeccably monogamous and progenitive. Those who have worked closely with him tend to admire him. On both the economic and the foreign-policy sides, he has already put together impressive and above all sensibly moderate teams. The debit side of the ledger A useful list, to be sure: but can it outweigh the negatives? Mr Romney's pragmatism has an inconvenient flip side: no one is quite sure where he stands. The Republican base does not think he is reliable on such things as gay rights and abortion. That will not matter so much to independents (who will probably also accept that any Republican has to say a few mad things to win a nomination). But people have to trust a president on the main issues, and, despite publishing a long economic manifesto, Mr Romney remains vague over how a lot of it is to be accomplished. It is not at all clear how he would reform America's ruinously expensive health-care and pensions systems. His views on what he wants to do about America's 12m illegal immigrants are also unsettlingly gnomic. And where he has been clear, he has sometimes been wrong: his insistence that, on day one of his presidency, he will brand China as a currency manipulator represents dangerous pandering to populists. His pledge to cut federal spending to no more than 20% of G DP, a sop to his party's fiscal extremists, would also be dangerous if applied as quickly as he implies. Mr Romney will have other problems in wooing the electorate. He would be the richest candidate ever to win a bigparty nomination and he reeks of privilege. His father was a governor as well, and he himself studied law at Harvard. On the other hand, Mr Obama is a millionaire several times over, can give a fair impression of having come from the planet Vulcan, and also studied law at Harvard. Mr Romney's lack of charisma is a problem; but perhaps America wants fewer soaring speeches and more pragmatic restructuring plans. Mr Romney's last difficulty is one that should not be a problem at all. He is a Mormon and, despite Mormons' protestations to the contrary, a third of Americans do not consider them to be Christians. There is not much Mr Romney can do about this. He could explain the Mormons' extraordinary missionary work, but he can hardly risk saying that it is not really any more incredible that God communicated His plans to man in upstate New York in 1820 than He did in Palestine in OAD. We recall, however, that America was for decades "not ready" for a Catholic president, or for a black one. Eventually, Americans thought better of those attitudes. Prejudice would be a silly reason for the Republicans to reject a man who offers their best chance of beating Mr 0 bam a. •

10

Leaders

The Economist January 14th 2012

India's identity scheme

The magic number A huge identity scheme promises to help India's poor-and to serve as a model for other countries economy might be IpleNDIA'S thriving, but many of its peoare not. This week Manmohan Singh, the prime minister, said his compatriots should be ashamed that over two-fifths of their children are underfed. They should be outraged, too, at the infant mortality, illiteracy, lack of clean drinking water and countless other curses that afflict the poor. Poverty has many causes, and no simple cure. But one massive problem in India is that few poor people can prove who they are. They have no passport, no driving licence, no proof of address. They live in villages where multitudes share the same name. Their lack of an identity excludes them from the modern economy. They cannot open bank accounts, and no one would be so foolish as to lend them money. The government offers them all kinds of welfare, but because they lack an identity, they struggle to lay hands on what they have been promised. The state spends a fortune on subsidised grain for the hungry, but an estimated two-thirds of it is stolen or adulterated by middlemen. The government pays for an $8 billion-a-year make-work scheme for the rural poor, but much of the cash ends up in the capacious pockets of officials who invent imaginary "ghost workers". Suppose those thieving middlemen were obliged to deliver grain, not to poor people in general but to named individuals who could confirm receipt by scanning their fingerprints? And suppose those ghost workers had to undergo an iris scan before being paid? If poor Indians each had an identity number tied to unique biometric markers, it would be much harder for the powerful to rob them. Sceptics will scoff that the Indian government is far too incompetent to implement such a scheme. But the sceptics are wrong. ID-ing the benefits This month India's unique identity (um) scheme will enroll its 200 millionth member, having had almost none only a year ago (see page 39). By the end of this year, says Nandan Nilekani, a former software mogul who runs the project, the tally could stand at 400m, a third of all Indians. The scheme is voluntary, but the poor are visibly enthusiastic about it. Long lines wait patiently in the heat to have their fingerprints and irises scanned and entered into what has swiftly become the world's largest biometric database. For the poor, having a secure online identity alters their relationship with the modern world. No more queueing for hours in a distant town and bribing officials with money you don't have to obtain paperwork that won't be recognised if you move to another state looking for work. A pilot project just begun in]harkhand, an eastern state, will link the new identities to individuals' bank accounts. Those to whom the government owes money will soon be able to receive it electronically, either at a bank or at a village shop. Ghost labourers staffing public-works schemes, and any among India's 2om government employees, should turn into thin air. The middlemen

who steal billions should more easily be bypassed or caught. That is just the start. Armed with the system, India will be able to rethink the nature of its welfare state, cutting back on benefits in kind and market-distorting subsidies, and turning to cash transfers paid directly into the bank accounts of the neediest. Hundreds of millions of the poor must open bank accounts, which is all to the good, because it will bind them into the modern economy. Care must be taken so mothers rather than feckless fathers control funds for their children. But most poor people, including anyone who wants to move around, will be better off with cash welfare paid in full. Vouchers for medical or education spending could follow. Companies-and their customers-stand to gain from the system too. Mr Nilekani talks of India stealing a march on other countries if firms have an easy, secure way of identifying their customers. Banks will be more likely to lend money to people they can trace. Mobile-phone firms will extend credit. Insurers will offer lower rates, because they will know more about the person they are covering. Medical records will become portable, as will school records. Ordinary Indians will find it easier to buy and sell things online, as ordinary Chinese already do. Just as America's Global Positioning System, designed for aiming missiles, is now used by everyone for civilian navigation and online maps, so might um become the infrastructure for India's commercial services. They've got your number India's scheme holds three lessons for other countries. One is that designing such a scheme as a platform for government services, not security, keeps the costs down and boosts the benefits. Another is to use the private sector. From the start, Mr Nilekani harnessed the genius of Indians abroad, including a man who helped the New York Stock Exchange crunch its numbers and one of the brains behind Web MD, an American health IT firm. Both public and private actors (mostly tech firms that enroll participants and process data) are paid strictly by results. The cost of enrolling each person is a little over 100 rupees ($2). Many other poor countries could afford that. And the third is that, alas, even a brilliant idea has enemies. India's stubborn home minister, P. Chidambaram, is now blocking a cabinet decision to extend the um's mandate, which is needed for the roll-out to continue. Parliamentarians and activists have raised worries over India's lack of strong privacy and data-protection laws; they also complain about the weak legal basis for the scheme. These complaints have some validity, but not enough to derail the scheme. For instance, India plainly needs better dataprotection laws, but even if the existing rules remained unchanged, the threat to liberty would be dwarfed by the gains to welfare: to people who live ten to a room, concerns about privacy sound outlandish. Some of the resistance is principled, but much comes from the people who do well out of to day's filthy system. Indian politics hinge on patronage-the doling out of opportunities to rob one's countrymen. um would make this harder. That is why it faces such fierce opposition, and why it could transform India. •

The Economist January 14th 2012

Leaders 11

Executive pay

Bosses under fire Britain is a case study in how politicians miss the point when they try to "fix" executive pay HEN things went wrong for Middle Eastern tribes a ~ couple o f millennia ago, the ac15 A .s&P500 (US) cepted remedy was to send a ,./ ~ 10 sacrificial goat out into the wilderness to placate the gods. The ~ 5 practice continues today, but the 1998 2000 02 04 06 08 10 voters have replaced the gods, and highly paid businesspeople the goats. The growth of inequality all over the world encourages these rituals, and recent trends in remuneration certainly make bosses harder to sympathise with than goats. In Britain, where the latest bout of politicking about pay has broken out, chief executives can expect to receive average compensation in excess of £4.5m ($6.9m) this year. Pay at the top grew by over 300% between 1998 and 2010. At the same time, the median British worker's real wage has been pretty stagnant. These trends mean the ratio of executive to average pay at FTSE 100 firms jumped from 47 to 120 times in 12 years. This is feeding the view that there is something wrong with British capitalism. Britain's political parties, although deeply divided on most economic policy, are competing for a middle ground which demands action on pay. The prime minister, David Cameron, thinks there is a "market failure", and his coalition government wants to empower shareholders and staff to constrain pay at the top. Specific options include giving shareholders a binding veto on board pay, changing the make-up of pay committees and making compensation, including pay ratios, more transparent. This remedy will be about as effective as the goat. Bosses' pay has gone up not because corporate governance is failing but because of globalisation (see page 55). In the1970S the FTSE 100 was made up largely of parochial companies serving British customers. Now it is a global index of multinational com-

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Average CEO remuneration

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panies operating in many different industries and countries. FTSE bosses are picked from a glo hal pool. The skills they need, and the pay they receive, have changed. Nor is it clear that British shareholders are weak. British corporate-governance rules, which allow shareholders to sack board members, are envied in America. At private firms, where owners are more directly in control, top pay is less visible, but has risen at similar rates. FTSE 100 bosses are facing criticism not because their pay is the highest, but because it is the most transparent. Heads of legal and consultancy firms (which are not, by and large, public companies) are paid similar rates. British bosses are paid rather less than American ones and less too than the bosses of top European companies. The long and the short of it Giving more power to British shareholders is not a bad idea, but it will not make any difference. Getting and keeping a good boss matters more to a firm's owners than how much he or she is paid; and they invest internationally, so they know how much good bosses need to be paid. This looks more like a market rate than a market failure. Mr Cameron should have focused on the weakest part of British pay: its emphasis on short-term performance. Tying bonuses to next year's earnings encourages scrimping on investment to buy back shares. Return-on-equity targets (until recently favoured by British banks) reward leverage, prioritising risky over risk-adjusted returns. A greater share of total pay in Britain should be tied to a firm's long-term performance, as it is in America. But if that happens, executives' pay will probably go up further to compensate them for waiting for their cash. Inequality is undoubtedly a serious political issue in the West. But governments that try to deal with the problem by passing the buck to companies will at best fail, and at worst harm the economy. Better sacrifice a goat. •

Natural disasters

The rising cost of catastrophes How to limit the damage that natural disasters do OMMERCE has long been at C the mercy of the elements. The British East India Company was almost strangled at birth when it lost several of its ships in a storm. But the toll is rising. The world has been so preoccupied with the man-made catastrophes of subprime mortgages and sovereign debt that it may not have noticed how much economic mayhem nature has wreaked. With earthquakes in Japan and New Zealand, floods in Thailand and Australia and tornadoes in America, last year was the costliest on record for natural disasters.

This trend is not, as is often thought, a result of climate change. There is little evidence that big hurricanes come ashore any more often than, say, a century ago. But disasters now extract a far higher price, for the simple reason that the world's population and output are becoming concentrated in vulnerable cities near earthquake faults, on river deltas or along tropical coasts (see pages 6o-62). Those risks will rise as the wealth of Shanghai and Kolkata comes to rival that of London and New York. Meanwhile, interconnected supply chains guarantee that when one region is knocked out by an earthquake or flood, the reverberations are global. This may sound grim, but the truth is more encouraging. When poor people leave the countryside for shantytowns on ~~

12

Leaders

~ hillsides

or river banks they are exposed to mudslides and floods, but also have access to better-paying, more productive work. Richer societies may lose more property to disaster but they are also better able to protect their people. Indeed, although the economic toll from disasters has risen, the death toll has not, despite the world's growing population. Preparing for the worst The right role for government, then, is not to resist urbanisation but to minimise the consequences when disaster strikes. This means, first, getting priorities right. At present, too large a slice of disaster budgets goes on rescue and repair after a tragedy, and not enough on beefing up defences beforehand. Cyclone shelters are useless if they fall into disrepair. A World Bank study recommends using schools and other bits of normal public infrastructure in disaster-protection plans, so that the kit and buildings are properly maintained. Second, government should be fiercer when private individuals and firms, left to pursue their own self-interest, put all of society at risk. For example, in their quest for growth, developers and local governments have eradicated sand dunes,

The Economist January 14th 2012

mangrove swamps, reefs and flood plains that formed natural buffers between people and nature. Preserving or restoring more of this natural capital would make cities more resilient, much as increased financial capital does for the banking system. In the Netherlands dykes have been pushed out and flood plains restored to give rivers more room to flood. Third, governments must eliminate the perverse incentives their own policies produce. Politicians are often under pressure to limit the premiums insurance companies can charge. The result is to underprice the risk of living in dangerous areas-which is one reason that so many expensive homes await the next hurricane on Florida's coast. When governments rebuild homes repeatedly struck by floods and wildfires, they are subsidising people to live in hazardous places. For their part companies need to operate on the assumption that a disaster will strike at some point. This means preparing contingency plans, reinforcing supply chains and even, costly though this might be, having reserve suppliers lined up: there is no point in having a perfectly efficient supply chain if it can be snapped whenever nature takes a turn for the worst. Disasters are inevitable; their consequences need not be. •

Scotland's referendum

Clarity, please Scotland is to vote on independence. The referendum should ask one question: in or out? AFTER three hundred years of ..t"\.union, Scots are to be given the chance to vote for independence. The offer of a legallybinding referendum, probably in 2014, comes from David Cameron, who is not just prime minister of the United Kingdom but also leader of an outfit formally known as the Conservative and Unionist Party. It is more than a remarkable concession. Since the Scots may indeed plump for independence (see page 54), it is also quite a risk. Mr Cameron's move has not, however, been met with overwhelming gratitude in Scotland. Widely described as a "Westminster Eton toff" north of the border, he is suspected of setting a trap by trying to bounce Scotland into a vote on terms that would tip the balance in the union's favour. Mr Cameron wants a straight in-or-out question. Alex Salmond, Scotland's first minister and leader of the Scottish National Party (SNP), which dominates the legislature in Edinburgh, is not so sure. He has said he favours a simple question. But he also points out there is a powerful view in Scotland that the country ought to be given more powers, taking it just to the brink of independence-"devolution max", as it is known. Perhaps the referendum should reflect this view by offering three choices. Or perhaps two questions should be asked at the same time: whether Scotland should become independent, and whether it should acquire more powers. It is easy to see why the nationalists are keen to muddy the clear Scottish waters. Polls suggest that Scots are keener on more power than on outright independence. Give them three options, and the unionist vote could split, possibly producing a plurality for independence. Whatever the result of the vote,

Scotland would surely end up with more powers. The SNP would have delivered something to its nationalist supporters. But anything other than a straight in-or-out question may result in a damaging wrangle. What if, in a three-part question, independence wins-but with only 35% of the vote? What if 51% of Scots vote for independence, but, in a second question, 8o% vote for more powers? Nationalists would interpret that as a mandate for independence. But Westminster could fairly argue that Scots apparently prefer further devolution to outright independence. Scotch, neat, no ice A simple question also makes for straightforward campaigning. The Conservative, Labour and Liberal Democrat parties would have to explain why union is good for Scotland-something they have so far done poorly, which is one reason they are in headlong retreat north of the border. The SNP, for its part, would have to explain the problem to which independence is the solution-which they haven't done either. And if the Scots turn down independence, they can later be asked if they want more devolution. Mr Cameron's question, then, is the right one. And he should have a say on the referendum's terms. Divorces affect both partners. Scottish independence would have mighty consequences for Britain, raising questions from how to settle the two nations' fiscal accounts to where the Royal Navy's nuclear submarines should be parked, if not in Scotland's deep lochs. Canada has a sensible model for moving towards independence: its government has passed a law which sets various conditions on any future referendum on Quebec's independence, including that the question should be a clear one. If most Scots wish to leave Britain, so be it. But it must be a clean divorce, not a long, finger-pointing row that hurts everyone. •

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14

Oil and trouble SIR- Lexington's column on the "wretched Middle East" (Decembenoth) seemed to take comfort from the fact that America "no longer imports more than 10% of its oil from the Middle East" and that "America buys most of its oil elsewhere". Given the latest bit of brinkmanship between Iran and the West, a few points are in order. America has notably reduced its dependence on imports (net imports fell from 57% in 2008 to 45% in Nov ember 2011) and in addition significantly increased its domestic production (adding1.2m barrels per day between October 2008 and October 2011) with the help of independent producers and shale and other sources. So America is buying considerably less of its oil than it used to from unsavoury producers. However, petroleum imports from the Persian Gulf still account for almost15% of our total imports (1.8m bpd) and as you noted, oil is a "globally traded commodity", so ripples in Europe or Asia from interruptions in Iraqi, Egyptian, Libyan, or Iranian crude do ultimately lap our shore and dampen our market recovery. Europe gets around half its oil from the Middle East and the dependency ranges between 70-90% for Asia. America is fortunately more self-reliant in its energy portfolio, but given that 17m barrels of oil pass daily through the Strait of Hormuz on an average of 14 supertankers, Iran might not be as "contained" as some might think. FREDERICK LAWRENCE

Independent Petroleum Association of America Washington, DC Republican redux SIR- Your list of the

core beliefs that are required of any presidential candidate by Republican voters provided a useful, and scary, perspective on just how far right the party has drifted ("The right Republican", December 31st). But I was struck by the thought that, in a parallel universe, if the

Republicans nominated Barack Obama for president The Economist would throatily endorse him on the basis of his muscular, smart and collaborative foreign policy, his balanced approach to stimulus and deficit reduction, his emphasis on education and infrastructure, and his quiet moderation on social policies. By the way, you could have added to your list of Republican must-have beliefs a refusalto acknowledge the scientific validity of evolution. PETER GRUENSTEIN

operations with few communications would have been all but impossible. This suggests that instant communications and constant feedback do not necessarily create better management of multinational enterprises across different cultures. Nor do they help in developing expats or local managers to take risks, learn on the job, and gain maturity from experience. PROFESSORS . PRAKESH SETHI

Zicklin School of Business Baruch College New York

Anchorage, Alaska SIR- I found

it curious that your ideal Republican would have the silver tongue of Abraham Lincoln. I presume that you meant his speechwriting. According to first-hand accounts at the time, Lincoln's voice was "shaky", "squeaky", and "unpleasant". Back then, before the phonograph, political speeches were not recorded so the president did not need to have the same oratorical gifts as Barack Obama or Ronald Reagan. He was judged on his writings and, as it should be, on the quality of his ideas. EVAN ZIMMERMAN

Los Angeles Long before e-mail ... SIR- I enjoyed your piece on the British East India Company ("The company that ruled the waves", December 17th). One has to wonder how a private company could successfully manage such a large enterprise, and for such a long time, across the oceans when the only means of communication was quite often a letter by boat. An important explanation for this phenomenon was the "training" of the company's men, who were so well instilled in the traditions and values of the company, and of England, and reproduced identical progenies over suecessive generations. Thus, their superiors in England could confidently predict the actions their officers would take in India as if it were they who were making the decisions on site. Without such total acculturation, managing distant

Suicide in the military SIR- A reader cited a statistic that on average 18 American veteran servicemen commit suicide each day (Letters, December 31st). In their recent study on the issue of military suicides, Margaret Harrell and Nancy Berglass noted that this estimate came from the Department of Veteran's Affairs, yet the true number is unknown. This is an emotive subject. As far as serving military personnel are concerned research by Sandra Black and others showed that between 2001 and 2007 the rate of American military suicides was actually lower than that for civilians (though the military rate rose considerably in 2008 and 2009). ASH KALFAYAN

journalists merely through the political lens of "Brussels". J.J.F. TIMMERMAN

Brussels SIR- Your

otherwise enjoyable article was marred by irrelevant swipes at Belgium. You stated that Belgium is an "unremarkable country that has made little impact on the world". Yet Belgium launched the revolutions that led to Dutch independence, brought the industrial revolution to the European continent and prevented a German victory in the first world war by delaying the German advance into France, at great cost to Belgians. Belgium has a tradition of tolerance appreciated by refugees from Erasmus to Hugo to Marx. The first plastics came from Belgium, as did modern cosmology. And don't forget Tin tin and the Smurfs. Remarkable indeed, for a tiny country that has existed independently for only 150 years and serves as the capital of the union that has given Europe the longest period of peace and prosperity in its history. JAY MODRALL

Overijse, Belgium SIR -I completely disagree with your assertion that Belgian beer is best. I can't help moaning, I'm a bitter man. SIMON PAGE

Hong Kong

Renhold, Bedfordshire Those poor rich folk Belgian drinking habits -Your tale of the history of beer in Belgium did notrecount the most important factor behind the country's high consumption of the stuff ("Brewed force", December 17th). At the end of the 19th century, when alcoholism was rife during the industrial revolution, a law was passed making it illegal to sell spirits in quantities of less than two litres, which the working class could not afford and resulting in their conversion from genever (gin) to beer. The law was named after a Socialist. Concerning your remarks about "reviled Eurocrats", many Belgians resent their country being portrayed by sIR

SIR -The depiction of the rich on your weekly covers are very enlightening. They either appear to be cowering in a state of Blitz-era terror and deprivation (January 7th), or chased by savage hounds in fear of their lives (September 24th). I didn't realise quite the penitential grief it takes to pocket those bonuses. LUKE SMOLINSKI

Burgess Hill, West Sussex • Letters are welcome and should be addressed to the Editor at The Economist, 25 StJames's Street, London SWlA lHG E-mail: [email protected] Fax: 020 7839 4092 More letters are available at: Economist.comfletters

15

Executive Focus The Agency for the Cooperation of Energy Regulators, ACER, is a European Union •ger~cy centrJtl to the completior~ of the Intern•/ Energy H.1rket in g,1S and elect rlclty

GLOBAL DEVELOPMENT NETWORK President & Chief Executive Officer Established by the World Bank in 1999, the Global Development Network (GDN) is a leading international organization dedicated to enhancing the capacity of researchers in developing and transition countries to generate, distribute and apply high-quality, policy oriented research in the social sciences to support economic and social development. GDN seeks to build a critical mass of accomplished and renowned economists and social scientists in developing and transitional countries through partnerships with research institutes, academic institutions and think tanks; over 11,000 individual researchers; and international donor organizations and governments. GDN works in collaboration with a network of eleven regional partners. GDN is seeking a President & CEO to lead the delivery of its ambitious capacitybuilding programs and realize its Business Plan; be an advocate with key partners at the highest levels; and ensure that GDN is adequately resourced . Candidates will be effective leaders and accomplished senior executives with experience of running complex organizations. Reporting to the GDN Board of Directors, the President & CEO will have the executive capabilities, development research expertise, scholarly record and strategic mindset to lead GDN to its next level of achievement. Leading the staff of GDN 's global offices in Cairo, New Delhi and Washington DC, the President & CEO will be the voice and the intellectual inspiration of the organization, articulating its purpose and increasing its visibility. He/she will bring a profound understanding of the global development research capacity challenges and opportunities to make an impact. For further information and how to apply, please visit www.gdn.int/gdn.

Head of the Market Monitoring Department ( r ef: ACER/20 12/ 0 0la) The new EU Regula on on Energy Market lntegnty and Transparency, REMIT, gives the Ag ncy forth Coop ration or Energy Regul tors • ACER, a new and ch II n91ng rol in monitoring th whol ale en rvv tradi n g m arkets In the EU To fulfil thiS new role th AQency IS sett1n9 up dedtcated Department

Th H d of th Mark t Mo n itoring 0 partm nt of ACEA will: • lead, coordonate and manage the newly establtshed Market Monttonng Department whiCh will be responsible ror all acttvltles to be performed by ACER under REMIT; • controbute to th definoUon of the expected resul and milestone for the effecttve mplementatlon or th Regula oon . We are looking for cand id ates with : • a unrverstty educa ton In engineering, economiCS or equtval nt; • a least 10 years or professional expenence In the energy sector of wh ch a I t 5 ye rs spectftCally In the en f!IY trading, m rket supervision and/or monltoong, or enef!IY sector regulation The success ul candldat will be recruited n an EU T mporary Agent at AD 11 level for a period of 5 years whoch can be renewed The place of employment wtll be Ljubljana (Slovenia}, wher ACER ~ based All d ta•ls otbout the ro~ and ~ppllc;at10n proce CJtn be found on www.acer.europa.eu. CJosmg date for otpp/ICIJhons: Wednesday 29 I' bru ry 2012

I nterested In Join ng the REMIT team at ACER? Pleas c.h eck r gul rly on www.ace.r. uropa. u for more job opportun ltl •

The closing date for nominations and applications is 24th February 2012.

careers

edical Director Po tion at the Untted Naron

Do you have expert medical knowledge and excellent le dership kills? Are you motivated to make a differ nee in the world? The United Nat ions is looking for a dynamic and experienced Medical Director (D-2) and Deputy Directo r (D-1) for the Medical Services Division of the Department of Management, NewYork. The responsibilities of these leadership positions include: developing global medical policies across the United Nations and its Funds and Programmes; oversight of staff health facilities in peacekeeping missions worldwide; coordination of employee health promotion initiatives; and strategic leadership of the Medical Services Division in NewYork. Education : An advanced degree In medicine, preferably in internal medicine. Work experience: A minimum of fifteen years of progressively responsible, practical experience in clinical medicine as well as proven managerial skills in an international organization, hospital or occupational health facility. rom women are strongly

The Economist January 14th 2012

16

Executive Focus

IFC, a member of the World Bank Group, tS the lar est global de elq>ment institution focused on the priVate sector 10 developmg countnes We create opportun1t1es for people to escape poverty and mprove the1r ltves. We do so by proVK11ng llnanc1ng to h lp businesses employ more people and supply essential services, by mobillz~ng capital from rs, and by delivenng adv1say serviCeS to ensure sustainable development. IFC recenUy launched a Spectal lmtia!Jve to strengthen Its ablhty to contnbute to the development of nfrastructure n Sui),-Saharan Africa. The Initiative In lves building up specialized capac1ty 10 Public.,rivale Partnerships (PPPs}. 10 order to worx more closely th Governments. the World Bank and private nvestors with the overarchtng goal to 111Cfease the flow of bankable anfrastruc1ure pi'OJ8Cis IFC is seeking to recrUit

IFC's Partnership & Advisory Services Operabons Oepartment (CPA) supports IFC AdviSOry Services (AS) through streamlined operations, bm ty nd accurate analysis and reporbng, effecttve partnership development and lnctus!Ve leam•ng and outreach CUrrent IFC managed AS aMual expendrtures ar roughly $300 mill on end growrng funded by a combination of IFC's own funds. cit nt cootribu1100 and donor partners IFC lS recrurtrng a

• Senior!Principallnvestment Officers as PPP Specialists

• Manager, Partnership and Donor Relations

With a proven track record in origmabng structuring and closing complex

Based Washmgton. O.C Pos 1112551, {)ea(f/me Jan 31 , 2012.

transacllOIIS

He/she wrll proVIde lead rsll p and strategiC VISIOfl for collabOrallon with dooor partners. develop donor funding trateg1es and oversee the Implementation of work plans. Integral results measurement and kno ledge mana ment anto the Corporatr01fs approach to partnership development negobate and Implement partnership frame rk agreements. halse wrth counterparts at th World Bank, end ensure that IFC globally pre nts one face to partners. Csnd dates Will d monstrat extensive knowledge or the donor commumty, eir strateg•es, pnontles and structures excellent communication and lnfluencmg sl
PPP Power Specialist Based Oa 81. Nairobi or Washmgton. OC. Pos 1120024; Dead/me Feb 12, 2012. lead1ng nd develoPing power ~PPs, corporate and utlh!Jes} and reo able energy proJects across Sub-Saharan Africa

Agribusiness and Infrastructure Specialist Based Dakar. Nmrobl or Washington. O.C. Pos 1120022. Deadlme Feb 12. 2012. leading and developmg mfrastructure PPPs related to agnbusmess activities across Sub -Saharan Afnca

_ Mining and Infrastructure Specialist Ba ed Dakar. Nairobi or Washmgton. o.c. Pos # 720023; Dead/me Feb 12. 2012. leading and developmg opportunrtJes on mfrastructure PPPs related to mmeral resources exploltallon pro eels across Sub-Saharan Afnca

All posttions reqUire an advanc~ educatJonal background end outstanding technical II , as well as e llent client relabonsh•P and negohatron s lis A mrmmum or 8 years' expenence is requrred on the Senror and 10 years on the PnncipaJ end Manager level. IFC's working language Is English, candidates wrth additional language slulls have a compebtlve advantage

For full Job d saiptlons and to apply on-line please vis• IFC's career website at: www.itc.org/careers IFC offers rewan:ling ca rs In a glob I wor1t environment Women are strongly encouraged to apply.

With around 1200 people end on onnuol budget of (1 .4 btllion, the Information Sodety and Media Oiredorote- General is dnvrng forward the Oigrtol Agenda for Europe and promohng an open mt rnol mark I for communication networks and servrces In this ptvotal position, you will formulate the Oirectorote's strategy and polides, pion end execute the work programme and co-ordinate the adivifies of different units, whilst controlling signtficont budgets At the some trme, you wtll represent lhe European Comm1ss•on ot inter-tnshtutronal discuss•ons ond rn emotional forums, so you con exped on extremely high profile To take on this challenge, you should bring a very good understanding of informolton soetety policies, tn portrculor regarding eleclronic commvnrcalions, plus knowledge of EU gu1delines concerning the stngle merkel, EU2020, competition and consumer protechon A slrong agent of change, you will hove shown strong achievements os a Ieeder ond monag r, wtlh o proven record in poltcy formulation or regulatory

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careers

momtortng and enforcement at hrgh-level posrhons. Fmolly, you must be o Clhzen of a Member Stole wtth o degree level education and thorough knowledge of one of our officrol longuoges, plus a reasonable command of o second A full job description with the deta il ed eligibility and selectron criteria os well os application details con be found in Official Journal C 10 A of 12 Jo nvory, 2012 or on the EUROPA website: http .//ec.europo .eu/ dgs/ humon-resourcest worlong_semor_mgt_en.htm If you wont to apply, you must reg tster vio the Internet by gorng to the website; h1tps :1I ec .europe .eu/ dgs/ humon-resources/ senrormonog mentvoconcies/CV_En cad xt The closing dote for applications rs 9 February, 20 12. Online registration will not be possible after 12.00 noon Brussels t1mo.

http:/t.WM~M~.e(;.ewr.oga EUROPEAN COMMISSION

The Economist January 14th 2012

Executive Focus

The Economist January 14th 2012

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Executive Focus Executive Director- Aidspan Nairobi Circa S140,000 plus excellent benefits Aldspan Is an Independent watchdog of the Global Fund to F~ght AIDS. Tuberculom and Molano, and 1s publtsher of Global Fund Observer. read by nearly 10,000 health nd development pro ss•onals glob.llly. Atd pan alms to WOfk sa crit•c I fr nd of the Glob.ll Fund. undefl tng r search and factl1tallng dtscussoon. w1th a m1sslon to r •nforce and •mprove the effect1v n s of the Global Fund and Its grant lmpl ment rs worldw•d Aldspan has an annu I budget of c•ru S2m•lllon. Th founder o Aldsp n, Bernard Rivers. wtll hand over the Exe
Ide I candtd tes w II comb ne strength n developong VISJOI'I and strategy w•th an outstand•ng apt. tude for research/analys•s. They W111 be compelling communicators and experoenced managers of people and budgets A demonstrable comm. rn«~t to the work of the Global Fund Is essenttal, long w• h a track rKord of post!tve external relatiOnship manag ment.

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Leadership for Social Justice

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In ,,, 76th year of globolleodersh•p m ph.tonthropy, the Ford Foundo •on dynomK:, creot•ve one/ mnovo/IVe leoders to serve os ·~

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DIRECTOR, BLACK SEA ENERGY & ECONOMIC FORUM The Atlanttc Counctl seeks a Orrector for rts annual Black Sea Energy and Economrc Forum The Forum IS a bus1ness·led lnrtlallve that fosters cooperatron on energy trade and Integration across the greater Black Sea and Caspran regions Parttcipants mdude senror government offterais. corporate executrves, and leaders from other walks of life The Orrector wrll resrde rn Istanbul, Turkey and Will manage the Forums busmess development and implementation rn the regron Responsrbihties rnclude plannrng marketing, fundrarsing , and event management The successful candrdate Will be h1ghly entrepreneunal have a proven track record 1n fundra1stng, marketing and organiz1ng conferences, and be able to work effectrvely at senior levels Famrhanty w1th the Black Sea and Caspran regions and an abthty to speak Turkish and/or Russian w111 be Important assets Further 1nformat1on on the Atlantic Council, the Forum. and th1s posrtron IS avatlable at www acus org The All tiC Council Ollars com comperl$ai.IOI1 t ., 11 InClude com b.ued on lund r er lid app~ean· Should aenc:1 a cover lellet and resume 10 BSEEFOpo$1 100 acus org ApplicatiOns " be eo::cep:ed until the poSition IS lied The AtlantiC Counc•l•s an Equal ()pportun•ty Employe<

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The Economist January 14th 2012

19

Executive Focus

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The lnttr·Am riun Dev lopment Bank (I DB ). tht larg u and leading sourc.t or linanclnJ for r glonal development In l atin Amerka and the C•rlbbtan, Is se king high level professionals to work In our Compttltlv ness and Innovation (CTI) Division 11nd In the Education Division rtspe
Telecommunications L ad Specialist who wllllud proarams and Initiatives for the development and strtn&lhenlna of the tel communications sector. Its reculatory framework, and capacity building In support of reslonal member countries Th Specialist will des len and promote new ilpproaches .tnd Initiatives to foster access to brO.tdb nd communications In small and m dlum enter prius and will also s ek opportunities to lnttsrll telecommunlutlon Infrastructures In transporl. enersy and water oper~tlons.

Education Lead/ Sr. Specialist in Central Amenca who will be rtlponslble lor malntalnlns a continuous dlalosue, In the uslgned country .tnd reglon.tlly throughout C ntril Amtrlu. wllh tht education sector stakthold rs, In ordfl to procr~m new operations, lead high quality technical and llnanclaluslslance. t~tcutt projects efficiently and wuh hi&h lmpiCt, product htah qu•llty knowleds• products and disseminate the Bank's work. To read the complete job description and apply. pi au vt.slt our career site ww 1.1 t il n Deadline for appllutlons: January 2 th. 2012.

IDB

The IDB ts committed to gend r equality and encourases women to apply. We s k dlvenlty also In t rms of natlonallt;. tthnlclty. race, and educational b ckaround. Per1ons lfvlnc with dfliiblllty or HIV/AIOS ne equilly encour~ce<~ to apply.

The GAVI Alhance tS aleacfoog I)Jbbc-pm te pannershrp commrtttd o saving chrldren's frves and protecting people'~ health by tncre 1rng access to rnvnunrsatiOrl In pool countries. GAVI man ges a programme of more than US $4 billion and has ptQOe('t'ed rroova ~~~e frnanctng and performance based approaches to rntem ronal rd drvtlopm$l .

DEPUTY DIRECTOR, PROGRAMME FUNDING TEAM The GAV1 All ranee IS krng an based rn Gent!'lla, Swrtzertand

ceptronalrndrvrdual to fill th following positron

DEPUTY DIREcrOR. PROGRA MME FUNDING TEAM In thrs capacrty, you wrll be managrng key strategrc resource moblfrsatron prOJectS and <X>~Ioptng a best-practrce donor portfolio m gement to secure higher levels of fundrng fOf GAV1 from current and new donors You W111 have the opportunity to structure nd rrang new fundrng wlndOW5 lookmg t ways to wpport new vc1«rne development You wrll advrst and empower a team ol11 staff to build new publrc and private dooor relatronshtp nd play ll promotion I role 1n gentrllting new busrnesses. Thrs wrll involve coordrnatton wrth the lnnova1rv finance T am to manag rnarketrng of new schemes to donor countrres.. You wrll also le d the development of a donor portfolro management framework nsuring effec:trve rnstruments are In pla<e tom • forecast nd tra
The Economist January 14th

2012

~ Save the Children Save the Children International International Change Manager • £50,000 to £60,000 p.a. • london based with 60%- 75% world travel Save the Children is the world's leading independent organisation for children. Our vision is a world in which every child attains the right to survival, protection, development and participation. We work to inspire breakthroughs in the way the world treats children and to achieve immediate and lasting change in their lives. We are in the process of creating an exciting and innovative new international programming division, with scalable and empowered Country and Regional Offices worldwide as a keystone of our ambitious growth strategy, enabling us to have an even greater impact for children . Once complete, the organisation will have a budget in excess of US$1 billion and over 12,000 staff. We've already completed 10 countries and there's plenty more to go! A dynamic rapid scale-up of such magnitude needs experienced hands-on change managers with a successful track record gained ideally in merger, acquisitions, outsourcing or similar major organisational re-structuring initiatives . Results driven, you will be a creative problem solver, strategic thinker and incisive analyst. You will have the credibility and powers of persuasion to influence issues and people at all levels with tact and diplomacy. A highly motivated self-starter, you will set yourself ambitious goals and own the responsibility for achieving them. Collaborative by nature, you will be prepared to travel extensively worldwide, probably spending 60% to 75% of your time abroad . Experience of working internationally and strong language skills, especially in French and Spanish, though not essential, would be advantageous . For a copy of the full job description please email [email protected] CV and cover letter to be sent to SCIRecruitment@ savethechildren.org

Please quote ref: Econ01 Closing date: 6th February 2012 Registered char ity number 1076822

20

Executive Focus

Dtrector of Accounts Divl Jon (0·2) Do you h v excellent m nagem nt nd I d hi ill 1

Founded In 1996 Asia House. the only pan Asl n organballon In the U e 1sts to build dynamiC hnks wtth The v1 lmporunce of these lin s Is now I'll()( obvious them ever By prOVIdtng unique Ins ts Into busmes pol rultll'e and education Asia House promotes tnfom1ed understanding and the mutual~! ng of Ide . build ng stronger relatloo'lhlps between the diY

The United Nations Department of Management is looking for an energetic and experienced Director who will be responsible for establishing appropriate accounting policies and leading implementation of IPSAS in the UN.

As1a House Is a non- profit non polcUcal or anlsatlon It receives no support rom publ c: funds Its eographiC.ll rem~t rang s from Iran In the west to Japan In the east and from the central As an republics 111 the north to Indonesia In the south

Education: Master's degree or equivalent in finance, accounting, business administration or related area.

- Reporting to the Chilli"""· the Chief Exec:utJ" ...,, provide wateg leadership and day to-day mana nt of As a House. w th a strong emphaSis on the e ect I! flllllndal management of the bu!Jness An lmporunt and c.h I ng spea will be to seOJre the flnand I futll'e of

Wori< experience: At least fifteen years of progressively responsible experience in financial management, preferably in an international organization.

Provide high qwllty relationship managemen to Asla Houses corporate members Your Cred ntlals An experienced nd proven adef whose appointment In will m e a dear satemen of Intent for Asli House - Excellent commerCI I acumen and proven ablll y to sell an organ satJon t boMdlevel Credll* Asl n e ~lence and/or connection

c:ommun•Ues of Europe and ASia

The Opportunity

Asla House

Application from women are trongly encouraged.

To pply. pleas m II your full c:ar r d tails to Midi I Ferndale, at executiv harveynash com quot ng r f renee HN6626E. Harv y Nash Is a

global executive s arch consultancy C liS w. .. .,,...,..,,.,.,.. ...,.,...,

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Sec\6ltles CorTmssion Malaysia (SC) IS lool
c£90,000 Lond on or East Kilbrid The Department for International Development (DFID) is seeking a highly skilled leader for a critical senior role. Reporting to the Director-General, Polley and Global Programmes, the Director of International Finance Division leads financing, shareholder and policy relat1ons with the World Bank Group, IMF. regional development banks, global health and education funds and CDC. This post calls for in-depth knowledge of international finance concepts and the geo-political context of the multi-lateral system. Expert negotiation skills are also essential, together with a strong belief in our work and values. To find out more about this vacancy please visit our website www.dfid.gov.uk DFID 1s an equal opportunities employer and selection is on merit. Candidates should be UK nationals, nationals of a member sta e of the European Economic Area (EEA), Swiss or Turkish nationals or Commonwealth Citizens.

The pnva e penoon actrinistrator Wlft be responsble for ensomg the es lShment end operat 11011 of an icient adml tra !VB system lor the OYerall pliva e pension r.du5try 11'1 ~ ect as a central reposrtory of transacliOOS made by con butors to private pens100 schemes n the oounuy. As a resout:e and data centt& lor the prlva!e pension inOOstry, I will also play a key 1018 11'1 prov\d'flg end opiions on eclll'lg the Industry and l8tJtemEII'It pJamng Wrth at least 10 years of senior management expenence 11 pensiOfl or lund adm tratron, or 11'1 custodian, trustee or com nee buslne8s end operatiOOS, t Ctl!ef Exacuwe Officer wt be respociSible for putoog 1n plaQf tne

lion's management teem, estabish1og rts operations and sett.ng strategiC directJon.

l.lllc* yQI.Jf ieedet8hlp. the orgalliSatron Wll build confidence n the pnva e pension lld 11y by givll'lg oorrtributors a cooY!ll'\ient and · Wf1'l manage their perlSIOf1 se11emes You oontnbute to the dellelopmeot of Malaysia's pnvat pension lndustly, drawlrg upon your experienoe 'N8I1 as of seniOr contacts in the global nc7.Jslry. Reporll'1g to Board and the SC. you wtll repr the organ&ation to SCiniClf offcl 11 the government, members o irOJstry and the !)(de. l'helefore, you demonstrate bo strong COITW'f'W.JniCSIJon high analytical

Oosing date for applications: noon (GMT) on Friday 27 January 2012.

www.dfid.gov.uk IV

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be based In Kuala l.l.xnplx and be offered 8 ~ !VB salary wth

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The Economist January 14th 2012

21

Executive Focus The Geneva Association (The International Association for the Study of Insurance Economics)

Head of Institutional Relations l deng 1111 mabOnal msur nee lh•n tan The Geneva Assoaaoon. IS looktng tor a Head of tnstJt\lbOnal RelatiOns The successful candtdate Will lead the lnstJtutJonal RelatiOns Department a ey pillar of The Geneva AssoaatJon s evolvmg aetJv•ttes nd stronger outreach manda Slhe will report directly to the Secretary General and Managlllg D~rector The Assooaoon s woriCing nguage Is Engh h nd the rol 1 based 1n Ba I With COOSiderable mtemabOnal travel Definition of activity portfolio Lead and direct the outreach aetJvtiJe$ of The Geneva Assocla 10n .. Manage/oversee the ou ch and llaiSOO functiOns and their key actM round the workf ,. Develop pos ons lor outreach and ha•son wortc lor The Geneva AssoaatJon nd worlltng groups 1 member companl , Organtse and dran po5ltton papers for lnt mat10nal1ns tubOn lmteractJOn and Ill eract With The Geneva Assoaa on s research pillar .. Lead and develop the ey relations With ldenll•ed target orga sabons lntemauonally , Represent wond-leadtng tnsurers through The Geneva AsSOCiatiOn at selected events & mee ngs Qualifications of th cand date At least ten years of nstlluoons-relabon expenence 111 msurance!llnance ndlor haYing occupted a ruor posetJOn In the Insurance or Wider flflano I seMCeS Industry (ba tng . secunbes or related orgarusatJons) With strategiC outreach responSibth es Exc lent credenbals tnd hegher academtC educatiOn tn a relevant •eld lor the functiOn Ou tandeng It record tn organesmg and runntng tnstJtuliOnalrelatJOns ~ Very good orgamzaltonal wn ng tnterpersonal and communtcatJOns tis "' Enghsh mother-tongue or near-perfeCI knowledge of Enghsh o her languages a plus Sk1fled author of posrliOn papers "' Strong commitment to the ensurance Industry s role en the economy & soaety Readfness to travel lnternaUonally chleRy or ltBJSon purposes but also to attend conferences and mee ngs on behal of The Geneva Assoaaoon and make Y1 ts to member companres Plea send your subrntSSIOns to Patncra Lmstaedt a The Geneva AssoaallOn VIB posta mall or email o ap 0hcabons@genevaasS9da!lon O!Q To obtam the full jOb descnpoon. vtSJ our websl e qeaeyaaSSQC@l!On oro

www

The Tony Elumelu Foundation

iYMEli'IT OPPOfiTUN.ITY

TEF PubliC Sector Compe et~veness f ellow - SeniOr lnvestmen Adv1sor to the Nigerian Federal Mrn•s ry of Agricul

ure and Rural Development

lN! Tony Elu ' fouoo.t100 (Tf Is .m A fr~ and Af an.fundf'd no: or •mr 110n de le-lce In buSI
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www.coebank.org Estabhshed 1n 1956 under th supreme uthonty o f he Council of Europe. the CEB multt teral d lopment ban Wlth soc I voc 10n Based 10 Pans, 11 composes 0 M mber St To support Its mcreas1ng actiVIties the CEB 1 launching a C II for Interest

for •

Ombudsperson/Mediator

The selected nd1vld

I

e peeled to provide the following servtceS:

• Contnbute to Informal con fhct r solution by se rng fnendly settlements o the desputes refe!Ted to h1mlher • Act san Imp rti llntermedl ry betw n CEB s t aff member and th admintstratiOn of the B nl<. • Endeavour to facilitat e an agreement between t he t wo part•es using concih I ron or any othe r appropnate means and propose a fnendly sett lem nt to the person concerned • Present progress reports to the Gov rnor and prepare an annual report m king recommendations and suggesting amendments to the S t aff R gulatlons or their lmpl m nling rules . as w II as ch nges In dmimstrative practrces The Ombudsperson/Medtator shall p rlorm his/h r dulles rn a fully lnd pend nt m nner

n al Qu lific tions: In-depth expenence of matters concerntng the tnternat100al ciVIl service and. preferably, of m t ters concerning an International frnanciallnstl tullon. Excellent Interpersonal kill nd very good nalytical as well as wrl '"9 skll Ab4hty to work md pendently whll dealing wtth highly confidential matters 1 t reqwe the hlg t thlcal standard

Very good command or the Bank s two offiCial languages (EngliSh nd French)

Make a difference to millions

Political Affairs Officer Asia & Europe We promote democracy, advance development and celebrate divef'Si y. We are he associatiOn o 54 countries iMio share the common values of peace. se
For u er mformatiOO, please VISit www.thecommonwealth.org The clos•ng date ts Fnday, 17 February.

www.thecommonwealth .org The Economist January 14th 2012

22

Executive Focus

!i FINCA The Commonwealth Busmess Counc1l (CBC) 1s appo•nttng a Deputy Otrector General COO tn early 2012 o support the new Otrector General, Str Alan Con•ns, m he running of the Counc1l The CBC was formed n 1997 a the Edinburgh Commonwea h Heads of Government Meet1ng ICHOGM) and Is a Membersh•p-based organ~sat•on whose a•m ts to prov•de ~ d rsh•p •n •ncreas•ng n ernattonal trade •nd .nvestmen Aows, crea e n w business opportvm .es, promo e good governance and corpora e soc1c11 respons•b•ltty, reduce th dig1 at dtVtd and tn egra e developing countnes nto he global market I has becom a centre of e cellence tn th se areas, ell equipped to deliver cutt1ng ed e programmes to meet the Commonweal h's global agenda S•nce 1997, Commonwealth rade has tncreased rom USD2 trillion to USD4.5 trtlt•on and •nvestmen flows have reached over US018o b•llton The Deputy Otrector General w11t be respoM~ble for day to day opera lOlls and financtal con rot, wrth part.cular emphasts on mobthstng final'lcla resources rom the pnvate sector and government, membersh•p development ;md orgamsatton of the many con erences, events and programmes run by he Counetl Cand•dates w1R need considerable r lev m e•perience, preferably In the pnvete sector, and wilt need to demonstrate the abiltty to represen the 01rec or General a h1gh leveltn emauonal events and meet•ngs A htghly compet1 tVe remunerat•on package w1U be available for the nght cand1date. For further tnformauon or to apply please ematl ddgm [email protected], w• h a cover letter and fvll CV The closmg date or apphcat•ons IS 16 February 1ou.

Microfinance - Banking with a Soul FINCA's mission is to provide financial services to the world 's lowest-income entrepreneurs so they can create jobs, build assets, and improve their standard of living. As one of the world's leading microfinance institutions, FINCA provides financial services to nearly 1,000,000 clients through 21 subsidiaries in Africa, Eurasia, Latin America and the Greater Middle East. In order to sustain the dynamic growth of the current subsidiaries , and for future start-ups in new countries , FINCA International is looking for: TOP MANAGEMENT POSITIONS

-CEO, COO, CFOFoR ITS lATIN AMERICA AND AFRICA REGIONS

In this role, you will be responsible for leading hundreds of local employees in their effort to bring microfinance services to low-income people. Together with the Board of Directors, you will develop and implement a strategy that benefits local communities, and maximizes outreach under the condition of financial sustainability. If you have the required experience and language skills (English , Spanish or French) , we invite you to visit the Career section of our website http://www.finca.org and apply for the job of your interest. FINCA Interna tional Inc. is an Equal Opportunity Employer.

e

International Transport Forum

ii

OE
SECRETARY-GENERAL The International Transport Forum (ITF) is an intergovernmental organisation with 53 member countries. It serves as a research centre for the global transport community, conducts evidence-based research and produces policy recommendations. Every year it organises a global summit of transport ministers that has established itself as the leading platform for debate on the future of transport and as a key networking event. The ITF is hosted by the Organisation for Economic Co-operation and Development (OECD), based at its headquarters 10 Paris. The Secretary-General provides strategic leadership to the Forum and plays a key role in advandng the substantive work of the Organisation and its international presence. 5/he also plays an important role as an !nstitulfon-builder 10 a way that opens new horizons for the organisation and possesses a strong understanding of strategic global transport issues. We are looking for a dynamic, resourceful and team·orfented leader with broad international experience relevant to transport policy-making. As the Head of an experienced and highly professional management team (30 economists, statisticians, policy analysts and administrative staff), the Secretary-General will lead the further strategic development of the ITF and will report to the Board of International Transport Forum's member countries. Full d tails of the po !tlon are availabl at www.oecd.org/hrm/vac odes (reference 8053). Applkatlons from nationals of OECD and ITF m mber countries should be submitted online by 31January 2012.

DEPUTY MANAGING DIRECTOR THE INSTITUTE OF INTERNATIONAL FINANCE WASHINGTON, DC The Institute of International Finance is the world's largest global association of financial institutions. We currently seek a senior banking executive or regulatory official to develop and oversee initiatives to address regulatory policy issues of concern to the global financial services industry and to advise the Managing Director on key program and management issues. The person may also provide oversight to the Institute's global events and training programs and membership functions. The position reports directly to the Managing Director. Successful candidates will have extensive experience at the senior level managing banking and/or regulatory operations in a financial firm , regulatory body, or central bank; will be knowledgeable with international and US regulatory processes; will have a deep understanding of a broad range of financial instruments and their role in global finance; will have a strong command of the English language and exceptional analytical and writing skills; will have an advanced degree, be computer literate; and will be able to travel extensively.

For more information on the IIF please refer to our website at www.iif.com. Please email resume and cover letter with salary requirements to personnel@ iif.com. The Economist January 14th 2012

The cost of a free ride

The unretouched woman

Debate: The UK and the EU

Thrifty car dealers like to piggyback on the ample showrooms and well-trained staff of their higher quality rivals. This is a good thing for consumers as it keeps prices down. But it also has drawbacks, which are exacerbated by the rise of online sellers and price-comparison sites

Eve Arnold found her calling aged 38 when a boyfriend gave her a $40 Rolleiflex. By the time she died earlier this year, she had spent nearly 50 years telling stories with her camera. She could always capture something fresh, whether at a civil-rights rally orin Marilyn Monroe's face

Two British politicians discuss whether the country should leave the European Union . Daniel Hannan argues thatthe EU is falling behind in a competitive world; Douglas Alexander says Britain needs to be "in the room" when decisions on important matters are being made. Join the debate

Economist.comjnode/21542589

Economist.comjnode/21542635

Economist.comj debates

United States: Candidates v private equity

Asia: Big election in little China

Technology: Difference Engine

What Newt Gingrich's attacks on Mitt Romney mean for the conventions that govern primary races

Why election campaigning in small-town Taiwan, with its mixture of lion dances and triad connections, matters to the mainland

Economist.comjnode/21542623

Economist.comjnode/21542675

Civilian usage of pilotless planes has been slow to take off. What kind ofrules and regulations will have to be put in place before tiny robot drones can start flying around our neighbourhood airspace?

Africa: Masai chefs

Business: Running out of time

Economist.comjnode/21542636

Anew cooking school in Kenya is transforming Masai cuisine

Honda's new Accord Coupe could determine whether the Japanese carmaker can recover after a devastating year

Technology: Out offocus

Economist.comjnode/21542654

Economist.comjnode/21542596

In the 1990s our correspondent used the first commercially available digital camera: Kodak's DCS100, serial number 0000001

Business education: Samba management

Economist.comfnode/21542622

Brazil becomes a source of inspiration for Western business schools

Culture: Is "no choice" a good choice?

Middle East: Don't rip us off

Libyans are offering foreign businessmen a wary welcome Economist.comfnode/21542683

Economist.comjnode/21542317

London is seeing a new breed of restaurants in which the chef functions as auteur

Language: The dreaded comma splice

Economist.comjnode/21542555

Asia: Not yet risen

Ayear after the devastation of Christchurch, New Zealand's second city, its recovery has yettogetgoing

Should you join two clauses with a measly comma, oris this a style crime?

Economist.comjnode/21542674

Economist.comjnode/21542657

Links to all these stories can be found at Economist.comjnode/21542681

Towards the coronation DES MOINES AND WASHINGTON, DC

Victorious he may be, but Republicans-and others-still have many misgivings about Mitt Romney. Are these justified? N THE day of the Iowa caucuses, Janu0 ary 3rd, Mitt Romney held a final rally at a former Masonic lodge in downtown Des Moines. As usual, everything was meticulously choreographed. One aide continuously readjusted the ropes that separated the seating areas for press, public and the candidate's entourage; others signed up new arrivals to mailing lists; a third lot directed them to the least crowded areas of the meeting hall. As soon as "Born Free", his campaign song, began to thunder from the loudspeakers ("Wild like an untamed stallion-if you can't see my heart you must be blind") the candidate strode into the room, followed by a photogenic selection of family members and congressmen. He proceeded to deliver his standard stump speech, about Barack Obama's rejection of the American way, in contrast to his own embrace of it, both as a businessman and as governor of Massachusetts. That night, as the final results of the caucuses dribbled in, with Mr Romney and Rick Santorum, a former senator from Pennsylvania, virtually tied for first place, Mr Romney spoke again. It was difficult to

use either a speech of victory, or one of concession. So he ended up repeating the same speech he had given in the morning. There was no reference to the extraordinary turn events had since taken, bar a brief tribute to the other leading candidates. Not sure of the right tone to strike, or how things might pan out, Mr Romney decided to stick to a script he already knew. That decision is typical: Mr Romney, the opposite of the impulsive, uncontrollable stallion of his theme song, is unfailingly cautious, disciplined and well-prepared. Those qualities have brought him immense success as a businessman, and helped to advance his political career. They seem likely, now that he has also won New Hampshire (see page 27) to deliver him the Republican nod to take on Mr Obama later this year. But they are also at the heart of Republican primary voters' ambivalence about their presumed nominee. He is often seen as too studied and calculating, brimming with ambition but short of passion, instinct and conviction. As Frank Luntz, a Republican consultant, puts it, Mr Romney has all the qualities Republicans would

like in a president, but none of the attributes they are looking for in a candidate. No question hovers over Mr Romney's intelligence. He is articulate and knowledgeable, if wooden, on the stump. He seems widely read, alluding in his own writing to everything from the poetry of Tennyson to academic tracts on economic history. In his youth he won places at several of America's most respected universities, including Stanford and Harvard. He graduated with honours from Harvard Law School and in the top 5% of his class at Harvard Business School. As a businessman, Mr Romney was phenomenally successful. After a brief stint at Boston Consulting Group, he was poached by a rival consulting firm, Bain. His new boss later chose him-in part, apparently, for his thoroughness and caution-to set up a private-equity arm, Bain Capital. In his first round of investments at Bain Capital, Mr Romney turned $37m into over $2oom. He backed some enormously successful firms, such as Staples, an officesupply chain, and Domino's, a pizza-delivery service. So impressive was his performance that he was later called back to run Bain itself. Along the way, he made himself a fortune of $2oom or so. Mr Romney has also notched up impressive achievements in the public sector. He left Bain to run the Salt Lake City Winter Olympics, which were mired in scandal and behind schedule on fund-raising. He turned them into a great success, leav-

~~

The Economist January 14th 2012 ~

ing the budget in surplus. He then got himself elected governor of Massachusetts, campaigning in part on his prowess as a manager. In office he eliminated another big budget deficit while resisting the desire of the Democratic majority in the state legislature to raise income taxes. He also instigated an innovative scheme to ensure universal access to health care in the state. Throughout all this, Mr Romney has lived an apparently blameless personal life. He married his high-school sweetheart, Ann, in 1969, while they were both undergraduates. They have five sons and 16 grandchildren. Mr Romney reportedly declined to join colleagues at Bain investing in a small film studio, on the grounds that its output was not wholesome enough. When asked about his biggest failing during an unsuccessful run for the Senate in 1994, he lamented spending only one day a week helping the needy.

The Mormon factor Mr Romney is a devout churchgoer. He helped convert not only his wife, but also her mother and her two siblings, to Mormonism. As a young man he spent twoand-a-half years as a missionary in Europe. While making his millions at Bain he still found time to serve first as the head of his local congregation near Boston and then as the most senior representative of the Mormon church in the area. In keeping with his faith, he abstains from alcohol, tobacco, tea and coffee. But in Mr Romney's various political campaigns all these seeming virtues have been used against him. His piety, normally an asset in American politics, is more of a liability thanks to widespread misgivings about Mormonism, a faith shared by only 2% of the population. Several other Christian denominations have formally declared that Mormons are not Christian, despite the central role that Jesus plays in their beliefs, because of their 19th-century additions to the Bible and assorted doctrinal deviations. In a poll conducted in November by the Pew Centre on Religion and Public Life, only half of respondents considered Mormons to be Christians. Among evangelical Protestant Republicans, who make up a big share of voters in several states with early primaries (including South Carolina), the proportion fell to a third. Some 8% of all Republicans, and 15% of white evangelicals, said that Mr Romney's religion would make them less likely to vote for him. Many more, presumably, share that view but feel too embarrassed to admit it. However, only half of the voters Pew polled even realised that Mr Romney was a Mormon. When a Texan pastor publicly reiterated the Baptist teaching that Mormonism is a "cult" and a "false religion" in October, all the Republican presidential candidates lined up to denounce his

Briefing Mitt Romney 25

and talent, he argues, in part because it does not prevent unsuccessful firms from failing. Moreover, cuts can sometimes salvage a struggling enterprise, along with at least some jobs, he notes, whereas a refusal to contemplate them often dooms the entire firm, along with all its employees.

Converting Europe (right)

views. Steve Deace, a Christian radio host in Iowa, concedes that there may be some prejudice, but argues that Mr Romney's faith is the least of his problems among evangelicals. His perceived slipperiness and inconsistency as a candidate worry them much more. Moreover, in some early-voting states with lots of Mormons, such as Nevada and Arizona, Mr Romney's faith should actually help him. And in the general election his religion should be much less of handicap, since the population as a whole seems less bothered by it, and most evangelicals consider Mr Obama even more godless. Mr Romney's record as a businessman is also proving something of a doubleedged sword. He says he helped to create 10o,ooo jobs during his time at Bain, although the assertion has prompted questions about his accounting. He claims that this equips him to solve America's economic problems better than any of the other candidates, including Mr Obama. Not all of Bain Capital's investments prospered, however. The Wall Street Journal calculates that 22% of the firms in which Bain made big investments closed down or declared bankruptcy within eight years (Bain had severed ties with some of them by that point). And even those that stayed in business still sometimes sacked lots of workers. During all Mr Romney's campaigns for public office, his opponents have drummed up people who lost their jobs after Bain took over their employer. These unfortunates naturally denounce Mr Romney as a callous corporate raider with more concern for profits than people. Mr Romney's standard riposte is that business is inherently risky. He makes no bones about his enthusiasm for red-blooded American capitalism (see Schum peter). In "No Apology", a book-cum-manifesto he published in 2010, he devotes several pages to explaining and defending the concept of "creative destruction". America makes especially productive use of capital

Rich boy makes good All this is true, although not the sort of thing most political campaigns like to dwell on, especially with unemployment at 8.5%. What is more, Mr Romney is being disingenuous: not all the firms that foundered after Bain's involvement were simply down on their luclc Bain had saddled some of them with hefty debts, while profiting handsomely itself. Take Dade International, a maker of medical equipment, which a consortium including Bain bought in1994. Bain, which had invested $3om, extracted $242m from the firm in 1999 in the form of a share buy-back, financed by borrowing. Three years later Dade, crushed by its debts, declared bankruptcy. Not all its employees lost their jobsDade emerged from bankruptcy as a going concern. Mr Romney had left Bain to run the Salt Lake City Olympics shortly before the fateful buy-back took place. Moreover, ~~

I

The Romney prospectus What he plans to do right away if and when he gets to the White House

Five executive orders (with immediate effect)

0 Start to dismantle Obamacare by exempting states from as many of its requirements as

P.~~.~i.?.l~ .................... .......... .. ................. . f) .~~.~~~~~~~~. ?.i .l~.~ ~!!~ ~.~. P.~.r.~~~~ ... .. .. .......... .... .

0 Eliminate all Obama regulations "that unduly .b.u;~e~. t~e. ~C()~.o .mxo.r j()~ .c~~.a~()~.': ...... .

0 Eliminate all regulations that favour .?.r.~~~.i.~e~ .l~.~?.~.r......... ..... ....... ... .............. .

0 List China as a currency manipulator

Five bills (to be pushed through Congress)

0 .R.e~uce. t~~ .corp~ra.te. ~ n.c~~~:ta.x. ra.te.t~ .z~~·. f) Reinstate the president's power to fast-track

trade deals

o ·s·p~~d ·~j; ·[~~~i ~·9· i~ ·~ [[ ·~ ~~~; ~j;p·;~~~d ·i~·r· ····· .e.n~~gX .e~plora.?o.n

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

0 Return worker-retraining programmes to the states

0 Cut non-security discretionary spending by 5%, reducing the annual federal budget by $20bn

Further ambitions Block-grant Medicaid funds to the states and

.~~.P. ~.~~.~.~~ ~.~. ~~. ~.~~ .~~~~.~a.~~~ ............ ... ... Try to make Social Security (pensions) viable, including by raising the eligibility age

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

.Part~P~v.atis.e ~e.dic.a;~ .......................... . .. .E~P.~~d. ~~alt~ .~a.vi n.gs. ~~~o.u~ts.. .. . Repeal the Dodd-Frank .fi.n~~.c~~L.-.~e.Qu,~~~()~. L~~ .. .. ..... ..... ...... .. ... ... . Eliminate taxes on capital gains, interest and dividends for those earning less than $200,000 a year Source: Romney campaign

26 Briefing Mitt Romney ~ the vast majority ofBain's investments did

not yield such dire results for the companies involved. But such episodes nonetheless allow Mr Romney's rivals to undermine the main selling-point of his campaign: his record of creating jobs. The charge that Bain left misery in its wake is all the more awkward because Mr Romney had a privileged upbringing. His father, George Romney, was a rich, albeit self-made, car executive. He left business to become governor of Michigan, ran unsuccessfully for president and ultimately joined the cabinet of Richard Nixon as secretary of housing and urban development. As a result, the younger Mr Romney lived in a grand neighbourhood, attended a private school and moved in exalted circles. He compounded his inherited wealth while at Bain. In election documents last year he estimated his net worth at somewhere between $8sm and $264m-a range his campaign subsequently narrowed to $190m-250m. But he has placed most of his fortune in blind trusts, and has been careful not to flaunt his wealth. He sold a ski chalet in Utah and an expensive house outside Boston before the campaign got under way (that still leaves him with a beachfront property in California, a lake-front one in New Hampshire and a relatively modest terrace house near Boston). Unlike many presidential candidates, he refuses to release his tax returns. America has plenty of millionaire politicians. Indeed, their riches often help them to get elected, although Mr Romney has not spent any of his personal fortune on his current campaign (he shelled out $42m last time). He does have an unfortunate habit, however, of accidentally highlighting the vast gulf in circumstances between himself and most Americans. In one debate among the Republican candidates he casually offered Rick Perry a $1o,ooo bet. This week, talking about the benefits of consumers being able to choose among health insurers, he said that he liked being able to fire people. His opponents are already making hay with such remarks, and Mr Obama's ad men doubtless will be soon. Perhaps the biggest drag on Mr Romney's candidacy, however, is his relatively liberal record as governor of Massachusetts. His rivals point to his support for measures to curb greenhouse-gas emissions, his willingness to increase revenues by raising fees and eliminating tax loopholes and, above all, his embrace of the notion that the government can oblige individuals to buy health insurance. All these policies have become anathema to the right since Mr Romney stepped down as governor in 2007, although they were not quite as controversial at the time. Worse, since Mr Romney now tries to present himself as an ardent conservative, these policies have allowed the other can-

The Economist January 14th 2012 didates to denounce him as a flip-flapper and an impostor. Mr Romney himself admits he has changed his stance on abortion, reversing his previous acceptance of it as a matter of individual conscience. Many more of his present views-including opposition to cap-and-trade schemes for greenhouse gases, to a federal mandate to buy health insurance, and to all increases in government revenue-seem entirely at odds with his past positions. In fact, the inconsistency is not always as dramatic as it appears. Mr Romney, in keeping with Mormon doctrine, has always expressed personal opposition to abortion. His argument that it is better to experiment with health reform in the states than at the federal level is both plausible and on firm constitutional ground. He says his concern about cap-and-trade is not the concept but the cost. And he is doubtless right that the big problem with the federal budget, at least in the long term, is rising spending, not shrinking revenue. Nonetheless, Mr Romney is at the very least guilty of trying to please different audiences by putting a series of contradictory glosses on his politics. When running, unsuccessfully, for the Senate in 1994 in leftleaning Massachusetts, he denied being a fan of Ronald Reagan; nowadays he is all reverence. By the same token, in his campaign for governor he did not paint himself as much of a social conservative, whereas he now professes to be a true believer. Voters in Massachusetts used to worry that Mr Romney was a Republican ideologue dressed up as a moderate; ironically, many Republican primary voters now express the opposite fear. How much all this diminishes Mr Romney's electoral prospects is unclear, however. In an "entry poll" at the Iowa caucuses CNN asked participants what quality they

In that order?

thought was most important in the candidates. Of those who were looking for a "true conservative", only 1% voted for Mr Romney. But more voters were looking for someone who could beat Mr Obama-and half of them took Mr Romney's side. He also won the biggest share of voters who valued experience over ideological purity. All this was enough to hand him victory. No need for thrills Republicans around the country seem to be following a similar logic. Almost 6o% deem Mr Romney an "acceptable" nominee, according to Gallup, a polling firm, a higher proportion than any of his rivals. Strikingly, he received the blessing of both moderate and conservative Republicans in equal proportion. Most soundings show Mr Romney running better against Mr Obama than any of the other candidates-a fact not lost on primary voters. Some right-wing pundits worry that Mr Romney will fail to excite the party's base, and thus depress turnout on election day. But elections are won among swing voters, and he holds far more allure for them than any of his rivals. He is strongly supported, too, by the politicians who will be running below him on the ticket if he wins the nomination. Mr Romney has more backing among Republican congressmen and governors than all the other candidates combined. Anyway, Mr Romney probably does not need to thrill voters to beat Mr Obama. When an incumbent president is running, says Charlie Cook, a political analyst, the election normally turns into a referendum on his performance, as long as his opponent is "colourless and odourless". If so, the meticulously anodyne nature of Mr Romney's campaign may be its greatest strength. •

27

Also in this section 28 The recovery and the election 29 Closing Guantanamo 29 Harsh laws 30 The rebalancing of America's forces 32 Lexington: Obama and Iran

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

The New Hampshire primary

Mitt Romney marches on MANCHESTER

Another good result for the former management consultant and governor. South Carolina (onjanuary 21St) could seal the deal EW HAMPSHIRE is the Khyber Pass of American primary elections, but on N this occasion there was no ambush and all the candidates got through. The state is famous for its upsets, but instead of felling the front-runner it enabled Mitt Romney to stretch his lead, from a mere eight votes in last week's Iowa caucuses to a convincing 39% of the Granite State's total. He was followed by Ron Paul with 23% and Jon Huntsman with 17%. Rick Santorum failed to translate his second place in Iowa into a bounce in New Hampshire. He came in fifth with 9%, a fraction behind Newt Gingrich, the former House speaker. Rick Perry, Texas's governor, trailed with less than a single percentage point. This was neither the thrilling result the media craved nor the clarifying one theRepublicans needed. Because Mr Romney, a former governor of Massachusetts running near to home, was always favoured to win, the big question before the vote on January 1oth was who would emerge as his chief conservative challenger. In the event, the election gave no answer. Though the libertarian Mr Paul was an impressive runner-up who will have a continuing impact on the campaign, his is a special case because his isolationist foreign policy caps his appeal to mainstream Republicans and rules him out as the eventual nominee. The third-placed Mr Huntsman does not fit the bill either. Much of his late surge came from independents (who

are allowed to vote in this state's Republican primary). Another Mormon, but one who positioned himself to Mr Romney's left, is unlikely to make a mark on January 21st in South Carolina, an extremely conservative state with many evangelical Protestants in the electorate. That narrows the field of potentially viable non-Romneys to Messrs Gingrich, Santorum and Perry. But none emerged with a decisive lead, and in the course of their New Hampshire campaigns all betrayed conspicuous weaknesses. Mr Santorum's close second in Iowa had thrust him into the limelight in New

I

Heading south Republican presidential primaries,% •

New Hampshire result, Jan lOth 2011 0

•

10

South Carolina average poll rating* 20

30

40

Romney Paul Huntsman Gingrich Santorum Perry Sources: 2012NewHampshirePrimary.com; RealClearPolitics.com

'RCP poll average January 4th-11th 2011

Hampshire, but, with only six days between the two events, he was undone by his lack of local organisation. At one packed event at a restaurant in Manchester a fire marshal turfed out the audience, and when it decamped to the car park the candidate's team did not have so much as a bullhorn on hand to drown out hecklers and enable his voice to be heard. The former senator from Pennsylvania also showed that he has a tin ear. At some town-hall meetings he gave detailed answers to questions on the economy and talked affectingly about his grandfather, an Italian immigrant who worked in Pennsylvania's coal mines until the age of 72. But during a talk to college students he was booed for a hectoring sermon on the wrongs of gay marriage, a message with limited appeal in the "live free" state, where it is already legal. His social agenda, especially his no-exception horror of abortions, will play better in South Carolina, but he goes to the Palmetto State stripped of the momentum he gathered in Iowa. New Hampshire also deflated Mr Gingrich, who was polling second in December but fumbled his chance to capitalise on a coveted endorsement from the state's largest local newspaper, the conservative Union Leader. One mistake was failing to return to the state until the air was already seeping out of his balloon. Despite a promise to run a positive campaign, he whinged repeatedly about the "lies" of Mr Romney's high-spending super-PAC and vowed to get even in New Hampshire. He scored the odd zinger, for example by calling on Mr Romney to drop "the pious baloney" when the perpetual campaigner tried during one debate to claim that he had never seen politics as a full-time career. But these barbs expose him to the charge that he is a sore loser, bent mainly on revenge. In his stump speech Mr Gingrich calls

~~

28 United States ~ himself

a "Reagan conservative" who served at the great man's side. He denounces Mr Romney simultaneously as a "Massachusetts moderate" (horror) and a ruthless corporate raider who spent his years at Bain Capital destroying firms and livelihoods. It is, he says, his rival's character, not capitalism, he wants to put on trial. Mr Gingrich's own super-PAC, plumped up now with $sm from Sheldon Adelson, a casino billionaire and Gingrich admirer, will be screening a half-hour documentary during the South Carolina race called "When Mitt Romney Came to Town", a melodrama describing the human and corporate wreckage caused by a company "more ruthless than Wall Street". If it is dreams of revenge that are propelling Mr Gingrich south, the motives of Mr Huntsman are harder to decipher. The former ambassador to China skipped Iowa and bet his all on New Hampshire, clocking up more than 160 campaign events and asserting confidently that he could win first place. When the results were in he called a poor third "a ticket to ride", claiming gamely to have an "excellent" organisation in South Carolina. Even in New Hampshire, however, the sheer volume of campaign events could not compensate for his lack of a forceful message. The endorsement of the liberal Boston Globe was a mixed blessing in aRepublican primary. During one debate Mr Huntsman broke into Mandarin to make a point about China, prompting groans from a conservative audience watching on a big screen down the road in Manchester's Radisson Hotel. Worse, he is short of the money he needs not only in South Carolina but even more in Florida, a large and expensive state that holds its primary at the end of the month. Though he has a billionaire father, who has contributed to his PAC, the candidate says his family applies its fortune to humanitarian causes, not political campaigns. While New Hampshire was voting, Mr Perry was holding a campaign event almost 1,ooo miles away at Shealy's Bar-BQue in Leesville, South Carolina. The Texan governor did not disgrace himself with another "oops" moment in New Hampshire's two pre-election debates (except perhaps for appearing to call on the spur of the moment for American troops to return to Iraq). But he saw early that his cause was hopeless and is banking on a stronger showing closer to home. From South Carolina, where unemployment is almost double the rate in New Hampshire, he echoed Mr Gingrich's attack on Mr Romney, likening Bain's corporate raiders to "vultures" who swoop on sick companies and leave only the skeleton behind. Though Mr Romney could hardly have hoped for a better result from New Hampshire, his test is not quite over. It will be harder to perform so well in a state whose

The Economist January 14th 2012 voters are deeply conservative, even though he did quite well with evangelical vote in New Hampshire. In 2008 he finished a wretched fourth. This time, however, he was ahead in South Carolina's polls (see chart on previous page) as the campaign teams and the chasing media packed their bags and raced south. There he has the valuable support of Nikki Haley, a popular governor, and $19m of cash in

hand as well as the mojo that comes from rare consecutive wins in the first two contests. On the other hand, even before polls had closed up north, Mr Gingrich was running ads in South Carolina attacking the front-runner's flip-flop on abortion. Mr Romney may be cruising to the nomination, but the former speaker looks bent on revenge. There is no telling how much damage he can still do. •

The recovery and the election

That 2004 feeling WASHINGTON , DC

Will America's recovery come through fast enough for the president? ITH an election less than a year away and the structural headwinds W holding back job growth, time is not on the president's side. Or so this newspaper warned in October 2003. The fact that George Bush junior went on to be re-elected may be encouraging for Barack Obama. Job growth in the current recovery has been shockingly weak, but the same was true of the previous two recoveries. The turnaround came too late to save the job of George Bush senior. But his son fared better. Employment continued to fall for nearly two years after his recession ended in November 2001, but reversed direction in time to save his job (see chart). Could Mr Obama enjoy the same late boost? On January 6th the government reported that employment had risen by 200,000 in December compared with November, the best gain since April, corroborating a cluster of other reports that show an economy picking up steam. As in previous months, cuts by state and local governments held back the total, but those cuts are, finally, diminishing as receipts to state coffers start to rise again. The unemployment rate, meanwhile, has fallen half a point in the past three months, to 8.5%, the

Too Late? Post- recession employment Start of recovery=lOO

105 104 103 102 101

~~;;;~=~~~~~§~=

...

10

15

20

25

30

100 99

35

Months since start of recovery Sou rce: Bureau of *Election Labou r Statisti cs t Exdud es temporary Census workers

lowest since early 2009. The news isn't quite as good as it looks. Package delivery companies added 42,000 employees, a large proportion of whom were no doubt sacked once the online holiday shopping season ended. Construction payrolls rose 17,000, mostly because of unusually mild weather. The fall in the unemployment rate is also due in great part to strangely low growth in the labour force, a troubling sign for the underlying vigour of the economy. Monthly job growth averaged 142,000 in the second half of 2011, which is probably closer to what can be expected for 2012. The economy still faces the problems of heavily endebted consumers, moribund home sales, and fiscal austerity at all levels of government. But all these things are, at the margin, getting better, rather than worse. Whether this will change Mr Obama's fortunes in time for the election is another matter. Employment is climbing out of a far deeper hole now than in 2004, and there's almost no chance the unemployment rate will be below 7-3% come November, said to be the historical dividing line between winning and losing incumbents. But Tony Fratto, a spokesman in Mr Bush's administration, says the raw data matter less to voters than their personal sense of whether things are getting better, for example if a friend leaves a job for a better opportunity, rather than because he was fired. Government data show that the proportion of people who leave a job because they quit is growing, and now exceeds the share who leave because they are sacked, by a widening margin. In 2004 Mr Bush could tout his credentials on battling terrorism even if the economy was lacklustre. Now, the economy swamps all other priorities, even the killing of Osama bin Laden. Mr Obama will have little to boast about if the recovery fizzles out; but his opponents will have even less to say if it continues to gather speed. •

The Economist January 14th 2012 Guantanamo

Noway out

United States 29 Harsh laws

Another one in the net LOS ANGELES

Thou shalt not watch whales eating WASHINGTON, DC

America marks the tenth anniversary of the prison camp EORGE BUSH wanted to close it. So did John McCain. And Barack Obama G promised to do so within a year of taking office. But nearly three years since then, and ten years after the first inmates stepped through its barbed-wired gates in January 2002, the prison camp at Guantanamo Bay remains stubbornly open. It is, perhaps, the most glaring failure of Mr Obama's first term. On his second full day in office, surrounded by 16 retired generals and admirals, he signed the order to close the facility that he said had probably created more terrorists than it ever detained. With majorities in both chambers of Congress he looked set to make good on his pledge. There was just one problem: the president had a timetable, but no plan. "Where are we going to send them?" asked Mr McCain after the order was signed. His Republican colleagues warned that dangerous terrorists could end up in local jails. In fact, Mr 0 bam a had in mind a facility in Illinois similar to America's "supermax" prisons, from which no one has ever escaped. But right-wingers stoked public dread and polls soon showed significant disapproval of the closure. In the face of such opposition, and with little support from a White House distracted by healthcare reform, the Democrats quickly backed down. In a series of votes, both parties signalled their displeasure with the president's policy, blocking funds for Guantanamo's closure and banning the transfer of detainees to American soil. The White House fought back, defeating an effort aimed at stopping the government from putting the alleged architects of 9/11 on trial in federal court. Then came its boldest move. In November 2009 Eric Holder, the attorney general, announced that Khalid Sheikh Mohammed and his four co-conspirators would face justice in Manhattan. The trial would show that America's civilian courts could handle even Guantanamo's worst. But just two months later, amid mounting security concerns and rising political pressure, the effort fell apart. Once again, the administration had underestimated the political and logistical challenges posed by its policies. Succumbing to the obstacles placed in his path, in March last year the president lifted his moratorium on new militarycommission trials at Guantanamo and instituted a system for holding some detainees indefinitely. Civil-liberties groups called it an admission of defeat. PolitiFact,

NE of the unforgettable experiences to be had in California is to go whale 0 watching in Monterey Bay. Nancy Black, a licensed marine biologist, is one of the scientists who lead these commercial outings, besides doing her own whale research. As Lawrence Biegel, her lawyer, tells it, one day Ms Black was in her research boat with assistants when killer whales attacked a pod of grey whales and killed a calf. Its blubber floated to the surface, and the killer whales were about to feed on it. Seizing this opportunity to film their behaviour, Ms Black threaded ropes through some pieces of blubber, then lowered a camera underwater. For this, Ms Black might now face up to 20 years in prison and half a million dollars in fines, after a federal grand jury indicted her this month. Little about the charges makes common sense. The federal law in question is the 1972 Marine Mammal Protection Act, which was intended to save dolphins, seals and whales from being killed and harassed. The law also banned feeding these animals, on the theory that doing so might compromise their ability to forage naturally in future. Feeding is what Ms Black is now accused of. She says she was using the protocols she had learned from the federal agencies that are now investigating her to observe a natural feeding that was already in progress. Just as ridiculous, says Mr Biegel, is the accusation, increasingly common in federal cases, that Ms Black lied to the authorities, which carries its own prison terms. Ms Black always edits the commercial videos of her whale outings to make them more interesting. When investigators demanded footage, she gave them one of these edited videos. Prosecutors now claim that she had an outfit that assesses the accuracy of statements made by politicians, declared Mr Obama's campaign promise "broken". Nearly Boo prisoners have passed through Guantanamo in the past decade. Most have been transferred abroad, some sharing stories of abuse and wrongful imprisonment. Others have returned to the battlefield. Of the 241 detainees Mr Obama inherited, 171 remain. Of those, four have been convicted and are serving sentences, 32 have been designated for trial, including Mr Mohammed, and 46 will be held indefinitely as significant threats. Some 90 detainees have been designated for transfer. But no one has left Guanta-

tampered with evidence. To Harvey Silverglate, the author of "Three Felonies a Day: How the Feds Target the Innocent", this is par for the course in America's federal justice system today. A couple of trends have combined to threaten justice and liberty. First, federal statutes are often so poorly written and so vague that they are in effect incomprehensible. This gives excessive discretion to bureaucrats and prosecutors, with their own career ambitions, who apply them haphazardly. Second, federal law has been moving away from mens rea ("guilty mind"), a common-law tradition that suggests that a person who had no idea he was breaking a law should not be accused of doing so. With bloated federal legislation and without mens rea you can accuse most people of something or other, says Mr Silverglate. The question should be, he says, whether charges are reasonable when they run "counter to all human instinct and experience". namo for over a year. This is in part due to restrictions placed by Republicans in last year's defence bill, a measure reluctantly signed by Mr Obama. This year's bill contained more such constraints, including language that some believe codifies indefinite detention. Again the president signed. The White House says Mr Obama still wants to shut down the prison. But as he approaches the end of his first term, he finds himself in the same position as his predecessor, who also hoped to close the camp. "I laid out an aspiration," said Mr Bush back in August 2007. "But it is not as easy a subject as some may think on the surface." Mr Obama would now agree. •

The Economist January 14th 2012

30 United States Rebalandng America's forces

The downgrading of Europe

Barack Obama's new defence plans neglect Europe at their peril

HE new "strategic guidance" anT nounced by Barack Obama on January sth, has triggered a wide-ranging debate about the future of American military power. On the right, critics have lambasted it as "declinist", principally because, quite sensibly, it seeks to reconcile America's strategic priorities with the need to find around $soo billion of defence savings over the next decade. In particular, the retreat from the 6oyear long assumption that America should be able to prevail in two different major ground wars at once has caused some angst. This is odd given that even with the huge defence budget increases that came after September nth 2001, America struggled to provide the resources to win in both Iraq and Afghanistan, the latter campaign suffering nearly terminal neglect because of the needs of the former. Mostly there is agreement that a more focused response (in the form of a new doctrine known as AirSea Battle) is needed to counter China's fast-growing military capabilities and address the concerns of allies in the region about how the emerging superpower will behave. But there are worries over the administration's assumption that America will not have to fight a big counter-insurgency operation once the bulk of combat troops have left Afghanistan in 2015, and that it is betting too heavily that counter-terrorism can be left to special forces and armed drones. Perhaps the least remarked upon part of the new strategy is the seemingly bleak future for American forces in Europe. It

Networking, NATO-style

glibly refers to "most European countries" now being "producers of security rather than consumers of it" and talks about a "strategic opportunity to rebalance the us military investment in Europe" following the drawdown in Iraq and Afghanistan. The American military presence in Europe, it hints, is an expensive relic of the cold war and it suggests there are no significant threats to Europe's security other than Iran developing a nuclear-capable ballistic missile, which supposedly will be countered by the new missile-defence system America is starting to deploy. The number of European-based American soldiers has already fallen from 213,000 in 1989 to only about 41,000 today. It has already been agreed that one of the us Army Europe's four combat brigades will return to America by 2015. Its commander, Lieut-General Mark Herding, has recommended a unit and a schedule. However, the Pentagon may now want more, running the risk of downgrading the United States European Command (EucoM) into little more than a hollowed out headquarters. General Herding says "there is a tension between the budget and national security and my worry would be that forces will be eliminated that ensure American interests are protected. Once eliminated, they are hard to regenerate." The thinking behind the "rebalancing" looks flawed for several reasons. The first is that far from being on oasis of stability, EuCOM's 51-country region covers some pretty flammable trouble spots, among them Georgia's border with Russia, Kos-

ovo's border with Serbia and Turkey's border with Iraq and Syria. Israel is also within EUCOM. There are less conventional security threats too, from terrorists moving between safe havens to cyber attacks. The second is that-quite apart from possible flash points in its own region-Europe is closer to many of the fights that American forces may be committed to in the future than bases in the United States. us Army Europe currently has two of its four brigades in Afghanistan-the 170th Infantry Brigade in Mazar-i-Sharif and the 172nd Infantry Brigade in Paktika, one of the most violent provinces in the country. As well as generating forces for missions out of theatre, EUCOM is a service provider for two other important combatant commands, AFRICOM and CENTCOM. On a swing through Turkey and Afghanistan last month, your correspondent attended several meetings between General Herding and senior officers in the field in which the commander never failed to ask what he could provide to make their jobs easier. The third is that the new strategy places great emphasis on military-to-military cooperation with other countries. The best way of enhancing that is for American soldiers to train with their counterparts from other nations. General Herding says that after training, the command's second priority is to enter into effective partnerships with the many different countries in its region. "By sharing ideas, tactics and procedures," he says, "you build trust with partners." During the final readiness exercise before deployment to Afghanistan, the 172nd trained with troops from nine other countries, the same ones, notes the general, whom they would later find themselves fighting alongside. Nearly 8o% of the countries contributing troops to the NATO-led coalition in Afghanistan have come from the European region. Many have trained at the us Army Europe's Joint Multinational Readiness Centre at Hohenfels in Germany. After a big training event in October involving the 173rd Airborne Brigade and soldiers from Slovakia, Britain and Germany, General Herding's deputy, Maj-General James Boozer, said: "You'll hear about theatre security co-operation and partnership capacity building. That is what we do. Nounits back in the United States do partnership capacity building." While the feeble defence effort of too many NATO members riles Americans, the organisation remains the only vehicle that reliably provides partners when America wants to do something and does not want to do it on its own. Mr Obama's strategic guidance risks talking up the importance of partners while undermining the effectiveness of the command that does more than any other to make those partnerships work in America's interest. •

32 United States

The Economist January 14th 2012

Lexington Running out of moves I

Far from "appeasing" Iran, did Barack Obama give up on diplomacy too soon?

ITH the glaring exception of Ron Paul, most of the Republicans who want to be president agree on one thing. Barack W bam a has been soft on Iran. Mitt Romney calls Iran "the greatest 0

threat we face" and accuses Mr Obama of a woeful failure to understand the danger. Newt Gingrich, who spends a lot of time reminding voters of his hitherto overlooked role (along with Ronald Reagan, Margaret Thatcher and Pope John Paul II) in the downfall of the Soviet empire, says that as president he would put together a similar plan to topple the regime in Tehran. Rick Santorum, on the stump in the old mill towns of New Hampshire, takes time out from the economy to alert voters to the perils of Shia theology. He and Mr Gingrich agree with Israel's prime minister, Binyamin Netanyahu, that under its present leadership Iran is to be understood not as a rational actor but as an apocalyptic suicide cult which, if it built a nuclear bomb, would not be constrained by the usual logic of deterrence. Mr Santorum promises that if he were president and Iran did not submit, he would send in the bombers. The Republican focus on Iran makes sense on two levels. First, Iran is unarguably dangerous. It is uttering threats against American warships in the Strait of Hormuz. It is developing the wherewithal to make a nuclear bomb. It has spent years ignoring United Nations instructions to stop enriching uranium. It says it wants Israel to disappear. Second, Iran is a national-security problem that Mr 0 bam a has so far failed to solve. He may have killed Osama bin Laden, decimated al-Qaeda and helped to rid the world of Libya's grotesque Muammar Qaddafi, but the hand he stretched out to Iran three years ago was in the end met with a clenched fist. Here at least, foes at home have concluded, is one area in which he can be safely accused of "appeasement". And yet that is a strange choice of word-unless you believe that the very act of talking to an enemy is tantamount to appeasement, a view that would have astonished the sainted Reagan during his long chats with Mikhail Gorbachev in the 1980s. It is an especially strange word given the unprecedented pressure Mr Obama has methodically persuaded the world to apply to Iran. That pressure, it is true, has not yet achieved its aim: Iran continues equally methodically to enrich uranium. But Mr Obama, who insists that he will not allow Iran to acquire nuclear weap-

ons, appears to be trying every means short of war (including, some say, sabotage, cyberwar and the assassination of scientists) to stop it. And if all else fails, war could follow. He has made a point of saying that "all options" remain on the table. Sure, Mr Obama has made mistakes. While promising that all options are on the table, he has let successive defence secretaries say that bombing Iran would be futile and dangerous, which may be true but blurs the message. He also fumbled his response to the popular demonstrations that followed Iran's fraudulent presidential election of June 2009. Having worked hard to start a dialogue with the Iranian leadership, and calculating that the Green movement would not be able to topple the government, he was slow to denounce the crushing of the protests. That looked weak. But the Republican claim that this squandered an opportunity to fell the regime is questionable. In contrast to Egypt, where America had influence on both Hosni Mubarak and the army it had helped to equip, it had no serious leverage on the ground in Iran, and its verbal support might have damaged the credibility of the very people it was trying to help. Iran's internal crisis also paralysed decision-making in Tehran and so killed a confidence-building deal that might have created more time for nuclear diplomacy. The idea was for Iran to ship 1,2ookg of its low-enriched uranium overseas to produce fuel for a research reactor, thus leaving the country for a while with too small a stockpile with which to make a bomb. After the election this idea became too hot for the regime to handle, especially after one of the reformists' leaders, Mir Hossein Mousavi, denounced it as a "surrender" to foreigners. Turkey and Brazil resuscitated the deal in the spring of 2010, but by then Iran's stockpile had grown and Mr Obama was on the point of guiding a new, hard-won sanctions resolution through the Security Council. After the work he had invested in bringing Russia and China on board for the new resolution, the president seems to have decided that he could not risk letting the sanctions unravel. Why not try again? While Republicans accuse him of appeasing Iran, Mr Obama faces critics from the opposite direction who say his biggest mistake was to withdraw his outstretched hand too soon. In a thorough new history of the president's engagement with Iran ("A Single Roll of the Dice"), Trita Parsi, the founder of the National Iranian American Council in Washington, oc, regrets Mr Obama's failure to accept the proposal from Brazil and Turkey. Having chosen to pursue diplomacy and pressure simultaneously, he bet all the diplomacy on a single roll of the dice, and when that got nowhere was left only with the pressure-which may in time also fail. If diplomacy is ever to succeed, Mr Parsi says, America must not retreat at the first sign of Iranian intransigence or congressional opposition, both of which are inevitable. The trouble, he concludes, is that the 30-year enmity between Iran and America is no longer a phenomenon, "it is an institution". Inside both countries, accusations of appeasement have become part of the institution. Mr Obama has not yet "failed" on Iran: Iran grew stronger on George Bush's watch and has grown more isolated on his. Among all the options supposedly still on the table might be another go at diplomacy. But time is short, and this week's Republican ruckus from New Hampshire will make it hard to try again until America's election season is over. • Economist.comfblogsflexington

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35

Also in this section 36 Iran and Latin America 37 Colombia's former paramilitaries 37 At Last, Lima's metro

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

Brazil's trade policy

Seeking protection SAO PAULO

China has become Brazil's biggest economic partner-and its most difficult one

PPOSITE Rio de Janeiro's best-known shopping mall, just before the tunnel that takes drivers to the beach resorts of Copacabana and Ipanema, stands a gleaming new showroom for JAC Motors, a state-owned Chinese car maker. The prominence of the location is appropriate: imported Chinese cars have suddenly become a visible presence on Brazil's roads. This has alarmed Brazil's car industry and President Dilma Rousseff's government. Last month a 30-percentage-point tax increase on cars with less than 65% local content took effect, taking the tax on some imported models to a punitive ss%-on top of import tariffs. The tax increase is an unusually blatant act of protectionism. It almost certainly violates the rules of the World Trade Organisation, of which Brazil is normally an enthusiastic supporter. It shows how sensitive the government of President Dilma Rousseff is to claims that the country is suffering "de-industrialisation". Although the latest figure shows industrial production increasing slightly, it has been broadly flat for more than a year. Economic growth has fallen sharply. But consumer demand remains robust, rising 4.1% last year, says the Central Bank. A bigger share of the market is going to importersChina in particular. Imports of Chinese cars rose almost fivefold last year; the new year has brought complaints of dumping of Chinese mobile phones and shoes. With extraordinary speed, China has

O

become Brazil's most important economic partner: total trade between the two countries has risen 17-fold since 2002. But frictions are increasing almost as fast. Although Brazil enjoys a big overall trade surplus with China, most of its exports are of commodities (mainly iron ore, soya beans and crude oil). It has a big deficit in manufactures (see chart). The reasons are not hard to spot. In recent years Brazil's manufacturers have been hobbled by a strong currency, high interest rates, high taxes, poor infrastructure and a poorly educated workforce. "Brazil faces a big competitive challenge, and the relationship with China only dramatises that," says Sergio Amaral, a former industry minister who chairs the Brazil-China Business Council.

I

The raw and the cooked Brazil's trade with China, $bn •

Raw materials

•

Exports

Manufactured goods

Imports 50

50

40

40

30

30

20

20

10

10

0 2002

2011 *

Source: SECEX

0 2002

2011*

*11 months to November annualised

The government's response is a mix of short-term protectionist measures combined with modest steps towards more constructive longer-term policy changes. The tax rise on cars was announced last September, as part of a new industrial policy. The aim was to bully carmakers without plants in Brazil to hurry up and build them. This seems to be working: JAC Motors, BMW, and Jaguar Land Rover, a unit of India's Tata Motors, have all announced plans to build factories in Brazil since the import tax was unveiled. The industrial policy also features an experimental cut in the payroll tax for footwear, textile, furniture and software firms. But officials are at pains to point out that, rather than help specific industries, the main thrust of the new policy is to try to boost competitiveness more generally by promoting innovation, higher education and training. Many Brazilian industrialists distinguish between Chinese and other competitors. "We don't believe in protection against efficiency;" insists Roberto Giannetti of Sao Paulo's Federation of Industries (FIESP). But he adds that "today we can't accept China as a fair trader". FIESP says it did not want the tax increase on imported cars. But it complains that China is dumping diverted exports from depressed Europe. Meanwhile, Brazilian manufacturers trying to export to China face steep non-tariff barriers on manufactured goods, such as obstructive state purchasing agents. Rubens Ricupero, a former finance minister, thinks that rather than acquiesce in the disappearance of its industries, Brazil will move towards managed trade with China, at least in some sectors. Two things may serve to reduce some of the trade tensions. The first is that Chinese investment in Brazil is taking off. Until 2009 this amounted to only about $soom. But in 2010 investment of $19 billion was ~~

36 The Americas ~ announced,

and $12.7 billion finalised, according to calculations by the Brazil-China Business Council, making China the largest single foreign investor in Brazil that year. Of that sum, just three acquisitions (two of oil stakes, and one in electricity distribution) accounted for more than $11 billion. But Chinese firms are also starting to build manufacturing plants in Brazil. The second emollient is that the real has depreciated by 17% against the dollar since its peak in late July. That is partly because investors fled emerging markets but also because of government intervention, in the form of taxes on short-term capital inflows. At the same time, the Central Bank has taken advantage of the economy's soft patch to cut its benchmark interest rate,

The Economist January from 12.5% in August to 11%. With inflation at 6.5%, the real interest rate is much lower than at any other time in the past decade. But industry also wants to see fewer taxes, cheaper energy, less bureaucracy and better transport networks, says Paulo Skaf, FIESP's president. On these things the government is moving far more slowly, if at all. However narrowly targeted, protectionism will not only raise prices in Brazil but risks sending the wrong message to businesses. Across Latin America, trade with China is growing but partly at the expense of intra-regional trade in manufactures. Brazil should lead a move to tear down all trade barriers within Latin America, thus turning the Chinese challenge into an opportunity, says Mr Amaral. •

Iran and Latin America

Brothers in arms?

CARACAS

Mr Ahmadinejad calls, yet again

HERE are not many places in the world T these days where Mahmoud Ahmadinejad can count on red-carpet treatment. So his five-day visit this week to Latin America was an opportunity to show that Iran still has some allies, even as Europe and the United States prepare to tighten sanctions against the Islamic Republic (see page 32). He called on his longstanding friend, Venezuela's Hugo Chavez, and joined him at the inauguration of Daniel Ortega for a constitutionally dubious third presidential term in Nicaragua, before flying on to Cuba and Ecuador. It was Mr Ahmadinejad's fifth trip to the region since 2005, and has inflamed fears in the United States that Iran may be building a terrorist network on its doorstep. There is no clear evidence of that. Indeed, the signs are that Iranian influence in the region is decreasing. His hosts this time are confined to members of Mr Chavez's anti-American ALBA alliance. In 2009 Mr Ahmadinejad also visited Brazil. But Dilma Rousseff, Brazil's new president, has been far more critical of Iran than her predecessor, Luiz Inacio Lula da Silva. The Obama administration, to the ire of many in the Republican Party, has downplayed the potential threat posed by Venezuela's alliance with Iran. It gently warned that "now is not the time to be deepening ties." But it also chose the occasion to expel the Venezuelan consul in Miami, Livia Acosta, who was accused in a documentary aired last month by Univision, a Spanish-language American channel, of involvement in an alleged cyber-plot against the United States featuring Iranian dip-

lomats and Mexican computer hackers. Mr Chavez called the report "lies" and the expulsion "bullying". As ever, he and Mr Ahmadinejad swore eternal friendship. What does that amount to? The two governments have signed hundreds of agreements, on everything from agriculture to tourism. But the most visible initiatives have flopped. Typical is a cement factory in the eastern state of Monagas. Due to open in 2007 and produce rm tonnes a year, it is still under construction. Mr Chavez claims Iran has built 14,000 prefabri-

14th 2012

cated houses. Not for the workers building the cement plant, who this week staged a protest over claims by a chavista union leader that they were well housed. Suspicion attaches to agreements under which Venezuela might potentially help Iran evade sanctions over its nuclear programme. After Iran's Export Development Bank set up a subsidiary in Caracas in 2007, the United States' Treasury department imposed sanctions on it. Last year the Treasury applied largely symbolic sanctions against PDVSA, Venezuela's state oil company, for exporting refined products to Iran. (The United States continues to be PDVSA's main export market.) Venezuela denies that it is mining uranium or exporting it to Iran. The murkiest areas are military and intelligence links, including the alleged presence in Venezuela of the Quds force, the foreign arm of Iran's Revolutionary Guard. Some American analysts claim that Lebanon's Hizbullah, an Iranian ally, is involved in cocaine trafficking from Latin America. Under Mr Chavez, Venezuela's armed forces have adopted the doctrine of "asymmetric warfare", which explicitly endorses acts of terrorism in the event of an American attack. But there is little reason to believe that Mr Chavez would risk international isolation by allowing Iran to launch attacks against American targets from Venezuela. Manochehr Dorraj, of the Texas Christian University and the co-author of a forthcoming book on the two countries, says that Mr Chavez's solidarity would be "likely to take primarily a political form even in the case of a military attack [on Iran]". For Mr Ahmadinejad and for his Latin American hosts, the main purpose of his visit would seem to be political theatre. •

Heard the one about the Nicaraguan, the Iranian and the Venezuelan?

The Economist January 14th 2012 Colombia's former paramilitaries

Criminals with attitude

The Americas 37 Lima' s metro

The train leaves platform one at last LIMA

Better late than never SANTA MARTA

A crime mob takes on the government HE streets of Santa Marta, a city of T 450,000, were nearly deserted and shops and offices were closed. But it was not a holiday that shut down a swathe of northern Colombia on January 5th and 6th. It was a criminal band called the Urabeiios, who declared an "armed strike" in retaliation for the death of their leader, Juan de Dios Usuga (alias "Giovanny"), in a firefight with police on New Year's Day. In leaflets handed out in six northern departments they declared: "We don't want to see anyone on the streets, doing any work." That was enough to shut down transport, commerce and even government offices. In Santa Marta, filled with holidaymakers at this time of year, the mayor called on shopkeepers to avail themselves of police protection to open their doors. "Sure, the police are around today, but the Urabeiios are watching and if I open my store, then tomorrow or next week or some day when the police are gone, those guys will come and pam! get back at me," says Milton, who shut his corner store in a middle-class district. In Santa Marta alone, the strike is estimated to have cost $5m in lost trade. The Urabeiios burned 11 vehicles for violating their ban on movement. Security forces found leaflets offering up to 2m pesos ($1,075) for every police officer killed in Antioquia, the gang's stronghold. The strike was the biggest challenge to the authority of the state since Juan Manuel Santos became Colombia's president in August 2010. His government has tried to downplay the importance of the criminal bands which emerged after more than 30,000 right-wing paramilitaries loosely grouped in the United Self-Defence Forces

r ". . .

~ECUADOR -1

T HAS taken more than a quarter of a Itime century, but on January 9th for the first passengers travelled the full length of a 22km (14 -mile) elevated railway line from the poor southern suburb of Villa El Salvador to the centre of Lima, Peru's capital. The metro line is the first in this city of more than 8m people. Its vicissitudes mirror those of the country. The project began in 1986 with a loan deal between Alan Garcia, in his first term as Peru's president, and Italy's prime minister Bettina Craxi. It halted again after three years, 9km and more than $2oom, amid claims of rake-offs in both countries. Economic depression and political instability meant that for years the line's unfinished cement pylons served only for graffiti artists. In 2006 Mr Garcia returned to power.

Delayed by kickbacks on the Line of Colombia (Au c) formally disarmed under Mr Santos's predecessor, Alvaro Uribe. The Urabeiios "are trying to display a power that they do not have," said Juan Carlos Pinzon, the defence minister. Others disagree. The paramilitary successor groups are "the biggest threat to the rule of law and the protection of human rights in Colombia," the local representative of the UN High Commissioner for Human Rights said in December. The AUC purported to have political aims, fighting leftist guerrillas and acting as the local state where the government was absent, while committing savage murders and engaging in criminal rackets. Most of the successor groups, although led by former paramilitaries, are just drug gangs. But the Urabeiios, numbering at least 1,600 armed men and controlling drug export routes on the Caribbean coast, harbour grander ambitions. Their formal nameAutodefensas Gaitanistas de Colombia-

With a loan of $300m from the Andean Development Corporation work on the "electric train", as Peruvians call it, began again. The line has begun operating with just five (Italian) trains, running at 20minute intervals. Anothen9 trains, from France's Alstom, are due in 2013. Work has begun to extend the line by another nkm to north-eastern suburbs. Late and expensive though it is, the metro is welcome. Lima has one of the worst public-transport systems among Latin American capitals, featuring tens of thousands of privately owned minibuses. The result is gridlock, pollution and frequent accidents. Luis Castaneda, the city's mayor from 2003 to 2010, built a 26km bus rapidtransit line through the heart of Lima. His successor, Susana Villaran, has promised to move ahead with further metro lines (there are plans for four more). Traffic congestion makes the average commute in Lima over an hour each way and costs more than $1 billion a year in lost output and health problems caused by pollution, according to Antonio Brack, a former environment minister. The city needs a debate about whether to favour bus rapid-transit systems, or more expensive but faster and highercapacity metro lines. Unfortunately it is not likely to get one. The unpopular, but honest, Ms Villaran must instead devote her energies to fighting an effort by her opponents to organise a recall referendum to unseat her in September. refers to a populist politician murdered in 1948. Their leaflets declared: "we are an army that fights for social demands and the dignity of our people." German Vargas Lleras, the interior minister, fears the Urabeiios will sabotage a government scheme to restore to its owners some 6.6m hectares (16.3m acres) of land usurped by the Auc and guerrillas. The strike "coincide[d] with the areas where the greatest usurpation of lands occurred," he says. On January 6th Mr Santos visited Santa Marta, tore up one of the leaflets and pledged an "effective and resounding response". He denies that the Urabeiios are political, and rejects talks with them. A year ago the government acted against the group after it killed two students in Cordoba. Police claim to have arrested more than 1,000 members of the gang last year. But the question the strike poses is whether the Urabeiios can be crushed by policing alone. •

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39 Also in this section 40 Malaysian politics 41 Air pollution in China 41 Disappearances in Sri Lanka 42 Australia's aborigines 43 Banyan: Let them eat yellowcake

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

India's UID scheme

Reform by numbers DELHI AND UTTAN GAON

Opposition to the world's biggest biometric identity scheme is growing OR a country that fails to meet its most basic challenges-feeding the hungry, F piping clean water, fixing roads-it seems incredible that India is rapidly building the world's biggest, most advanced, biometric database of personal identities. Launched in 2010, under a genial ex-tycoon, Nandan Nilekani, the "unique identity" (um) scheme is supposed to roll out trustworthy, unduplicated identity numbers based on biometric and other data. Any resident who wants one can volunteer. The scheme combines work by central and state governments and anumber of other partners-largely technology firms that capture and process individuals' data. The goal, says Mr Nilekani, is to help India cope with the past decade's expansion of welfare provision, the fastest in its history: "it is essentially about better public services". All that should have been the recipe for a project mired in delays, infighting, empire-building, graft and bad results. Few expected um to hit its ambitious targets. A year ago, only a few million had enrolled and barely un identity numbers had been issued. Warnings about fragile technology, overwhelmed data-processing centres and surging costs suggested slow progress. Instead this week saw the no-millionth um number issued. Enrolments (which precede issued numbers by some months) should reach 2oom in a couple of weeks. Mr Nilekani, eagerly hopping about his office to call up data on his laptop, says that

over 20m people are now being signed up every month. He expects to get to 400m by the year's end. That is an astonishing outcome. For a government that has achieved almost nothing since re-election in May 2009, the scheme is emerging as an example of real progress. By 2014, the likely date of the next general election, over half of all Indians could be signed up. If welfare also starts flowing direct into their accounts, the electoral consequences could be profound. To get a sense of the scale of um's achievement, linger at a mosquito-ridden enrolment centre in Uttan Gaon, a coastal village north of Mumbai. Huddled in a damp fire-station a young man connects a laptop, a binocular-style iris scanner and a glowing green machine that records 30 points from a set of fingerprints. In the gloom, his contraption could be a robot from an early Star Wars film. Employed by Wipro, a technology firm and agent for the um project, he has to get through 40 to so residents a day. His hassles, and those of armies of others deployed all across India, look endless. At times no one comes to enroll. Local government is supposed to run campaigns to lure them in, but indifference, bad weather and non-stop religious festivals keep them at home or partying. Other days, as when a (false) rumour crackles through a nearby slum that laorupee notes will be dished out to those who sign up, hordes pour in. Nerdy techni-

cians are ill-prepared to manage frustrated and even violent crowds. To hit his targets, the agent in Uttan Gaon must process each of the residents, who perch in turn on a red plastic chair, in 12 minutes or less. That is fine- but only for the young and educated. The day's first arrivals are a barely literate rickshaw driver, an elderly couple and a call-centre worker. Each one overruns. By mid-morning a long queue has formed, but the pace picks up. Wipro and the rest work fast, since that is the only way to turn a profit. One of 3S agents active in Maharashtra state, it bid to be paid just 26 rupees (so cents) for each person processed, with a higher rate in rural areas. It supplies all equipment and staff, and uploads the huge amounts of data to central processors. It also copes with thefts, damp cables that break the iris scanners, and labourers' fingers so worn that their prints do not show. Still, contractors look far nimbler at solving myriad problems than civil servants, who are still hampered, for example, by rules ordering that all official communication be done on paper (e-mails will not do). Speed matters. An agent hitting targets can bid to take work off laggards. This flexible "ecosystem", designed with help from Indians working in Silicon Valley, thus lets the most efficient prosper. To fund it, the central government dishes out 100 rupees, which various partners share, but only once each identity number is issued: "we have built a system where everyone has an incentive to get results", says Mr Nilekani. And these are striking: Wipro alone has had nearly 6m numbers issued, of more than 22m issued in the state as a whole. As it grows, however, the project is drawing fire. Most pressing, the mandate of the um authority will expire within weeks-once the 200 millionth resident is signed up. The cabinet has so far failed to ~~

The Economist January 14th 2012

40 Asia ~ extend it, though reformers

are keen. Montek Singh Ahluwalia, the powerful deputy head of the national planning commission, for example, says he will allocate billions more rupees to um as "the money will be more than fully covered from efficiency gains from government schemes". Total costs are rising as um expands: its budget has more than doubled from nearly 32 billion rupees ($614m) for the first five years, to over 88 billion rupees for the next phase. But the government's chief economic adviser, Kaushik Basu, among others, agrees that savings by "plugging leakages"-that is, stopping huge theft and waste in welfare and subsidies-will be "very big, very beneficial". The real difficulties are political. They fall into two areas. Most immediate is the home minister, Palaniappan Chidambaram, who is blocking the new mandate. He says he worries about national security. He also looks annoyed that a rival biometric scheme to build a National Population Register (for citizens, not just residents) has been cast into the shade. Run by his home ministry, by late last year it had only issued some 8m identity numbers. He also has a longstanding rivalry with the finance minister, Pranab Mukherjee, who is associated withum. The prime minister, Manmohan Singh, will probably have to tell the home minister to give way. Then officials need to respond to a second, much broader, band of critics. Last month, for example, parliament's powerful finance standing committee issued a 48-page report attacking um, calling it hasty, directionless, ill-conceived and saying it must be stopped. Headed by Yashwant Sinha, a stalwart of the opposition Bharatiya Janata Party, the committee was eager to throw all criticism possible at the scheme. Yet the report contains testimony from a range of experts with legitimate objections. Some were procedural, including a demand that um be based on law passed by parliament, not, as now, on a mere executive order. Other worries, such as cost, should abate as the unique identities are tied to bank accounts of welfare recipients, and so help track the flow of public money. The omens are good. Last week Karnataka state claimed that by paying welfare direct to bank accounts it had cut some 2m ghost labourers from a rural public-works project. Yet there are also tougher accusations from activists and development economists, such as Jean Dreze and Reetika Khera, in Delhi. They worry that the voluntary programme will turn compulsory, that individuals' privacy is under attack and that biometric data are not secure. Along with others, they also oppose the logical next step in welfare reform that um enables. Once recipients have bank accounts, India can follow the likes of Brazil and replace easily stolen benefits in kind,

such as rations of cheap food and fuel, with direct cash transfers. Not only do these cut theft, but cash payments also let beneficiaries become mobile-for example so they can leave their state to seek work, while not jeopardising any benefits. Yet Ms Khera is wary of change. She points out that well-run southern states get rations efficiently to the poor, and cites a survey which found many recipients, especially women, would prefer to keep getting rations over cash. They fear money is more easily wasted, say on alcohol. Worse, in the most remote places, cash welfare is

no use since food and fuel markets do not even exist. Such fears need answering. India will have to pass a law on data protection and privacy. A shift to cash welfare would have to ensure that mothers benefit most, not feckless fathers. And perhaps only as Indians grow more urban, mobile and wellconnected will they see the full advantage of cash over rations. But for all the headaches, applying the um to an expanding and reforming welfare system opens the way for profound social change. Indians need to get ready. •

Malaysian politics

The end of Sodomy 2.0 KUALA LUMPUR

The acquittal of the opposition leader spices up the next election AFTER more than two years of legal

1"'\. wrangling, sordid media revelations and political point-scoring, on January 9th the High Court in Malaysia's capital finally handed down a verdict in Anwar Ibrahim's sodomy case-not guilty. Homosexuality is illegal in Muslim-majority Malaysia, and if found guilty the former deputy prime minister and current leader of the opposition could have been jailed for up to 20 years. Now, however, Mr Anwar's vindication allows him to throw his energies into fighting the government in a general election expected later this year. The case began in 2008 when a male aide reported to the police that Mr Anwar had sodomised him. Mr Anwar, however, maintains that the whole trial was a

Vindication 2.0

put-up job by a nervous government, desperate to discredit him after he came close to winning a general election earlier that year. The whole affair seemed an unlikely rerun of similar charges brought against Mr Anwar when he was ousted from his post as deputy prime minister in 1998hence the moniker of Sodomy 2.0 for this case. Indeed, Mr Anwar claims that all the legal suits over the past 14 years add up to a sustained vendetta against him by the ruling party, the United Malays National Organisation (UMNO), which has ruled the country continuously since independence from Britain im957. Once the golden boy of UMNO, Mr Anwar claims the feud started after he fell out with the autocratic and long-serving prime minister, Mahathir Mohamad. He has been demonised by his former colleagues ever since. After the first accusations in 1998, Mr Anwar spent six years in prison for corruption and sodomy before being cleared of the second charge by the country's supreme court and released in 2004. This time the judge ruled that the prosecution case against Mr Anwar was too flimsy for a conviction; the DNA evidence, in particular, was ruled unreliable. If the two sodomy charges really were invented by some in UMNO bent on wrecking Mr Anwar's career, then the strategy has backfired. The first case in 1998 rallied huge public sympathy for Mr Anwar. With Sodomy 2.0 he has been publicly vindicated, despite a widespread belief that he was going to be convicted. Indeed, the government swiftly attempted to exploit this by claiming that the verdict showed "the government does not hold sway over judges' decisions", framing this as part of its vaunted reform programme. The independence and quality of the judiciary has

~~

The Economist January 14th 2012

Asia 41

~ improved

a little since the days of Dr Mahathir, but many in Malaysia remain cynical and conspiracy theories abound. How will the verdict affect Malaysia's politics? In the short term Mr Anwar's victory will give a much-needed boost to the coalition of opposition parties that he leads. So much so, in fact, that the cautious prime minister, Najib Razak, might even postpone going to the polls. In the longer term, however, things are less clear-cut. Although Mr Anwar remains a charismatic figure and a forceful speaker, his reputation has been tarnished. That won't matter to his acolytes, but at 64 he also seems a distant and untrustworthy figure to many younger Malaysians. He has failed to nurture a new generation of opposition leaders. Rather than turning his party into a vibrant, modernising force in politics he has allowed it to become something of a family-run affair, riven by infighting. In prison, some political operators say, he could have served as a useful martyr figure to rally the opposition. Now, they are stuck with him indefinitely as a leader. Mr Anwar may still be popular enough to land a few blows on the government. But he may also be too weakened to deliver the knockout punch. •

Chinese air pollution

Clearing the air? BEIJING

Authorities in the capital respond to public pressure T WAS China's former leader, Deng XiaoItruth ping, who urged his countrymen to "seek from facts". But for the many in China who distrust government data, that sage advice can be hard to follow. In the case of official reports about the improving air quality in Chinese cities, however, taking Mr Deng's advice is easier. To evaluate a specious government report of yet another "blue-sky day", you need only look out the window, sniff the air, orfor the brave-take a deep breath. In Beijing recently the facts have been speaking for themselves. Smog is often so bad that residents cannot see buildings just across the street, schools cancel outdoor activities and the airport cannot operate. For those who do not trust their own burning eyes and scratchy throats, other sources of information are available. A controversial monitoring station at the American embassy in Beijing has for several years been issuing hourly reports from that single location. Chinese pressure groups have also begun monitoring campaigns of their own, and all these readings

No longer a blue-sky day have been widely distributed over Chinese websites and social media, including the vastly popular Weibo microblog platform. Despite their methodological failings, they have been enough to arouse public ire and now to force a change. Beijing city officials announced on January 6th that by month's end they would start reporting readings on "PM 2.5"-particulate matter that measures 2.5 microns or less in diameter, fine enough to enter deeply into the lungs and bloodstream and cause the most serious health problems. China's failure until now to report on PM 2.5 has been an important source of the discrepancies between official reports and the acrid, airborne reality. Officials have been monitoring PM 2.5 for years on a "pilot" basis, and had planned to wait until 2016 to start publishing those readings. Ma Jun, of China's Institute of Public and Environmental Affairs reckons the public outcry goes a long way to explain why the authorities decided to act sooner, despite official concerns about the capital's image. "With amazing speed, this term of technical jargon, PM 2.5, became a house-

I

Don't inhale Pollution readings, particulate matter with diameter of 10 micron s or less per cubic metre* 2009 or latest

0

Beijing Lanzhou Shanghai Rio de Janeiro Moscow London Los Angeles Sydney Source: WHO

40

80

120

160

~~~~===·· *Readings fo r 2.5 microns or less per cu bic metre not yet avai lable in China

hold word," says Mr Ma. People understood the huge impact on health, he says, and their fuss helped overcome the barriers to transparency. According to Deborah Seligsohn, an adviser at the Beijing office of the World Resources Institute, a think-tank, environmental officials have adopted a sophisticated, sustained strategy of enlisting public opinion against the polluters in support of tighter regulation. And, she says, they have achieved greater success than Chinese or foreign critics give them credit for. The European Union only started reporting on PM 2.5 in 2008, and the United States just six years earlier. In results confirmed by external experts, she says, China exceeded its ambitious targets for sulphur reductions in its most recent fiveyear plan. Success will require enforcement as well as public reporting. Ms Seligsohn predicts that Beijing residents will need to wait before seeing improvements. Raising air quality took 25 to 35 years in America, she says. The city of Los Angeles has been regulating its air quality since the 1950s and has never yet met federal standards. "In China," she says, "they are hustling, and doing things pretty quickly, but they started a lot later and it just takes time." •

Disappearances in Sri Lanka

Murky business People are disappearing-and the government has been accused HE 2009 victory of the Sri Lankan govT ernment over the Tamil Tigers in the country's long-running civil war may have brought peace, but it has been an uneasy one. Now people from all walks of life are disappearing. No-one knows why but some blame the government. Colleagues of two political activistsLalith Kumar Weeraraj and Kugan Murugananthan-who went missing in Sri Lanka's north on December 9th, fear the men are in grave danger. On January 9th hundreds of clamouring demonstrators marched through the capital Colombo. They demanded that the government release the activists, put an end to abductions in the north and pull the military out of former conflict areas. In fact, the opposite is happening. Mr Weeraraj and Mr Murugananthan spent much of the past few months campaigning on behalf of hundreds of missing Tamils, many of whom were last seen in the custody of the security forces. The two were intercepted in the northern city of Jaffna by men on motorcycles, bundled

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The Economist January 14th 2012

42 Asia ~

into a white van and taken away. Udul Premaratne, another prominent campaigner, insists that the army-controversially still deployed in large numbers in Jaffna-is responsible. But despite several eyewitness accounts (the incident occurred just before nightfall), the police say they have do not have enough evidence to proceed with the case. This pattern is now chillingly familiar. In December a government-appointed body, the Lessons Learnt and Reconciliation Commission (LLRC), wrote in a report that it was alarmed by the large number of complaints of "abductions, enforced or involuntary disappearances, and arbitrary detentions". It is rare for such a body to be so critical, appointed as it was by the president, Mahinda Rajapaksa, who led the government to victory against the Tigers. But the LLRC's report deplored a breakdown of the law in Sri Lanka. It called on the government to get the law-enforcement authorities to investigate the allegations and bring wrongdoers to justice. At first, many of the victims were Tamils from the north and east. But now Sinhalese and Muslims (who count as a separate ethnic group in Sri Lanka) are also being targeted. And some of the missing people are turning up dead. On January 3rd Dinesh Buddhika Charitananda, a 25-year-old ethnic Sinhalese, was abducted at night. His body was found near a river in a Colombo suburb the following morning. In October Mohamed Niyas, a Muslim astrologer, was taken away in a white van by a group of gun-toting men. Three weeks later he, too, was found dead. According to the Bangkok-based Asian Human Rights Commission, there is a "commonly held belief" that the abductions and murders are happening with "the direct or indirect knowledge of the police and often also with the tacit approval of political authorities". A government spokesman denied any government involvement in the disappearances. The bilingual Mr Weeraraj, who is of mixed Sinhala and Tamil parentage, had himself previously been taken away twice by men who his colleagues claim were soldiers. He was released in both instances. The third time, he was not so lucky. The families of the two activists have now petitioned the United Nations and there are signs that wheels have been set in motion. A spokesman for Ban Ki-moon, the secretary-general of the UN, says the case of the abductions is being sent to the UN Human Rights Council for investigation. The families turned to an international body, explains Mr Premaratne, because they could not get action from the local authorities. "Oh, and keep a story ready about me," he adds with wry humour. "I might be next." •

Australia's aborigines

Occupied land SYDNEY

More moves towards restitution for native Australians

ITH his long white beard and broad black hat, Australia's "father of recW onciliation" cuts a distinctive figure. Of all Patrick Dodson's battles for his fellow aboriginal people, though, none has proved more demanding than the bid to end what he calls the "ridiculous concept" that is still enshrined in the country's constitution: that when the British first settled in 1788, the land was considered terra nullius, or unoccupied. Australians will soon vote in a referendum on finally recognising the country's indigenous people in its founding document. Mr Dodson is co-chairman of a panel, half of whose members are aboriginal, that on January 19th is due to submit a report recommending the questions Australians should be asked to approve. This will be crucial. Australian pride at having forged a successful, multicultural country sits oddly with the country's constitution. Promulgated in 1901, when Australia's six states formed a federation, the document still contains clauses that constitutional legal experts say allow discrimination on racial grounds. Aborigines were mentioned cursorily in the constitution, and only to exclude them from the new country built on their tribal lands. The document thus reflected the attitudes of the white men who drafted it in the 1890s. A referendum in 1967 partly made

No sir, over there

amends. Australians voted overwhelmingly then to repeal a clause that had excluded aborigines from being counted in the census. But that left two jarring constitutional clauses intact. One accepts that people of "any race" could be disqualified from voting in state elections at the whim of state governments. The other allows the federal parliament to make "special laws" for "any race" it liked. Experts claim this second clause still permits the federal government to legislate against the interests of aboriginal people. The panel seems to favour Australians voting on both clauses. First, to delete the racial clause on state elections. Then to rewrite the "special laws" clause to acknowledge the heritage and culture of aboriginal people and to ensure that federal laws protect them. Australia's 500,000 aborigines (about five times their number in 1901) comprise about 2.5% of Australia's 23m people. They lag behind the rest of Australia in health, life expectancy and education; more than half rely on welfare for most of their income. Apart from belatedly cleansing the constitution of unseemly clauses, aboriginal leaders argue a yes vote would boost their people's self-esteem, and hence their capacity to become more productive citizens. Yet hurdles remain. Referendums, such as the one 13 years ago about whether Australia should become a republic, frequently fail. Political divisions have also helped to kill most government bids for constitutional change. But on this one, the conservative coalition opposition supports change. Julia Gillard, the Labor prime minister, has promised a vote by the time of the general election due next year. Success still depends on whether both sides can campaign without the rancour that splits them on almost every other issue. •

The Economist January 14th 2012

Banyan

I

Asia 43

Let them eat yellowcake

Even mass hunger may not driveN orth Korea into bargaining away its nuclear capability

"{ 1. ]HEN even the North Korean press admits it, things must be VV pretty bad. The traditional "joint new year editorial" carried in all the country's newspapers flourished the usual upbeat slogan: "Glorify this year 2012 as a year of proud victory, a year when an era of prosperity is unfolding, true to the instructions of the great General KimJong 11." It did, however, allude to the plight in which the great general left his people when he died last month: "the food problem is a burning issue in building a thriving country." North Korea is hungry again. After his father, Kim 11 Sung, died in 1994, KimJong 11 presided over a famine in which perhaps 1m of his people perished. Surely his son, the well-upholstered but juvenile KimJong Un, will not allow history to repeat itself? His country must have food aid, and its only ally, China, is unlikely to give as generously as North Korea would hope. So he needs other donors: America, Japan, even South Korea. But to win their help, North Korea will have to talk about its nuclear programme, which means resuming the "six-party talks" (with America, China, Japan, Russia and South Korea), which have now been stalled for over three years. On KimJong l1's death, many North Korea-watchers expected that the country would in effect draw down the blinds to mourn the great man, and shut out the outside world. The young Un, meanwhile, would be intent on consolidating the positions bestowed on him by the fawning press: as the Great Successor, leader of the Korean Workers' Party and its Central Military Commission, Supreme Commander of the armed forces and Genius of the Geniuses (though not yet as the country's leading golfer). Since the young Kim has a reputation as a muscle-flexing warmonger, allegedly behind North Korean outrages against South Korean targets in 2010, it was even feared that he might mark his accession with fresh military provocations, or a new nuclear test. Some analysts, however, now hope that, with the succession apparently going smoothly so far, the disruption to North Korean diplomacy might be minor. In the last few months of KimJong Il's life, North Korea had begun sounding out the other parties to the talks. At a regional summit in Bali in July, North Korea's sixparty delegate met his South Korean counterpart. Hillary Clinton, America's secretary of state, invited another North Korean official to New York, and dialogue, tentatively, began again.

Last month this led to an agreement on the resumption of American aid. Officially, America rejects any suggestion that food for the starving is a negotiating tool. In practice, as Marcus Noland and Stephen Haggard of the Peterson Institute for International Economics, a Washington think-tank, have shown, there is a lengthy list of occasions when American aid offers have coincided with North Korean diplomatic concessions. In this case, the offer of food seems to have helped produce a North Korean willingness to freeze its uranium-enrichment programme. That deal is suspended now, but Euan Graham, a former British diplomat now at the S. Rajaratnam School of International Studies in Singapore, points out that the pursuit of American aid can be portrayed as part ofKimJong Il's legacy. There is a parallel with the death inJuly1994 of Kim 11 Sung. Just three months later, North Korea signed an "agreed framework" with America, which had been under discussion before his death, promising to dismantle its nuclear facilities. The unusually frank admission of food problems in this year's new year editorial suggests it wants to keep the door open. Even a North Korean statement this week hypocritically rejecting America's alleged linking of food and politics could be read as part of a continuing negotiation. As Mr Graham points out, Kim Jong Un also has another pressing need from the outside world: for hard cash to pay for the perks and luxuries that keep the North Korean elite sweet. His family has never shown much interest in the ordinary citizen. But they have always managed to grease the wheels of the patronage networks and corruption that have kept them in power. Further fuelling the demand for cash are two big anniversaries. Next month KimJong 11's 70th birthday will be celebrated as lavishly as if he were alive. And April marks the centenary of the birth of Kim 11 Sung, an event long foreshadowed as signalling North Korea's achievement of prosperity. Mass hunger would not just be murderous; worse, for this regime, it would be embarrassing.

Guarding the fat boy's sticky buns North Korea, however, is not going to come begging. A mass rally in Pyongyang this week to swear allegiance to Mr Kim junior on behalf of the 1.2m members of the army, made the pledge to "wipe out the enemies to the last one if they intrude into the inviolable sky, land and seas of the country even o.oormm." The new year editorial railed against the "group of traitors" in South Korea and the government's defence commission has said the country will have no dealings with them "for ever". That suggests that the government thinks engagement with the South, and by extension the West, can wait until after the South Korean presidential election in December. Whether its people can wait, however, depends on China's generosity. In Beijing this week South Korea's president Lee Myung-bak exchanged, according to a statement, "candid views" with Chinese leaders on this "crucial moment" on the Korean peninsula. He is unlikely to have come away satisfied that China will push North Korea into making concessions. Another part of Kim Jong l1's legacy is an even closer relationship with China, which he visited four times in the last two years of his life. China may be exasperated with its Korean ally's economic ineptitude, but seems more afraid of the collapse of the regime and Korean reunification. China may not give enough food, but its political support allows North Korea to play hard to get, and, even if it does agree to resume talks, it will cling to its primitive nuclear deterrent, however hungry its people might become. •

Also in this section 45 South Africa's disappointment 46 Rwanda's disputed history 46 A new twist to Israeli politics 46 Religious divisions in Egypt 47 Tunisia's Islamist-led government 47 Russia's navy watches Syria

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

Nigeria

The spreading northern insurgency MAIDUGURI

The government must think hard about how to tackle an Islamist uprising that may have less to do with religion than the rebels claim AS THE muffled boom of a distant bomb ./'"\.set off by militants gives way seconds later to the clatter of government soldiers' automatic gunfire, Satu Mari listens in the car park of the hotel he owns in Maiduguri, a city in Nigeria's turbulent north-east. "Bomb is our daily bread," he says casually. "Bomb is our good morning and good night." Maiduguri is sliding towards a fullblown guerrilla war and Mr Mari runs one of the few businesses with a bright future. He lodges army officers. The government is sending thousands of troops to Nigeria's north to fight Islamist militants said to have emerged from a small cult in the past decade. Known as Boko Haram, it is blamed for nearly every act of violence now occurring in Africa's most populous nation, some 16om-strong. After a wave of attacks on banks and prisons in late 2010, the militants are said to have moved up a notch, murdering politicians and poll workers in the run-up to elections in March and April last year. They are also blamed for bombs that went off at the heavily guarded national police headquarters and at the offices of the UN in the capital, Abuja. And for the second year in a row Boko Haram is said to have attacked Christmas church services. All of this seems well beyond the capabilities of a small cult known mainly for its views on secular education. Boko Haram in Hausa, the main language of the north, means "Western learning is forbidden".

The frequency and sophistication of the violence has led many, especially in America, to suggest that the group is getting support from international terrorist networks. Algeria's branch of al-Qaeda and, more improbably, Somalia's Shabab have been mentioned. Nigeria's government, keen to win lucrative grants as a front-line ally in the West's "global war on terror", has encouraged such explanations. Religious and political leaders in the mainly Muslim north, however, see things differently. To them, the internationally connected, ferociously active Islamist fringe group described by officials is largely an imaginary bogeyman. They say there are some genuine religious fanatics in the north but suggest Boko Haram has been

co-opted into a murky mix of criminal opportunists and disgruntled political operators. "It's something like a Bermuda triangle." says Kashim Shettima, the governor of Barno State, where the group originates. "Boko Haram has become a franchise that anyone can buy into." Goodluck Jonathan, Nigeria's president, seems in two minds. He has claimed that Boko Haram and its sympathisers have infiltrated all branches of the government, including the army and police. "Some continue to dip their hands and eat with you, and you won't even know the person who will point a gun at you or plant a bomb behind your house," he told a church congregation in Abuja. The president, a Christian who is unpopular in the Muslim north, is following the advice of his top security men baying for blood. He has put much of the north under a state of emergency. He appears ready to give the armed forces and police a free hand to run large-scale operations. And he is set to spend an astonishing 20% of the federal budget on security this year. Some fear that such measures may make matters worse. Already deployed in parts of the north, troops are seen by locals as occupiers. Their high-handed, sometimes violent behaviour stokes rebellious feelings. A backlash is already happening. The north's most urgent need is economic development. Whereas the oil-rich south is booming, nearly three-quarters of northerners live on less than $200 a year, far below any poverty line. Few government programmes really help the region. The country's 8om Muslims blame a loss of political influence. When the army ruled Nigeria, northerners were largely in charge, but that ended 12 years ago. A sense of marginalisation has stirred political dissatisfaction which northern extremists feed on. Yet the intelligence services

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charged with hunting them down rarely seem to find them, whether they are religious extremists or political opportunists. While the spooks persevere, the government must quickly attend to legitimate and longstanding grievances. So far the opposite has been happening. The government's bold decision to cut fuel subsidies from January 1st, however much economic sense it might make, has further widened the gap between rich and poor. Nationwide strikes have ensued. Tension and lawlessness have risen. Yet the Nigerian state has shown it can end an insurgency if it plays its cards right. Until a few years ago most political violence in Nigeria took place in the Niger delta in the south. Just as in today's north, residents complained of corruption, poverty, inequality and lack of development. Some delta people backed armed groups; others benefited from their largesse. In the first nine months of 2008, 1,000 or so people were killed in the unrest and nearly 300

Middle East and Africa 45 taken hostage. Over the years, the cost to Nigeria through pipeline sabotage and oil theft was estimated at nearly $24 billion. But a deal in 2009 that included an amnesty brought relative peace to the region. Militants were offered an unconditional pardon and cash. Around 26,ooo accepted. According to official figures, 15,00o-plus former militants have had vocational training or a formal if belated education. Though the delta is much safer, the amnesty programme has yet to bring total peace. And it has been expensive. Repentant militants each got $393 a month in cash plus food allowances during rehabilitation. In this year's government's budget, $458m will be spent on sustaining the amnesty-more than is given to the Universal Basic Education Commission, which provides free primary education. Some say Boko Haram's real aim is not an Islamist state but a slice of the amnesty cake. If so, the government should at least explore such a possibility. •

South Africa

Disappointment BLOEMFONTEIN

The ruling party's tooth anniversary failed to mask a host of worries AFTER a traditional healer had called on 1"'\.the spirits of the ancestors to join present members of the ruling African National Congress (ANC) in celebrating the movement's foundation in Bloemfontein 100 years ago on January 9th, it was the turn of the Reverend Jesse Jackson to call on his Christian god to bless the proceedings. The 50,ooo-strong crowd packed into the town's rugby stadium roared with delight as the American civil-rights leader strode to the podium and declared "Happy Birthday to the new South Africa!" Few of the fans seemed to notice, let alone oppose, the conflation of party and state. Indeed, the line between them, since the ANC swept to power in the country's first multiracial elections in 1994, has been increasingly blurred. Turning a national liberation movement into just one in an array of competing political parties was never going to be easy. For the ANC, with no experience of running a sophisticated country, the task was made harder by its inheritance of a battered economy and a racist and often corrupt state whose resources had grossly benefited the 12% of the population who were white. The ANC has marked up some notable achievements. It enshrined civil and social rights in the constitution. It abolished the death penalty. It has built more than 3m free or subsidised houses, and has brought

Zuma' s clean hands clean water, sanitation and electricity to millions more. Every child now has a right to at least 12 years of education. More than 15m people, almost a third of the population, get some form of welfare. Severe malnutrition among children under five has been almost eradicated. Some 6m pupils get free school meals. Having at last accepted the link between HIV and AIDS, the ANC now has a grip on the epidemic, one of the world's worst. Crime is coming down; the murder rate has fallen by half

from its peak in 1994. The ANC has set up anti-corruption agencies in a proclaimed effort to bring corrupt people to book. But for most South Africans, the stench of graft, patronage and greed surrounding the ruling party itself is now too strong. The romance, solidarity and heroism of the days of struggle have gone. In the popular mind, ANC people, from the president down, seem keener on power, status and ostentatious wealth than on improving the lot of the poor. Always a broad church, the ANC is riven with factionalism and infighting. Lip service is paid to the old ideals, but the party seems increasingly rudderless. It has lost its way. When President Jacob Zuma came to power in May 2009, many hoped that the self-taught Zulu former goatherd with a dazzling smile and common touch would provide a new sense of direction. He started well, making shrewd appointments, steering pragmatically down the middle of the road, and assuring everyone he would uphold the constitution. He fended off his trade-union and communist allies, sticking to his predecessors' market-friendly economics. And he said he would deal more robustly with neighbouring Zimbabwe's brutal president, Robert Mugabe. But disillusionment crept in as Mr Zuma failed to fulfil his populist election promises. Unemployment remains stubbornly high, officially at around 25%, unofficially nearer 40%, even as business cries out for skilled staff. In a country awash with mineral riches, 40% of the population live on less than $2 a day. State education and health services are dire. The scourge of corruption is spreading. The ANC has tended to undermine the independence of the judiciary, the prosecution authorities, the intelligence services and the press. The country's foreign policy is inconsistent. Mr Mugabe still misrules Zimbabwe. Yet the vast majority of black South Africans, who account for 79% of the country's 50m people, will continue to back the ANC. More than 6o% of them still give it their vote. Many black South Africans would deem switching parties to be treachery. The liberal Democratic Alliance, though inching up from 17% of the vote in the latest general election, in 2009, to 24% in the most recent local elections, is still viewed as too white. A split within the AN c between a thoroughgoing left and the new crony-capitalist establishment may one day occur, but there is no sign of it happening soon; previous splits have barely dented the ANC's dominance. With good reason, Mr Zuma devoted almost his entire 90-minute centennial oration in Bloemfontein to the ANC's glorious struggle against apartheid. But the crowd seemed bored. South Africans want a vision of the future and a sense of leadership. By the time Mr Zuma had finished speaking, the stadium was nearly empty. •

46 Middle East and Africa

The Economist January 14th 2012 Egypt's religious divisions

Rwandan history

Not so "Happy Christmas"

Shifting the blame NAIROBI

A new investigation says the 1994 genocide was triggered by Hutus, not Tutsis N APRIL 6TH 1994 two surface-to 0 air-missiles blew apart an executive jet that was attempting to land at Kigali airport in Rwanda. On board were the Rwandan president,Juvenal Habyarimana, the Burundian president, Cyprien Ntaryamira, and a French aircrew. Who fired the missiles has been fiercely debated ever since. Many hold Hutu extremists responsible. Others put the blame on the present Rwandan president, Paul Kagame, and his Rwandan Patriotic Front (RPF), a Tutsi force which was then trying to overthrow Mr Habyarimana's ethnic Hutu state. The immediate effect of the downing of the jet was a frenzy of killing that left 8oo,ooo or so dead, mostly Tutsis. A French judicial investigation now concludes that the missile was fired from Hutu barracks, not from an RPF position on the other side of the airport as sugIsraeli politics

Shal
Could a new combination of parties ditch Israel's leader? HE alliance of right-wing nationalists T and religious zealots that underpins Binyamin Netanyahu's ruling coalition may be starting to fray. A new centristcum-secular party proclaimed on January 8th by a popular television anchorman, Yair Lapid, could poach votes from Mr Netanyahu's Likud, say opinion pollsters, though it would take more from the main opposition party, Kadima. And a widely mooted new centrist religious party under Aryeh Deri, a former leader of Shas, currently Israel's biggest religious party, would nibble away at the two religious ones (including Shas) now in Mr Netanyahu's coalition. Together, according to a recent newspaper poll, the two newcomers could give the combined parties of the "peace camp" a slight edge over Mr Netanyahu's "national camp" and perhaps even install a prime minister after the next election who would strive harder to do a deal with the Palestinians. Israel is abuzz with such hypotheses. But the next election is far away. By law, Mr Netanyahu can keep governing until October 2013. The Israeli economy is more robust than many and he is under no serious

gested by some. Hutu exiles and former friends of Mr Kagame's called for further research. They say infiltration of Hutu positions by RPF commandos makes it entirely possible that Tutsis were responsible. Regardless, the French government will probably accept the view that the Hutu extremists were to blame. Cynical diplomats wonder whether France's president, Nicolas Sarkozy, has fiddled the findings to improve relations with Rwanda and win business contracts there. Then again, France is keen to know who killed its citizens on board. During Mr Sarkozy's presidency relations have improved from a dismally low base. He visited Rwanda and apologised for French failures before and during the genocide, when France seemed to back the Hutus. Mr Kagame, on a visit to France last year, called on the two countries to make friends again. domestic threat that could cause his coalition to implode. The longer he waits, the likelier the new contenders are to shrivel and fade from public awareness. But Likud insiders say the prime minister fears possible friction between Israel and the United States in a second-term Obama presidency and may therefore prefer to hold an early election, say in October 2012, while the American president is still campaigning. At any rate, he is clearing his decks. He has moved up the Likud's leadership primary contest to January 31St, leaving his perennial rival, Silvan Shalom, the deputy prime minister, scant time to prepare for a fight. As a result, Mr Netanyahu will face only an ultra-right-wing challenger, Moshe Feiglin, whom he will trounce. Mr Lapid will hope that his message of brash, cosmopolitan Israeli-ness can woo young voters from Yisrael Beitenu, a fiercely nationalist and mainly Russian-immigrant party that is a vital Likud ally. His late father, Tommy Lapid, also a journalistturned-politician, was hugely if briefly successful in the late 1990s with his stridently anti-clerical party, Shinui. The younger Mr Lapid had to make his move now to escape a proposed new "coolingoff" law for journalists entering politics; as soon as he declared, the law was shelved. Mr Deri, who led Shas to prominence in the 1990s, is making a comeback after a stint in jail for taking bribes. He will court traditionalist voters uncomfortable with what he regards as their parties' excessive religious and nationalist zeal. •

CAIRO

Why Egypt's Christians are nervous O ONE was surprised that leaders of N the Nour Party failed to attend a Christmas mass, despite being invited by the Egyptian Christians' pope himself. After all, the party, which has done remarkably well in Egypt's multi-stage parliamentary elections, now drawing to a close, is on the ultra-puritan Salafist fringe of the Islamist spectrum. Its sheikhs concede that it is permissible to greet infidels on personal or national occasions. To say "Happy Christmas", however, let alone to sit silently and endure priests babbling about a son of God, is to give credence to false belief. Besides, although the Coptic prelate, Pope Shenouda, welcomed the heads of all Egypt's political parties to the ceremony on January 7th (the Copts' Orthodox calendar lags behind the Catholic and Protestant one), some of his flock had staged a pre-emptive protest against the Salafists. Many among Egypt's anxious 10% Christian minority blame them for inciting recent attacks on churches and for exploiting sectarian tensions to win votes. In any case, the mass at Cairo's Coptic cathedral was packed, and not only because milder Muslim scholars had reconfirmed Egypt's traditional religious tolerance by issuing hasty fatwas to counter the Salafists' ban. A posse of generals from the ruling military council filled the front pews. The Muslim Brotherhood attended in force, too, keen to soothe Christian nerves after capturing nearly half the seats in parliament. To the Nour Party's chagrin,

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The Economist January 14th 2012 ~

its own chairman's elder brother also discreetly attended. Nour spokesmen first denied any kinship, then sniffed that the wayward sibling was not a party member. Yet the Christmas pageantry did not really paper over cross-confessional cracks. Some in the cathedral crowd booed the generals, holding them responsible both for an incident in October when soldiers killed 24 mostly Christian protesters, and for the failure to investigate the bombing of a church in Alexandria last year, which killed another 24. Soon after Christmas, Copts again felt squeezed when a Cairo court gave the goahead for a trial of Naguib Sawiris, a scion of Egypt's richest family, for the crime of having re-tweeted a link to a cartoon pic-

Middle East and Africa 47 turing Mickey and Minnie Mouse as bearded and veiled Salafists. The Coptic telecoms magnate, who also funds one of Egypt's beleaguered liberal parties, could face up to six months in prison. Nor did Egypt's Christians gain much comfort from another message dispatched across the internet, this time from Ayman Zawahiri, the Egyptian-born successor to Osama bin Laden as head of al-Qaeda. Egyptian Muslims should refrain from attacking non-Muslims, commanded Mr Zawahiri in a taped address, but only to thwart the global plot hatched by America, Israel and Pope Shenouda that aims to sow sectarian strife to justify intervention to divide Egypt, just as they have divided Bosnia, Kashmir and, most recently, Sudan. •

Tunisia

Ideology v practicality GAFSA

Some secular Tunisians are still rattled by the new Islamist-led government

AMMAR GHARSALLA is unlikely to fiachieve the fame of Muhammad Bouazizi, the street vendor whose self-immolation sparked the protests that led to the Arab spring. Mr Gharsalla, a 48-yearold father of three from the western town of Gafsa, died on January 9th in a hospital near Tunis after setting himself on fire to draw attention to his joblessness: the first Tunisian to die in this way since the revolution that overthrew President Zine el-Abidine Ben Ali a year ago. Mr Gharsalla's dramatic gesture reminded Tunisians that there is no easy way to reduce the chronic unemployment that blights some regions of the country and which the new Islamist-led government is sworn to tackle. The country's new interim president, Moncef Marzouki of the centre-left Congress for the Republic party, has taken to donning a traditional cape as a statement of national and cultural identity and as a reminder that his roots are in the poorer south, not among the professionals of cosmopolitan Tunis. Thus attired, he visited neighbouring Libya earlier this month, amid hopes that a reviving economy there could generate tens of thousands of jobs for Tunisians. But some analysts reckon that Tunisia's unemployment rate, now around 16%, will rise to 19% by the end of this year. Among the young and educated in provincial towns such as Gafsa the figure is higher. To break a vicious circle in which persistent unrest discourages fresh investment, Mr Marzouki has appealed for a "truce" of six months in which low-paid or jobless workers would stop their wildcat

strikes and desist from mounting roadblocks to air their grievances. Investors are also being put off by Tunisia's fraught politics. The interim prime minister, Hamadi Jebali of Nahda, the Islamist party that won October's general election in a landslide, boldly appointed senior party figures to head the interior and justice ministries, but may have been too bold in announcing new directors for state television, radio and other state-controlled media. Hundreds of journalists gathered to protest that many of those appointed once worked with Mr Ben Ali's regime in enforcing a deadening official discourse. Nahda politicians for their part accuse parts of the media of distorted reporting and scaremongering. One determinedly articulate block of public opinion, echoed by some of the press, is reluctant to accept Nahda's electoral victory. It is also spooked by the increasing visibility of radical Salafist Islamists. Lecturers were dismayed when the humanities faculty of Tunis's Manouba University was closed down by Salafist protesters wanting women students to be allowed to wear the niqab, the full faceveil, in class. Riot police were dispatched onto the campus to end the sit-in without violence, signalling that the government will not be held to ransom by such groups. Mr Jebali has pledged to focus on making regions such as Gafsa less wretched. But secular-minded liberals are nervous. Nahda displayed its ideology during a visit by Ismail Haniyeh, a leader of Hamas, the Palestinians' Islamist movement that runs the Gaza Strip. At a rally of Nahda party

Syria and Russia

Wait and sea An awkward visitor

HE Syrian port of Tartus is Russia's T only military base outside the old Soviet Union. Moreover, Russia is the Syrian regime's only big-power friend. So the arrival there of the Admiral Kuznetsov aircraft-carrier and a few other warships earlier this month brought a warm welcome from Bashar Assad's defence minister, General Dawood Rajiha, who praised Russia's "honourable" support for his government. Russia still blocks sanctions against Syria in the UN Security Council. But its navy offers little practical support. The laboriously assembled flotilla (shadowed by NATO vessels) did nothing to stop Cyprus impounding a cargo ship carrying tens of tonnes of Russian ammunition and explosives to Syria; it was released on condition it went to Turkey. Russian officials say the visit is nothing to do with Syria's politics. Its warships visit often. It started modernising the near-derelict base, a legacy from Soviet times, in 2009. In any case they would be little use in a real fight: America's Sixth Fleet alone has probably more firepower than Russia's entire navy, which has barely 20 seaworthy surface ships. The toppling of dictators in Iraq and Libya hurt Russia's oil interests and arms sales. It wants to avoid that in Syria. Its dilemma is that too much support for Mr Assad risks a future regime booting it out of Tartus, which is valued by Russian spooks and electronic snoopers. But too little may mean defeat for an old ally.

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0 faithful, he stood approvingly beside a young French female convert who, in stumbling Arabic, declared her adherence to Islam. The human-rights minister and government spokesman, Samir Dilou, another Nahda man, helped get her wording right, to rapturous applause from the audience. Gafsa residents may have wondered how this would help alleviate poverty in their region. •

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2012 Global Economic Outlook January 24th 2012 - Four Seasons Hotel, New York City The euro zone's ongoing financial stress is adding to an already unstable business environment, causing credit to continue to tighten. What lies ahead in 2012? Competition for Commodities: A New Normal- An Interactive Panel Discussion. In a world where commodity prices are soaring and many emerging markets rely on the strength of commodities to fuel growth, panellists explore the impact of volatile commodity prices on cross-border expansion. Featuring

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49 Also in this section 50 French tourism 50 Germany and the euro 51 Greek woes 52 Albanians in Greece 53 Charlemagne: Denmark and the EU

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•

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

Europe's economies

A false dawn

The recession has been mild so far. But things are likely to get much worse NEW year can bring a burst of optimism, even in as troubled a place as A the euro area. Stockmarkets have been a bit cheerier, helped by better jobs and output figures from America. Bond investors seem less skittish: on January sth an €8 billion ($10-4 billion) auction of French government bonds was comfortably oversubscribed. The €498 billion that banks were able to borrow cheaply for three years from the European Central Bank (ECB) in December has helped to settle nerves. The news on the economy has also been a bit better. A closely watched index of business activity, based on surveys of purchasing managers across the euro zone, has risen for a second month in a row. The German economy has stayed resilient despite troubles on the European Union's southern rim. It grew by 3% in 2011, according to figures from the statistics office this week. Business confidence perked up in the last two months of the year on the gauge published by Ifo, a Munich research group. Unemployment fell in December to 6.8%, the lowest level since 1991. Yet the figures have not been so perky as to suggest the euro-zone economy will avoid recession. German GDP probably shrank in the fourth quarter of 2011, says the statistics office. French GDP was flat, says its central bank. Add in grimmer figures from Italy, Spain and elsewhere, and euro-zone GDP may have fallen by some 0.3-0-4%. The bright start to the year might

mean that the current quarter is no worse than the previous one, but much will depend on whether financial markets remain calm. With so much ahead that could go wrong, the chances of that are slim. The worries begin with sovereign debt. Barclays Capital reckons that euro-zone governments must raise €218 billion in new bonds in the first quarter, of which €167 billion is needed to pay maturing debt. Some €300 billion of short-term bills must also be sold. Italy will be the largest single issuer: it has two chunks of debt due in the last weeks of January and February. The government is likely to pay a high price for its money: yields on ten-year bonds are close to 7%. A bigger concern is that investors might snub one of Italy's

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Out of Athens Bank deposits,% change on previous year

2010 Source: European Central Bank

2011

bond auctions. That would be less of a worry if the euro zone had a stronger safety net for countries that have fallen foul of bond markets. But the EU summit in December deferred until March a discussion on whether to raise the €500 billion lending capacity of the euro zone's rescue fund. The standing of the fund relies on the credit of the countries that back it, including France, which is threatened with a twonotch downgrade to its AAA credit rating by Standard and Poor's. A decision on whether to downgrade all euro-zone government bonds is due before March-one more reason to fear the worst. The biggest danger is Greece (see page 51). The country's slow-motion bank run has continued (see chart 1). Its central bank has provided emergency liquidity to banks to make up for lost deposits, which have dropped by more than a quarter since 2009. An IMF report on Greece just before Christmas was sobering. It says GDP probably shrank by s.s-6% last year and may fall by a further 3% in 2012. Deepening recession makes it harder for Greece to meet its budgetary targets. The pace of reform and of privatisation has been slower than hoped. Credit is scarce and dear. The delay in reaching an agreement with private-sector creditors on the losses that they should bear on Greek government bonds has not helped. The IMF reckons that, if all private bondholders agreed to take a so% "haircut" (ie, lose half the value of their bonds) and if Greece were to meet its fiscal targets, public debt might eventually fall to12o% of GDP. That is still a heavy burden. The so% target agreed on at October's EU summit is the minimum required to make the debt sustainable. Greece has a €14-4 billion bond due on March 2oth. A deal is needed soon so that bonds can be exchanged before then for ~~

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The Economist January 14th 2012

Europe

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A bigger haircut, or one that is not voluntary, would jolt investors. And there is always a risk that Greece might fail to meet its commitments or that it might fall out with its "troika" of rescuers: the EU, IMF and ECB . Bond-market indigestion; a rating downgrade; the worsening mess in Greece; or the wrangle over private-sector losses: any of these could rattle confidence and trigger a much deeper recession. Even in the absence of an accident, conditions are hostile to growth. Governments are cutting spending and raising taxes to assuage bond investors, as well as their would-be rescuers in Brussels and Frankfurt. Banks are required to meet EU capitaladequacy targets by June. Raising fresh money is proving tricky (see page 71) and so banks are rationing capital by selling assets. They are reluctant to make new loans. All this has taken a toll on confidence, which fell for a tenth month in December, says the European Commission. The misery is spreading far beyond the euro area. Sweden's economy rebounded more strongly even than Germany's in 2010 but is now flirting with recession. Manufacturing fell by almost 2% in November. Sweden's central bank lowered its main interest rate in December in response to the euro gloom (as did Norway's). In the east industrial production in Poland, Hungary and the Czech Republic has held up surprisingly well so far, says Gillian Edgeworth, of UniCredit. But capital flows-including bank loans from the euro zone-are drying up and countries with large current-account deficits, such as Turkey and Poland, rely on these. Currency weakness is one indicator of the region's distress (see chart 2). Turkey's central bank has intervened in the foreign-exchange market and allowed interest rates to rise to support the lira. What is a worry in eastern Europe is a small blessing in the west and south. The euro's recent fall against the dollar is helpful to exporters, especially in the struggling periphery (see Buttonwood). Sadly there are many more reasons to be fearful than cheerful about the euro zone. •

MONTEREAU

A French politician hopes a Napoleon theme park will pull in the tourists HE biggest employer and taxpayer in T the region of Seine-et-Marne is Disneyland Paris, which opened in 1992, amid howls from French intellectuals about a "cultural Chernobyl". Now comes the counterattack. Yves]ego, a deputy from the Radical Party and mayor of Montereau, site of a Napoleonic victory, plans a new leisure park just 70km (45 miles) from Disneyland, to re-enact the emperor's life and times. Napoleonland will have the usual hotels, shops and restaurants. Harder to design are the activities and rides. This year marks the bicentenary of Napoleon's 1812 Russian campaign. Even this tragic story could become an attraction, reckons Mr ]ego. At Moscow's gates, he suggested in a blog, visitors might don skis and glide down snowy battlefields and later across the Berezina river, scene of a disastrous battle, "surrounded by the frozen bodies of soldiers and horses". Napoleon is the best-known Frenchman after Charles de Gaulle, and is popular in Russia and China. Mr ]ego argues that the government has not catered to his millions of fans, at home and abroad. Although his vulgarly showy tomb is in Les Invalides in Paris, there is no national Germany and the euro

Unhappy new year BERLIN

Euro-zone leaders meet and talk, but have not resolved their crisis ICOLAS and Mario. Angela and Nicolas. Mario and Angela. The year is startN ing with a burst of speed-dating among the leaders of the euro zone's three biggest economies. Their talk is of the single currency, which is threatened by economic failings in Mario Monti's Italy, Nicolas Sarkozy's France and in even weaker Mediterranean countries-but also by dogmatism in Angela Merkel's Germany. The three leaders accept that they have not averted all the dangers, but claim to be making progress. "We have laid the groundwork for the medium term but have not yet won back trust," said Mrs Merkel after her meeting with Mr Sarkozy on January 9th. All are minding their manners, and yet tensions are apparent. Mr Monti, a technocrat (and former European commissioner) who took over from the populist Silvio Ber-

Napoleon museum. In 2005 the government boycotted the bicentenary of his victory at Austerlitz amid protests over his reintroduction of slavery in the French West Indies. Mr Jego's team must raise some €2oom ($255m) for the park, with construction planned to start in 2014. Russian and Middle Eastern investors are interested. Theme parks are a French political speciality: Puy du Fou, featuring medieval battles, Vulcania, a scientific park, and Futuroscope, boasting new technology, were all started by right-wing figures. Christian Mantei, head of At out France, a tourism body backing the project, claims that bosses at Disneyland Paris once said that only Napoleon had the stature to take on Mickey Mouse. The timing could be right, too. Gripped by pessimism and weighed down by debt and austerity, the French badly need a lift. In times like these, says Jean Tulard, a historian, "there is a nationalist reflex to return to the time when France was the strongest nation in Europe." Many hoped Nicolas Sarkozy, France's president, would be a Napoleonic figure, restoring French glory. But a theme park is better than nothing. lusconi in November, marked his visit to Berlin by warning Die Welt, a newspaper, that Italians could turn against the painful reforms he is trying to enact, and that Europe and Germany would be blamed. Mr Sarkozy, who faces a tough re-election fight this spring, carefully hides his differences with Mrs Merkel but sympathises with Mr Monti. The trio, an expanded version of the familiar Merkozy ensemble, will all convene in Rome on January 2oth. Mrs Merkel's hope is that trust will build up gradually from the groundwork already laid. A German-inspired "fiscal compact", enshrined in a new treaty and enforced by sanctions, could be signed either at the next European Union summit, on January 30th, or the one after, in early March. This austerity agenda will be supplemented by a friendlier growth- and jobs-producing "leg", also largely of German design. The idea is to spread best (usually northern European) practices in areas like labour-market regulation and to spend European funds more effectively. Even with its own economy weakening, Germany plans no new stimulus package to boost demand at home or in faltering peripheral countries like Italy and Greece. Mr Monti and Spain's recently elected

~~

The Economist January 14th 2012 minister, Mariano Rajoy, are among the new leaders who largely accept Mrs Merkel's view that deficit-cutting and structural reforms are what matter most. Mr Sarkozy is a recent convert. But, as Mr Monti's warning suggests, they do not think these will be enough. The fiscal pact must not "strangle" weak economies, Mr Monti said. At the post-summit press conference he called for lower interest rates, code for Eurobonds guaranteed by all euro countries and for more market support by the European Central Bank (ECB). The Germans think enough billions have already been pledged to wobbly euro members. These mechanisms should be given a chance to work (the ECB will advise the European Financial Stability Facility, the EU's temporary bail-out fund). The ECB is independent, but is more likely to

~ prime

Europe 51 help if governments do the right things. Markets are already starting to reward reformers, especially Spain, with lower interest rates. Despite German resistance, discussion of topping up the bail-out fund will resume at the March summit. Mrs Merkel's hoped-for crescendo of trust could be interrupted in two ways. One is a deep European recession, brought about partly by the euro crisis and partly by the fiscal tightening urged by Germany as a way of resolving it. The other is Greece, which is not part of Mrs Merkel's virtuous group. A Greek exit from the euro is seen in Germany as impractical, if not unthinkable. A "disorderly default" is more possible, but that is largely in the hands of the Greeks. Greece is an "exceptional case", Mrs Merkel insists. She and her friends must pray she is right. •

Greek woes

The Mediterranean blues ATHENS

Greece's economic crisis is worsening-as is life for ordinary Greeks HE news from Greece gets ever grimwill shrink in 2012 for the mer. T fourth year in a row. Talk of a default GDP

and/or departure from the euro is growing. This week Angela Merkel, Germany's chancellor, demanded urgent progress towards a deal imposing a "haircut" on private creditors (which may now have to be bigger than so%), saying that Greece might otherwise not get its second European Union/IMF loan. And thieves have just stolen a Picasso painting from the national gallery, where only one guard was on duty. Yet most evenings Athens is buzzing. Around Syntagma Square, the scene of so many protests, the streets are crowded, with cheery music playing. In nearby Karytsi Square, bars and restaurants are packed with rowdy people; some are even jolly. The mojitos may have been replaced by cheap beer, but Athenians live for an evening out with friends. "Staying home is not an option," says a classics student from Athens University. "It's too depressing." But when day follows night, the buzz gives way to bleakness. Sofokleous Street, home of the Athens Stock Exchange until 2007, is now the site of the city's main soup kitchen. It is a meeting-place for the homeless and for those too poor to afford food. To the east, on Kifissias Avenue, many small shops have gone bust, often to be replaced by gold dealers, pawnbrokers or seedy shops selling sexual paraphernalia. There has been a surge in crime. Police statistics show both petty theft and breaking and entering on the rise. In the first half

of 2011 some 314 house burglaries were reported in Athens, over twice as many as in 2010. Crime has spread to places thought of as safe only a couple of years ago. Homelessness has also shot up. Klimaka, a charity, estimates that 20,000 people in Greece have no home, 2S% more than in 2008. Before the crisis, the homeless were usually 3s- to so-year-old reclusive men from poor backgrounds. Now the streets are home to the young, struggling to find jobs, and the middle-aged, whose ca-

A Greek tricoteuse before the fall

reers have been cut short. Many are educated; some are graduates. Most have lost their homes because of debts. Georgios Barkouris, a musician from a middle-class Athenian family, worked for two decades for the national radio station. When recession hit he found himself without a joband, soon enough, without a home, too. One in five Greeks lives below the poverty line. "Expecting homelessness to double this year", says Mr Barkouris, "is awfully optimistic." Since Greece's first bail-out in May 2010, the government has imposed austerity, increasing taxes so much that people can barely manage. The unemployment rate is 19% and rising. GDP has contracted by12.s% since 2008 and is expected to fall by another 3% this year. Even middle-class Greeks are being driven into poverty. Property prices and rents have plunged. But property taxes have tripled. The biggest blows have fallen on small family businesses (with so employees or fewer), which make up 99% of enterprises and employ three-quarters of the privatesector workforce. Many have closed or sacked most of their staff. Big businesses (such as banks or private hospitals) are suffering, too. Indeed, the entire private sector is haemorrhaging workers. Of the 470,000 who have lost their jobs since 2008, not one came from the public sector. The civil service has had a 13.s% pay cut and some reductions in benefits, but no net job losses. Already low, public-sector productivity has fallen further. This has led to deep resentment of the civil service, which has mushroomed in the past three decades and now employs almost a fifth of the workforce. Outside Athens the situation is a little better. Except for Thessaloniki, Greece's second city, the rest of the country has not ~~

The Economist January 14th 2012

52 Europe ~ seen

the protests and social unrest of the capital. The cost of living and house prices are lower and family ties stronger. "Everyone has a place to stay here," notes a teacher in Preveza, a coastal town in the northwest. Crime is lower. Figures from the Research Institute for Tourism show that in 2011,64% of murders and 75% of robberies took place in the capital. The economy is also holding up better outside Athens. Tourism and agriculture have always counted for more in the countryside and on the coasts. The Association of Greek Tourism Enterprises reports that, in the first half of 2011, tourist arrivals increased by 13.9% (and revenues by 13.4%) over the same period in 2010. And farm exports have risen by 9.1%. A few city workers are even going back to the land. Outside Athens some in the public sector see their jobs as a sideline to earn pin money while their main occupation is farming. Many Greeks have chosen to move abroad in search of a better future. Successful academics, bankers and engineers have already fled for better pay and work conditions. Some have even gone without a job offer, usually to places such as Australia or Canada, where the Greek diaspora is large. The most destructive brain drain is of the young. Since 2008, ever more young people (mostly in their 20s) have gone, often to foreign universities. "When I left to study abroad in 2006 I was the odd man out," says a young Greek lawyer. "Now I thank my lucky stars." Greece's archaic education system and strikes have held back those who pursued their education at home. Exams have been delayed or cancelled. Some students are a year or more behind in their studies. If they manage to graduate, the prospects are still poor. Youth unemployment is over 47% (and rising). Those lucky enough to find a job are underpaid, overtaxed and, often, overqualified. They, too, may drift abroad. Young doctors go to Sweden for specialist training; engineers move to Abu Dhabi; many others head for Berlin, where life is cheaper and more fun. All this hugely damages Greece's prospects, given an ageing population. Within a decade the workforce will be shrinking, although the number of pensioners will keep growing. Disenchanted on Syntagma Square Not surprisingly the popularity of politicians and political parties is at an all-time low. Some voters have warmed to a populist, anti-Eu message. But they have not yet gathered enough traction to challenge Greece's pro-Eu, pro-euro course. The chief feeling is of disenchantment, not with Brussels or Berlin, but with the two main parties whose corruption, nepotism and incompetence helped create such a terrible mess. Polls find 77% of Greeks wanting the unity government led by Lucas Papademos, a technocrat and former

Albanians in Greece

Heading home again TH ESSALO NIKI AND TIRANA

Worried Albanians in northern Greece prepare to go home

T IS lunchtime and children pour out of IWaiting Sunday-school classes in Thessaloniki. parents seem agitated as they talk to Val bona Hystuna, a teacher. The adults speak Albanian; the children talk to each other in Greek. Many of the youngsters have no knowledge of Albania. But the crisis in Greece is forcing their families to return home. The latest census by Albania's statistical office found only 2.8m inhabitants in the country, several hundred thousand fewer than expected and 7.7% less than a decade ago. As many as L4m are believed to have emigrated in the past 20 years, over half of them to Greece. But jobless Albanians have begun to return. Many men worked in construction, which has ground to a halt in Greece. There is much anecdotal evidence of Albanians going home, but few statistics. Edmond Haxhinasto, Albania's foreign minister, says only a few have returned. Still, Ms Hystuna says that "a lot of people have left, a lot plan to leave and every200 km

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central banker, to take all necessary measures to keep Greece in the euro. For the time being, the consensus is that an exit would spell disaster. The preference for Mr Papademos reflects his apolitical credentials and financial expertise. His 66% approval rate is the highest among political leaders and over three times that of his Socialist predecessor, George Papandreou. Since he took over in November a measure of calm has returned. But that is now threatened by renewed crisis-and by a general election expected in April. The election may prove a risky distraction from the structural changes required for Greece to secure its next tranche of aid. The centre-right New Democracy is expected to trounce the So-

one is talking about it." In the past many Albanians lived and worked in Greece illegally, but most of them now have residence permits. Yet those who lose their jobs may also lose their permits, forcing them either to return home or to stay illegally. Albanians have mostly integrated well. Their children often speak better Greek than Albanian; many need language classes before going back to Albania. But, says Ms Hystuna, the Greeks can make life difficult. The anxious parents she spoke to told her that the authorities have, out of the blue, insisted that the Albanian papers their Greek-born children have are unacceptable, since they use the Albanian rather than the Greek name for Thessaloniki. As with migrant numbers, remittances are hard to measure. But what figures there are point to a sharp decline. In 2007 migrants sent home an estimated €950m ($1.3 billion). In 2010 that figure shrank to €69om; for the first three quarters of 2011it was €475m. In 2009 remittances were reckoned to make up 9% of Albania's GDP. Yet the economy, unlike Greece's, has not gone into recession: it is expected to have grown by 2.5% in 2011. Many Albanians in Greece are transferring savings to banks at home, fearful of what might happen if Greece leaves the euro. Some Greek companies have also begun to set up firms in Albania run by trusted Albanians who worked for them in Greece. So far, the effects of being a tiny economy largely dependent on recession-hit Greece and Italy have been negative but not disastrous. Yet as more Albanians move back, theywillfindjobs (and decent wages) scarce at home. cialists, but voters could yet elect a parliament with seven or eight parties, forcing it into a coalition that might find it harder to push through reforms. For over 30 years Greeks lived lavishly as the public sector became bloated, EU money poured in and many people routinely tricked the system. During the past three years, Greeks have been asked to endure hardship and humiliation. It is no wonder that they have often taken to the streets, nor that they feel depressed. The question is how much more they can take. The election could prove to be a breakingpoint, as Greece stumbles towards disorderly default. So far the Greek people have demonstrated extraordinary stoicism-but that may not last forever. •

The Economist January 14th 2012

Europe 53

Charlemagne I To opt in or not to opt in That is the question Denmark still wrestles with in the euro crisis

HE panjandrums of the European Union descended on CoT penhagen this week to hail Denmark's turn in the club's rotating presidency. For most Danes this was but a passing curiosity; theirreal celebrations are for the 40th anniversary of Queen Margrethe's accession to the throne. Her long reign has spanned Denmark's tumultuous membership, from its admission in 1973 to its rejection of the Maastricht treaty in 1992 (later reversed, with optouts) and of the euro in 2000. Whenever they have been asked, Danes have clung to the krone and coins with the que en's head. Today, when her popularity is at an all-time high, public support for joining the euro is at rock bottom. But that does not stop the new centre-left cabinet from wanting closer ties with the EU. In its hesitations over Europe Denmark resembles another venerable monarchy that also joined in1973 and marks a royal jubilee this year. Like Denmark, Britain has an opt-out from the single currency (other non-euro members are legally bound to join). When it comes to promoting the single market, Denmark and Britain have been ready allies. Danish kings once ruled parts of Britain and British troops liberated Denmark from Nazi occupation in 1945. Adding to the affinity, the newish Social Democratic prime minister, Helle Thorning-Schmidt, is married to Stephen Kinnock, son of Neil Kinnock, a former British Labour leader. For the Danes, life in the EU has often required finding a balance between Germany, their neighbour and biggest trading partner, and Britain, their soul mate and historic market for butter and bacon. Few were more dismayed than Denmark by Britain's bust-up with its EU partners in December. David Cameron, the British prime minister, vetoed a revision of the EU treaties, forcing the rest to seek a separate pact to enforce greater fiscal discipline. The split was "the worst-case scenario for Denmark", says Bo Lidegaard, editor of Politiken, a daily. "It is not in our interest to have our close friend and our biggest market drift apart." Ms Thorning-Schmidt's attempt to avert the rift earned her a caustic reprimand from Nicolas Sarkozy. "You're an out, a small out, and you're new. We don't want to hear from you," the French president said, by one account (Ms Thorning-Schrnidt denies such words were used, but admits to "robust debate"). Relations have been patched up, with Britain attending the negotiations as an "observer". Ms Thorning-Schmidt says that one priority for

her EU presidency will be to act as a "bridge-builder". What is striking is that, when forced to choose sides, she and all the other "outs" were so swift to abandon Britain to join talks on the new fiscal compact. Ms Thorning-Schmidt seems intent on signing up to as much of the new fiscal pact as she can, short of undermining Denmark's opt-out or being forced to call a referendum. Denmark has rebuffed British entreaties to form a new group of non-euro countries. Indeed, most in the Danish elite see Mr Cameron as misguided, or worse. "The British have become toxic. Nobody wants to be too closely associated with them," comments one official. Even in this sympathetic country, the only supporters Britain's Tories' can find are on the fringes. Pia Kjaersgaard, leader of the anti-Eu and anti-immigrant Danish Peoples Party (DPP), which backed the previous liberal-conservative government, said Mr Cameron had "saved Denmark from an undemocratic apocalypse"-though how exactly he did this is not clear. Denmark's hostility to the EU is not as visceral as Britain's. "British scepticism comes from a superiority complex. Ours comes from a minority complex," says Uffe Ellemann-Jensen, a former foreign minister, who helped to negotiate the Maastricht treaty. Most Danish leaders, if not yet all the voters, are pro-European. Even today, some parties talk of joining the euro (though not in the foreseeable future). And Ms Thorning-Schmidt wants to scrap Denmark's two other opt-outs, from defence policy and judicial and police matters. These were meant to woo Danes into overturning their rejection of Maastricht. Mr Ellemann-Jensen explained the idea by reference to Hamlet: "To be or not to be, that is the question. To be and not to be, that is the answer." The optouts, he said, supposedly gave Denmark a "cat-flap" to come in and out of EU affairs. But over the years some have come to see them as more of a mousetrap. Ministers complain that they can take part in shooting wars under NATO command, but not in softer peacekeeping operations led by the EU. Since the controversy over a Danish newspaper's cartoons of Muhammad in 2005, Denmark faces a greater threat of terrorist attack. But it cannot join the agreement between the EU and America to exchange information on airline passengers: it has to negotiate a separate bilateral accord instead. What price sovereignty? On the euro, though, Danish voters seem prescient. The markets agree: the borrowing costs of non-euro Denmark and Sweden are even lower than Germany's. The Danes and Swedes can at least print money, but for the most part Denmark is a mere appendix to the giant German economy. The krone is pegged to the euro, with Copenhagen copying interest-rate moves in Frankfurt. Unlike Britain, Denmark has pledged extra funds to the IMF so that it can lend more to the euro zone. Outside the euro, Danish leaders perennially fear that they lack influence on European policies, a concern that will grow as Britain hangs back. Unlike British Tories, who demand a repatriation of powers from Brussels, Danish leaders believe that sovereignty is best protected through a seat (and a vote) in all of Europe's councils. In the current crisis, the Danish government is unlikely to risk a referendum to give up any of its opt-outs. But if the euro survives, Danes are sure to be asked once again: to opt in or to opt out? Next time they may even vote in. • Economist.comfblogsfcharlemagne

Also in this section 55 Executive pay 56 Terrorists and historians 56 No-frills accommodation 57 Bagehot: Edonomics

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

Scotland's referendum

If at first you don't succeed EDINBURGH AND STIRLING

Long before Scottish voters are asked whether they want to leave the United Kingdom, the wrangling has begun OR generations of Scottish children, a school trip to study the Battle of BanF nockburn-a medieval clash which saw Robert the Bruce and his hardy spearmen rout a much larger force of English knights-has served as a milestone in their patriotic education. They learn how the underdog Scots caught the English in a trap, corralling their mighty horsemen "like sheep in a pen" and leaving them no room to attack. This victory, school groups hear, has "inspired the Scots ever since". In June 2014 the 700th anniversary of the battle will be marked by re-enactments and the opening of a new museum. A few weeks later, Scotland will host the Commonwealth games and the 2014 Ryder Cup golf tournament. And Scotland wants to hold another stirring event in the autumn of 2014: a referendum on whether to quit the United Kingdom. The announcement came from Alex Salmond, first minister of Scotland's devolved government and boss of the pro-independence Scottish National Party (SNP). Interviewed a day later at his official residence-a Georgian mansion in Edinburgh's New Town-Mr Salmond admits that, with all its cheering events, 2014 will be a "good year to hold a referendum". Like his hero Robert the Bruce, Mr Salmond starts this fight as an underdog. Although the SNP has controlled the Scottish Parliament since 2011, only about a third of Scots favour breaking with the union (see chart), though most would like to see more

powers shift from London to Edinburgh. The Labour, Liberal Democrat and Conservative parties are committed to keeping the United Kingdom together. Britain's prime minister, David Cameron, vows to defend the union with "every fibre", though his party has just one MP north of the border, and a growing number of his English MPS grumble about Britain "subsidising" Scotland's comparatively generous public services (a charge the SNP disputes, arguing that Scotland bankrolls Britain with North Sea oil and gas revenues). Labour and the Liberal Democrats, with scores of MPS in Scotland, have additional reasons to cheer the union. Without Scottish seats, Labour would struggle to win a House of Commons majority again. The SNP took office promising to hold a Fear of freedom Scotland should: % responding

70

60 50

~ ~ 1997 99 2001 03

05

07

Source: Scottish Social Attitudes 2011

09

11

40

30 20 10 0

referendum on independence, but not in the first three years of their term, prompting charges that the party feared asking Scottish voters sooner. The announcement of a 2014 date was bounced out of Mr Salmond after Mr Cameron said that a vote held without the authority of the British Parliament could be unlawful. Backed by his Liberal Democrat coalition partners, the prime minister made the SNP a highstakes offer: legal powers to hold a referendum, but on Westminster's terms. Mr Cameron's government is seeking several concessions in return for its help. It wants a straight yes-or-no referendum on independence, distrusting hints from Mr Salmond that he might put more than one question to Scottish voters, offering them not just independence but also a form of deep devolution that would leave little more than defence and foreign policy in British government hands. The pro-union parties dislike the vagueness of "devo max" and want to force Mr Salmond into a straight defeat on independence. The British government wants independent oversight of the poll and dislikes Mr Salmond's idea of votes for 16- and 17year-old Scots (seen as gung-ho about a split). For a heady day or so, aides to Mr Cameron talked about forcing the Scottish government to hold a referendum within 18 months, before Mr Salmond retaliated with his own date, accusing Mr Cameron of "almost Thatcheresque" conduct (a grave charge north of the border). Westminster teasing about a "neverendum" aside, Mr Salmond will probably pick the date. Everything else is up for grabs. Mr Salmond is on soothing form. He denies "any thought" of hijacking the Bannockburn anniversary. He insists, with a straight face, that his referendum is being delayed almost three years merely to ensure it is well-organised. The SNP, he says, is considering a multi-option referendum

~~

The Economist January 14th 2012 ~ because

it cannot ignore a big section of public opinion, not because it wants a fallback if Scots reject independence. Mr Salmond confirms that Britain's submarine-based nuclear deterrent would have to leave its current home in the deep waters of a Scottish loch. Scotland would leave NATO but would retain an army of perhaps 8,ooo-12,ooo men, a navy and an air force. Scottish warplanes could have served in Libya. But Scotland would have shunned the "illegal" invasion oflraq. An independent Scotland would be a co-operative neighbour, Mr Salmond repeatedly says. Queen Elizabeth II would remain Scotland's monarch. He would accept a stability pact as a basis for sharing the pound with the British. Asked if he would accept binding debt and deficit rules, he ducks the question. With its oil wealth, Scotland will be a better credit risk than England, he beams. Once voters choose independence, the Scottish government will be an easy negotiator with "few red lines", predicts the first minister. The friendship between the Scots and English will be "re-invigorated". But until then, no meddling in Scotland's vote. The warning is clear. Mr Salmond faces a tough battle. He intends to pick the ground on which he fights it. • Executive pay

Money for nothing? Executive pay levels rise because of globalisation, not poor oversight ARD work builds character, and should be rewarded. But many Britons believe the link between graft and gain has broken down. At the bottom, they see a dependency culture that costs them billions in welfare spending. At the top, pay for executives seems to soar regardless of the fortunes of their businesses. Even some on the right are rounding on corporate excess. David Cameron, ever alive to the public mood, announced on January 8th that he would reform executive remuneration. His ideas include giving shareholders binding votes on the pay, perks and severance packages handed out by companies. Vince Cable, the Liberal Democrat business secretary and perhaps the most left-wing member of the coalition, is leading the raid on boardrooms. Ed Miliband, the Labour Party's increasingly criticised leader (see Bagehot), wants to go even further. He argues for putting workers' representatives on company boards and making corporate pay more transparent. Labour is the party of equality, yet the issue is a bind for him. If he is

H

Britain 55

much more radical than Mr Cameron, he risks reviving his "Red Ed" reputation. If he is not, the government's efforts will grab all the attention. The debate over executive pay is likely to heat up over the next few months, fuelled by disclosures of bumper bonuses for bosses. The timing will be particularly embarrassing to public companies and politicians, as median real incomes are forecast to fall sharply as the economic slump continues. Mind the gap It is true that in Britain, as in many other

rich countries, the rewards of economic growth have not been evenly distributed. Chief executives' pay grew from an average of frm ($1.7m) in 1998 to £4.2m in 2010, a far greater increase than the average worker experienced (see chart). Measures of income inequality in Britain are close to their highest level since records began in 1961. At the top of the charts are the bosses of media, pharmaceutical and telecoms firms, such as Vittorio Colao of Vodafone Group (pictured). Their pay packages are worth more than £7 million a year on average, according to the Institute for Public Policy Research, a think-tank. The consequence is widespread anger, of the kind that worries governments. Yet the solution British politicians are putting forward to restrain executive paystrengthening corporate governance-will probably have little influence on it. This is because soaring remuneration has little to do with weak governance and rather a lot to do with globalisation. Britain's biggest companies-those in the FTSE 100 index-have gradually transformed from domestically-oriented outfits to truly multinational firms. The skills needed to manage that sort of company are relatively scarce, so those who have them can command higher pay. Unskilled workers in Britain are less distinguishable from those in China or India, and have seen their wages depressed by globalisation as a result. Yet experience in America suggests that leaving pay to the market does not invari-

I

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And if you pile up the cash, it's like this

ably mean more cream for the fat cats. There, the average pay of bosses has declined by 43% in real terms from its 2000 peak, reckons Steve Kaplan of Chicago Booth business school. The average s&P soo wage for chief executives is now $10 million. British bosses may simply have been catching up with their American counterparts; the strong upward trend in their pay may not continue. Moreover, pay increases at the top are widespread. Those running private-equity firms and law firms are paid comparable amounts (as are sports stars). It is hard to pin high pay on shortcomings in the governance of publicly-owned companies. The government's aim, to link pay more tightly to performance, is a good one, as is the goal of making pay more transparent. But simple changes would be better than grand reforms. British corporate governance rules are already pretty good, says Carl Rosen of the International Corporate Governance Network, a think-tank. Shareholders have had an advisory vote on pay for ten years and can sack members of pay committees if their advice is not heeded. If there is weakness, says Mr Rosen, it is more likely to lie in the increasingly fragmented and international character of shareholders (who may not care much about who is paid what) than in the powers they have. Giving shareholders a binding veto sounds impressive, but shareholders might be less willing to exercise it than an advisory vote. There is also scant evidence that putting employee representatives on pay committees yields better results. The idea that pay should be restrained ultimately rests on a flawed logic. Income inequality is best addressed by closing the skills gap in the workforce, not by preventing British firms from competing for the best chief executives. •

56 Britain Terrorists and historians

Deathly archive Police seek historians' secrets about terrorist crimes RUTH and justice will inevitably clash T when the history of terrorism is concerned. From a police point of view, all such serious crimes must be investigated, using all available evidence. But academics want the historical record enriched, eventually, with as much first-hand testimony as possible. If necessary, this may be gained by promising lifetime secrecy to those who provide it. That was the undertaking given by Boston College when it started collecting interviews from 26 former members of the Irish Republican Army about their paramilitary campaign against British rule. But the Police Service of Northern Ireland wants to examine the material, chiefly because it may shed light on the notorious murder in 1972 of Jean McConville, a widowed mother of ten children. The IRA killed her, believing, almost certainly wrongly, that she was an informer for the British. Police are particularly interested in the interview recorded by one former IRA member, Dolours Price. In an interview with an Irish newspaper she implicated Gerry Adams, a leading Northern Irish politician, in Ms McConville's killing. A tape recorded by another former IRA member, Brendan Hughes (who is now dead), contained a similar claim. Mr Adams has always denied membership of the IRA or any involvement in its bombings

Material for art historians

The Economist January 14th 2012

and shootings. As leader of Sinn Fein, the group's political wing, he played a central role in negotiations that ended the conflict. The British government shows no enthusiasm for prosecuting Mr Adams. But this has not stopped the Northern Irish police, who are also investigating more than a dozen other unsolved killings by the IRA and other paramilitaries. The Boston tapes could shed light on those too. The result is a politically-charged legal row in America, where the justice Department, on behalf of the Northern Irish police, is trying to make Boston College hand over the materials. This has brought furious protests by academics, including the researchers who recorded the interviews: Ed Moloney, a journalist, and Anthony McIntyre, a former IRA member. They say the university is breaking a solemn promise, jeopardising academic freedom, and (in Mr Mcintyre's case) exposing them to retaliation from former colleagues. (Mr Adams's allies say that is absurd: Mr Mcintyre has been bashing the Republican cause for years without any problem). Boston College lost the initial legal bat-

tie last year and had to hand over Ms Price's interview to a court. It says this was a concession worth making in order to safeguard the rest of the material: had it appealed and lost, it might have had to hand over the whole archive. Instead, a federal judge, William Young, is reviewing the other material in secret, while Mr Moloney and Mr Mcintyre are fighting a legal battle of their own. They won one round on January 9th, when the Justice Department decided not to oppose their attempt to postpone the handing-over of the tapes; a full hearing is due on January 24th. Mr Mcintyre, who lives in Ireland, says he asked the university to give him the archive when it came under threat in June, with the first subpoena forMs Price's tape: he would have gone to jail rather than surrender the material. (A college spokesman says that was "never an option".) It is highly unlikely that Mr Adams will be prosecuted even if the tapes do reach Belfast. But his reputation may suffer if he is linked to an IRA cell that carried out punishment killings. For lesser sins, Boston College's image is at risk too. •

No-frills accommodation

Room without a view Tiny additions to London's hotel market

T ONDON is renowned for its grand L hotels. It is also notorious for the dinginess of some of its less opulent ones. But the lower end of the market is growing and churning. Although budget hotels account for only16% of rooms in Britain, their capacity has roughly doubled in the past decade and is growing faster than any other part of the sector. The latest craze in no-frills accommodation is for rooms without a view-or even a window. Capsule hotels were pioneered in Japan in the 1980s. Guests slotted themselves into small, horizontal enclosures like bees into honeycomb, with space only for a bed and a tiny television. London already has its own take on these pods: in 2007 two "Yotels" opened at Heathrow and Gatwick, the capital's busiest airports, with 78 "cabins" for hire by the hour at any time of day or night (the minimum booking is for four hours). Another 25 rooms will open at Heathrow this year. The airport capsules are frillier than Tokyo's: there is a pull-out table and compact bathroom alongside the lowceilinged bed. But they are stuck in a niche, serving people in transit. Japan's city-centre capsules, by contrast, serve a local market with repeat customers. The bigger test of Britain's taste for

windowless pods will come with a new project starting construction this year at the Trocadero, a Victorian building in Piccadilly Circus that was most recently host to an amusement arcade. Slap in the centre of the West End, it will have 6oo identical rooms, each ten square metres, including a bathroom. "Once you take the window out you can just pack them in," says Michael Hughes of Criterion Capital, which manages the site. The hotel is due to open in 2014. The niche looks promising. Budget hotels in London had an occupation rate of 84% in 2010, better than their grander equivalents in the capital and the 69% occupancy in the rest of England, according to Miles Quest of the British Hospitality Association (BHA) . Yet Britain still has proportionately fewer low-cost hotels than many other countries; budget brands make up a quarter of the French market, for example, and a third of the American one, reckons the BHA. Many of the capital's existing hotels are cramped and basic, with windows that look onto ventilator shafts or grubby side streets rather than the capital's tourist glories. "They are basically sleep factories with very little else," says Mr Quest. And downsizing is in vogue. But a room with no window at all? That might prove a hard cell.

The Economist January 14th 2012

Britain 57

Bagehot I Edonomics The more Ed Miliband talks about how to fix Britain's economy, the less voters listen

D MILIBAND, leader of the opposition Labour Party, has a problem which should not be serious, but probably is. In this buffed and burnished television age, he sounds and looks a bit odd. This makes him increasingly the butt of jokes. Things are so bad that a BBC interviewer this week asked him-more or less directly-whether he was too ugly to be prime minister. There is not much that Mr Miliband can do about his slightly prissy delivery and doleful, irregular features. In contrast another, genuinely grave, flaw is entirely his own fault. Mr Miliband's plans for solving Britain's most pressing problems manage to be both too timid and implausibly ambitious. On January 10th Mr Miliband gave a speech on the economy, explaining what his party should stand for, now there is less money around. Amid horrible approval ratings (according to YouGov, a pollster, some two-thirds of voters think the Labour leader is doing a bad job) allies of Mr Miliband talked up the importance of the address. They called it a moment to "bash on the head" the idea that Labour is in denial about the need to fix the public finances. Mr Miliband made an important concession in his speech: that Britain will probably be stuck in austerity after the next general election, planned for 2015. That means a future Labour government would not be able to reverse every spending cut made by the Conservative-Liberal Democrat coalition, he said. His Labour Party would not be able to repeat Tony Blair's and Gordon Brown's strategy of letting financially turbocharged growth rip, while diverting some of the proceeds into public works and welfare. Labour would have to deliver "fairness in tough times". Mr Miliband and his inner circle are convinced this message resonates with the "squeezed middle": the group that has seen its living standards stagnate while welfare recipients at the bottom of society and bankers at the top seem to have been spared pain. The Labour leader believes that he predicted the current national mood of gloom and anger. He devoted chunks of his speech to explaining just how prescient he has been. He had been mocked when he first attacked "crony capitalism", he declared. Now Tories and Lib Dems were scrambling to copy him. A year and a half ago, Labour warned the government about the dangers of cutting spending too far and too fast. It had

E

been proved right, he insisted. Because too much demand has been removed from the economy, the government would have to borrow "£158 billion more" than planned over five years. The Labour leader is fond of this last argument about missing demand, and repeats it often. But this is odd. For one thing, it is a source of public doubts about Labour's commitment to reducing the budget deficit, a task most voters say is necessary. For another, it is a ludicrously complex line of attack. Economists disagree about the precise impact of deficit spending (and voters are just as confused, with poll numbers on whom or what to blame for Britain's economic woes splitting every which way). Most damagingly, Mr Miliband is picking a fight about the past. He is seeking to prove, with numbers, that voters made a mistake when they trusted the coalition back in 2010. That is a strange use of an opposition leader's time. It is also not working. Polls show voters far more inclined to trust Mr Cameron than Mr Miliband on the economy, even if they are not sure the Tory leader is worried about fairness. Perhaps this is because, on taking office, the coalition made a much bigger and more easily understood prediction: that a terrifying economic storm was brewing, which would be made more lethal by Labour's failure to put money aside in good times. Mr Miliband claims to "relish" the chance to manage the economy differently. But when it comes to embracing austerity, he could hardly sound more grudging. In his speech he did not admit to a penny of wasted spending in 13 years of Labour rule. He offered a single example of spending he might trim, and vowed to offset that with compensation from the private sector. In office, he explained, Labour might not be able to increase the winterfuel allowance (a universal benefit paid to elderly dukes as well as retired dustmen). To offset that pain, he would push energy companies to offer their cheapest fuel tariffs to the elderly. The quiet man What changes does Mr Miliband relish, then? The answer lies in his talk of breaking with New Labour's economic model. Yes, he says, he is "incredibly proud" of schools and hospitals paid for with the proceeds of growth, and the jobs created under Mr Blair and Mr Brown. But too many of those jobs offered low-paid, lowskilled drudgery. Mr Miliband wants to use "the power of government" in new ways. He vows to harness regulations, tax rules and government procurement contracts to craft a kinder, more sustainable version of capitalism with a marked Rhineland tinge: think apprentices, employee representatives helping to set bosses' pay, and a Britain in which smart graduates want to design clever machines, not City derivatives. These are bold plans, at a time when governments worldwide are struggling to survive until next month. Mr Miliband is serenely confident. These are early days, he says. The government is failing. Voters will come round. Voters' trust in the government could crumble. But Mr Miliband may not have much time. Grumbling from Labour MPS is turning into on-the-record sniping. Timidity about how to cut spending is less of a problem than their leader's vaulting ambitions to reshape British capitalism, just when voters have lost faith in the ability of experts of all sorts to improve anything. Mr Miliband is a mid-sized politician making outlandish claims. That credibility gap explains why voters are not listening. • Economist.comfblogsfbagehot

Video and human rights Also in this section

Visibility before all

59 Banned baby names

NEW YORK

Live video is now on tap from almost anywhere. Both the benefits and drawbacks are unpredictable

YRIA is off-limits to journalists, espeS cially those toting television gear. But the daily protests in the Damascus suburb of Hamoryah can be watched live on Ustream-and uploaded by locals using mobile phones. When the Libyan regime banned foreign reporters at the start of last year's uprising, a businessman called Mohammed Nabbous, who had previously installed commercial-satellite kit, set up camera feeds to the Livestream site. These were for a time the sole source of television-news pictures from Libya (he was later killed while reporting). Another videostreaming site, Bambuser, hosted more than 1oo,ooo broadcasts from the Middle East and north Africa in 2011. Technology turns anyone with a modern mobile phone into a cameraman-and international broadcaster. This is shaking up newsgathering. During the protests against election fraud in Iran in 2009, Access Now, a human-rights group that is adept with technology, received videos that showed many thousands on the streets, whereas CNN, wary of "unofficial" sources, used government-approved footage that made the protests seem far smaller. Now CNN's "iReport" web page features viewers' pictures alongside the network's own; other news channels also often use amateur footage in their reports.

More exotic technology is looming too. Drones that cost only a few hundred dollars, such as the Parrot Quadricopter, can take aerial pictures: these once required an expensive helicopter. Organisers of Occupy protests in America have used these gadgets to spot weaknesses in police lines. This footage is not only fodder for news reports. Images from the funeral in Tunisia of Mohammed Bouazizi, who set himself on fire to protest about his bullying by officials, fed the discontent that ended up toppling the country's president. In Egypt videos of protests showed citizens that they were not alone in their resistance. But images of beatings and police round-ups in Syria have not stopped the authorities from killing an estimated s,ooo people since the protests began last spring. Moreover,j erky, fuzzy footage of people chanting slogans-which is what most amateur protest videos consist of-can quickly pall. To make a real difference, a video must capture a startling, memorable image (which happens rarely) involving protesters' heroism, official iniquity or both. Shooting such pictures is hard and rare, and the presence of cameras may make malefactors more careful. B'tselem, an Israeli human-rights organisation, for instance, has for several years distributed cameras to Palestinians in the

occupied territories. Their footage has occasionally led the Israeli army to investigate allegations of abuses by its soldiers. But videos of Israeli settlers attacking Palestinian farmers have encouraged the settlers to raid olive groves at night instead. Similarly, Occupy Wall Street and its kin in America is probably the most exhaustively documented protest movement ever. When a policeman pepper-sprayed a line of students at a university sit-in in California two months ago, he was filmed from several angles simultaneously. A YouTube user synchronised four of the videos and combined them into a split-screen display to show that the spraying was unprovoked. Yet despite an outcry, the policeman has so far been punished with nothing worse than paid leave. Picture the difference To have real clout, video evidence needs not only clarity and impact but also provable authenticity, notes Sam Gregory of Witness, a human-rights group that promotes the use of video. As in the pepperspraying case, combining pictures of the same event can help. B'tselem gave Situ Studio, a New York design firm, footage from three cameras that captured the killing of a Palestinian man by an Israeli army tear-gas grenade in 2009. Situ used the ~~

The Economist January 14th 2012 ~ footage

to plot the trajectory of the grenade and prove that it was fired directly at him and not up in the air, prompting another inquiry (but no prosecutions). Compelling pictures from a traceable source may also prove to be a doubleedged sword for protesters. Police can mine video files for hidden information ("metadata" in the jargon) that could help identify the camera's owner, or use facerecognition software on the people being filmed. A study by Alessandro Acquisti and his colleagues at Carnegie-Mellon University found that a program developed there, known as PittPatt, was able to identify one in three students who were stopped and photographed voluntarily, just by matching the photos with their public ones on Face book. This is why Guardian Project and Witness, two non-profit groups, are develop-

International 59 ing some software called Obscuracam. It lets mobile-phone users upload video with the metadata stripped out and people's faces pixelated to protect their identities. Another work in progress is Informacam, which will add location information and a digital seal that shows if a file has been tampered with. That would allow someone to upload both a sanitised version for public viewing and a verified version to a secure server to provide legally solid evidence if necessary. The authorities will never be far behind. Anyone taking a smartphone through a checkpoint risks having the gadget seized and the data copied, with potentially dire consequences. Using it to film a protest may attract the attention of batonwielding cops, or worse. When all citizens are potential reporters, they risk being treated as journalists. •

Baby names

Thanl<s, mum

Governments find reason to regulate the names of children

T UCIFER, V8, Anal, Christ: these are Lamong the baby names rejected by New Zealand's department of internal affairs, who recently released a comprehensive list of those disallowed by registrars in the past ten years. Though no name is banned outright, says Ross McPherson, the deputy registrar-general, some applications were not even words. Disappointed parents included those wishing to christen their offspring with numbers (89), letters(], I, T) and punctuation marks(*). Few decisions are more personal than the naming of offspring. Yet laws regulating the choice of both first names and surnames are common around the world. Denmark expects new parents to choose from a register of acceptable names; Portugallists banned and approved ones. In Iceland a committee of language specialists must rule on any unusual name. German registrars prohibit the use of most nouns and place-names, and also frown upon any that do not clearly imply a gender: bad luck, Kim. Experts at a German-language society run a helpline offering advice to puzzled parents (at a cost). Governments argue that these rules prevent children being saddled with preposterous names (Sinbin) that may cause them problems in later life. They also aim to block names that might cause offence to others (]esuswept). Even where registrars have no power of prohibition, worrisome choices can be referred to judges or to child-protection agencies. In 2009 a couple

in New Jersey lost custody of a boy they had named Adolf Hitler. Less noble concerns play a role, too. First names that imitate lofty titles remain the most frequently disallowed in New Zealand. Registrars often frustrate enterprising parents trying to name their infants Justice, King, Prince, Baron and Duke. Strict laws in Sweden once aimed to stop people creating family names that imitated those already in use, says Staffan Nystrom at Uppsala University. Requests to change a last name must still pass through the patent office there. Patriarchy remains entrenched in countries like Italy that refuse to allow married women to pass their maiden names on to their children, even in a double-barrelled surname. Over time, the rules have eased. France scrapped its saint-strewn list of acceptable names in 1993. Two years later Iceland stopped requiring immigrants to adopt local names. The new constraint is technological, not bureaucratic. Government databases may struggle with long names: New Zealand allows 100 characters for all first names; the state of Massachusetts has a limit of 40 for each. Chinese face a particular difficulty: their language has tens of thousands of characters, but a name that uses archaic or rare ones can mean computer problems. Japanese parents with a penchant for the arcane face similar difficulties. Most countries ban names spelled in foreign alphabets, and many restrict the use of foreign diacritical marks: that fuels a

row between Lithuania and Poland. Carlton Larson at the University of California notes that his state's registrars, unusually, ban all such dots and squiggles. So in America's most Spanish-speaking state it is impossible to christen a boy Jose. Still, America and Britain have the most tolerant naming laws: what can be spelled with standard letters (however eccentrically) is allowed. Distinction-hungry celebrities make the most of this, as with Moon Unit (Frank Zappa), Apple (Gwyneth Paltrow) and Pilot Inspektor (the actor Jason Lee). Even the most strait-laced Americans see nothing odd in recycling a surname as a given name. Black parents are among the most inventive: a survey by two economists, Roland Fryer and Steven Levitt, found that nearly 30% of black girls in California in the 1990s received a first name that they shared with no other baby born in the state in the same year. Back in 1954 a baby (later to become secretary of state) gained the one-off name Condoleezza because it sounded like a musical instruction to play "with sweetness". Whether these decisions make any difference is another matter. A study in 2002 suggested that individuals may be unconsciously influenced by their first names. A disproportionate number of girls named Georgia live in the American state that shares their name; boys named Dennis may be slightly more likely to become dentists than those called Walter (and Georges seem to have a penchant for geology). Academics with surnames early in the alphabet are more likely to get good university jobs (the authors of papers are listed alphabetically). Ballot papers that list politicians' names that way also show a similar effect. But reinvention beckons. Britain's chancellor was born Gideon Osborne; aged 13, he became George. The UK Deed Poll Service, a legal firm, in 2011 helped 6o,ooo Britons rename themselves (fees start at £33, around $so); it was only s,ooo a decade before. American courts report similar trends. Some such applicants may wish to escape their parents' enthusiasms. Others may regret they were not given a more memorable moniker. •

I

Standing out from the crowd US babies given one ofthe 200 most popular names, per decade, % 90 80 70 60 50 40

..,.30 1900s

20s

40s

60s

80s

2000s

Sources: US Social Security Admi nistration ; The Economist

Counting the cost of calamities ROTTE ROAM, N ETH ERLA N DS AND WASHINGTON, DC

Death rates from natural disasters are falling; and fears that they have become more common are misplaced. But their economic cost is rising relentlessly HE world's industrial supply chains T were only just recovering from Japan's earthquake and tsunami in March when a natural disaster severed them again in October. An unusually heavy monsoon season swelled rivers and overwhelmed reservoirs in northern Thailand. The floodwaters eventually reached Bangkok, causing a political crisis as residents fought over whose neighbourhoods would flood. But before that the economic toll was being felt farther north in Ayutthaya province, a manufacturing hub. The waters overwhelmed the six-metre-high dykes around the Rojana industrial estate, one of several such parks that host local- and foreign-owned factories. Honda's workers rescued newly built cars by driving them to nearby bridges and hills. The factory ended up under two metres of water and is still closed. Honda was hardly alone: the industrial estates that radiate out from Bangkok are home to many links in the world's automotive and technology supply chains. Western Digital, a maker of computer disk drives which has 6o% of its production in Thailand, had two of its factories closed by the floods, sending the global price of drives soaring. Thailand is no stranger to floods. Europeans once called Bangkok the "Venice of Asia". But rarely have they done so much

economic damage. October's deluge cost $40 billion, the most expensive disaster in

the country's history. J.P. Morgan estimates that it set back global industrial production by2.5%. Such multi-billion-dollar natural disasters are becoming common. Five of the ten costliest, in terms of money rather than lives, were in the past four years (see map, next page). Munich Re, a reinsurer, reckons their economic costs were $378 billion last year, breaking the previous record of $262 billion in 2005 (in constant 2011 dollars). Besides the Japanese and Thai calamities, New Zealand suffered an earthquake, Australia and China floods, and America a cocktail of hurricanes, tornadoes, wildfires and floods. Barack Obama issued a record 99 "major disaster declarations" in 2011. Acts of God, or man? Although deadly quakes are rarely blamed on human activity, it is fashionable to blame weather-related disasters on global warming. It does seem plausible: warm air worsens droughts and lets tropical air hold more moisture, the fuel for cyclones (weather formations that include hurricanes and typhoons). However, a recent study by the Intergovernmental Panel on Climate Change, which represents the consensus among thousands of scientists, ex-

pressed little confidence in any link between climate change and the frequency of tropical cyclones. The world has succeeded in making natural disasters less deadly, through better early-warning systems for tsunamis, better public information about evacuation plans, tougher building codes in quake-prone areas and encouragement for homeowners to adopt simple precautions such as installing tornado-proof rooms in their homes. Annual death tolls are heavily influenced by outliers, such as Haiti's earthquake in 2010 (which killed more than 2oo,ooo) or the Bangladeshi cyclones in 1970 (}oo,ooo). But, adjusted for the Earth's growing population, the trend in death rates is clearly downward. However, even if natural disasters may be no more common and no more likely to kill people than before, there is no doubt that their economic cost is rising. This is because a growing share of the world's population and economic activity is being concentrated in disaster-prone places: on tropical coasts and river deltas, near forests and along earthquake fault lines. Thailand is an example of this. Since its last serious floods, in 1983 and 1995, the country's export-oriented industrial base has grown rapidly in the provinces around Bangkok and farther north along the Chao Phraya River. Ammar Siamwalla, a Thai economist, notes that the central plain where many industrial estates now sit was once heavily cultivated for rice precisely because it floods regularly. Although dykes (called levees in America) protect these estates and central Bangkok, they may raise water levels, and thus the risk of flooding, elsewhere.

~~

The Economist January 14th 2012 Wildfires, which destroyed thousands of homes in Texas in 2011 and in Australia in 2009, were more destructive than hitherto because, as populations have grown, new housing has been built in wooded areas. Throughout America's west and south-west, encroaching suburbia has put pressure on forest managers to suppress fires as quickly as possible. Yet repeated fire suppression allows forests to accumulate more fuel which can lead to more intense and devastating fires later on. Australia's "Black Saturday" bushfires (pictured, previous page), which killed 173 people and destroyed 2,298 homes in 2009, were said to be the country's worst natural disaster. But a study by Ryan Crompton of Macquarie University and others found that 25% of the destroyed buildings were in bushland and 6o% were within ten metres of it, and thus exposed to the threat of fire. The study concluded that if previous fires had occurred with people living so close to the bush as today, a 1939 outbreak of wildfires would have been the deadliest while Black Saturday's would rank second, and only fourth by number of buildings destroyed. In harm's way America's coasts may be a microcosm of where the world is headed. Florida's population has grown from 2.8m in 1950 to 19m now. Howard Kunreuther and Erwann Michel-Kerjan, disaster experts at the Wharton business school in Pennsylvania, reckon there are now nearly $10 trillion of insured and hurricane-prone assets along the coast from Maine round the Florida peninsula to Texas. Roger Pielke of the University of Colorado at Boulder reckons that the Great Miami Hurricane of 1926, which cost $1 billion in 2011 dollars, would cause $188 billion of damage now. Whether the economic toll of disasters is rising faster than global GDP is unclear, since a wealthier world naturally has more wealth at risk. Still, the incidence of spectacular, multi-billion-dollar catastrophes seems certain to rise. A 2007 study led by the OECD reckoned that by 2070, seven of the ten greatest urban concentrations of economic assets (buildings, infrastructure and the like) that are exposed to coastal flooding will be in the developing world; none was in 2005. In that time, assets exposed to such flooding will rise from 5% of world GDP to 9%. A World Bank study led by Apurva Sanghi estimated that between 2000 and 2050 the city populations exposed to tropical cyclones or earthquakes will more than double, rising from 11% to 16% of the world's population. Development by its nature also aggravates risks. As cities encroach on coasts, wetlands and rivers, natural barriers such as mangrove swamps and sand dunes are obliterated and artificial ones-dykes and sea walls-are erected to keep the water

Briefing Natural disasters 61

PACIFIC Leading natural disast ers, by overall economic losses, since 1980

~ Earthquake

I

[§ill Floods

~Hurricane ~Tsunami

C E A N

Year

Cost. $bn {2011 dollars) Number of deaths

So""'" 'luni
out. The result is to put more people and property in harm's way if those barriers fail. After the second world war Japan embarked on a vigorous programme of building seawalls and dykes to protect its cities against storm surges and tsunamis. That in turn encouraged cities' growth and industrialisation, but for the same reason exposed them to damage if a tsunami overwhelmed their defences, as it did in March. As cities on river deltas extract groundwater for industry, drinking and sanitation, the ground subsides, putting it further below sea level and thus requiring even higher dykes. Since 1980 Jakarta's population has more than doubled, to 24m, and should reach 35m by 2020. Land that once absorbed overflow from the city's 13 rivers has been developed, and is now subsiding; 40% of the city is now below sea level. Perverse incentives People originally settled in river deltas precisely because regular flooding made the land so fertile. Those cities have continued to grow because of the natural economic advantages such concentrations of human talent hold for modernising societies. Even when poor people moving to cities know they are increasing their risk of dying in a mudslide or flood, that is more than compensated for by the better-paying work

I

0

After the storm, the reckoning Global natural-disaster costs, $bn (2011 dollars) 400 300 200 100

0

1980

85

90

Source: Munich Re

95

2000

05

11

available in cities. And in rich countries, coasts are gaining population simply because people like living near water. Perverse incentives are also at work. In America, homeowners on floodplains must have flood insurance to get a federally backed mortgage. But federal insurance is often subsidised and many people are either exempt from the rule or live in places where flood risks have not been properly mapped. Some do not buy disaster insurance, assuming they can count on federal aid if their home is destroyed. Once the government declares a disaster, it pays 75100% of the response costs. Presidents have found it increasingly hard to turn down pleas from local leaders for assistance, especially in election years. Matt Mayer of the Heritage Foundation, a conservative think-tank, says the government routinely takes charge of local disasters that should be well within a state's capability. The result is that state disaster-management atrophies and disaster funding ends up subsidising disaster-prone places like Florida at the expense of safer states like Ohio. As a consequence of these skewed incentives, people routinely rebuild in areas that have already been devastated. Bob Meyer of the Wharton School gives the example of Pass Christian, a resort town in Mississippi, where an apartment complex was destroyed by Hurricane Camille in 1969, killing 21 people who had taken refuge inside. A shopping centre and condominiums were later built in the same area, only to be wiped out by Hurricane Katrina in 2005, since when more new condominiums have gone up nearby. This is not all because of incentives. As Mr Meyer says, people have a tendency not to price rare, unpredictable events into their decisions, even if these may have catastrophic consequences. Leo "Chipper" McDermott, the mayor of Pass Christian, notes that more than three decades elapsed between Camille and Katrina. "Life is a chance. And let me tell you some~~ thing else: water sells."

62 Briefing Natural disasters ~

If human nature cannot be changed, government policy can be. That might mean spending more on preventing disaster so as to cut its costs. Roughly 20%of humanitarian aid is now spent responding to disasters, whereas a paltry (but rising) 0.7% is spent on preventive measures taken to mitigate their possible consequences, according to the World Bank. A Dutch rethink The Netherlands, whose existence has long been at the mercy of nature, may be at the forefront of rethinking how to cope with it. Some 6o% of the country is either under sea level or at risk of regular flooding from theN orth Sea or the Rhine, Meuse and Schelt rivers and their tributaries. In 1953, a combination of a high spring tide and severe storm over the North Sea overwhelmed dykes, flooding 9% of its farmland and killing 1,800 people. The country responded with a decades-long programme of "delta works" to guard estuaries from storm surges, while raising and strengthening dykes. The success of those defences has, perversely, made the consequences of failure even greater, says Piet Dircke of Arcadis, a Dutch engineering firm specialising in water management. Protected by the delta works and dykes, the land stretching from Amsterdam to Rotterdam has heavily industrialised and now provides most of the country's output. "The northern and southern parts of the Netherlands are far more safe but are economically less attractive. People are moving to the western part of Holland because it's where the economy grows." In 1993 and again in 1995 heavy river flooding inundated the countryside and nearly rose above dykes in population centres, forcing the evacuation of more than 250,000 people. Katrina was the final wake-up call, making the Dutch face up to both the unreliability of forecasts of oncein-a-century events and the impossibility of their repeating the American feat of evacuating a million people. The country's philosophy of flood control has as a result pivoted from building ever higher dykes to instead making its cities and countryside more resilient to floodwaters. In 2007 it launched its €2.3 billion "Room for the River" project. At 39 locations along the Meuse, Rhine, l]ssel and Waal rivers, dykes are being moved inland, riverbeds deepened and fields now occupied by farms and households deliberately exposed to floods. The Dutch invented the word "polder" centuries ago to describe dry land created by enclosing floodplains (or shallow waters) with dykes. They are now "depolderising", removing or lowering the surrounding dykes and turning land back into floodplains. The Rhine's maximum flow without causing disaster will be raised from 15,000 cubic metres a

The Economist January 14th 2012

second to 16,ooo and, eventually, 18,ooo. The Noordwaard polder south-east of Rotterdam was floodplain until1973, when the delta works made it suitable for cattle and vegetables. It is now being turned back into floodplain to absorb floodwaters that might otherwise inundate cities upstream. To do so, the government had to persuade 18 farmers to move or have their farmhouses raised. Wim de Wit, who raises 75 cattle on the farm his father started in 1979, chose the latter. Near his farmhouse, earthmoving equipment is building a mound, or "terp," on which a new one will sit, safe from the periodic floods that will follow. It will not be pleasant, Mr de Wit acknowledges, "but it's only once every 25 years." And if he loses any crops or cattle to floods, the government will compensate him. The Dutch are building an industry of promoting their water-management philosophy around the world. Deltares, a research institute, recommends that the Thai government emulate Room for the River by moving dykes farther back where possible, limiting floodplain development and unifying water management so that safety is no longer subservient to irrigation and electricity generation. But the Dutch approach has limits. For one thing it is costly. Farmers were paid market value to leave the polders. To do this in a more densely populated city or industrial area would be prohibitively expensive. In America and China, the government has long had the right to breach dykes and periodically inundate occupied land to relieve extreme flooding.Jaap Kwadijk of Deltares notes that the Dutch government has previously rejected doing the

Pass Christian after Katrina passed

same thing. If a flood comes along that exceeds even the very high designed capacity of the dykes, "we don't have a plan B." If cities cannot be moved, they must, like the polder farms, be made more resilient to disaster. Rather than rely on dykes to keep water out, Rotterdam is also trying to mitigate the consequences if water comes in. A 10,ooo-cubic-metre tank was built into a new car park, big enough to catch roughly 25% of the water from a once-in-century flood. A public plaza has been designed to turn into wading pools when it fills with rainwater. In the city's harbour sits a floating pavilion shaped like three halved footballs built on huge blocks of foam. It is a model for the floating communities the city hopes might one day repopulate the docklands, whose traditional shipping activities are moving elsewhere. Pieter Figdor, one of the pavilion's architects, says floating buildings can be up to seven storeys tall, are inherently flood proof and can easily be moved. Wealth protection Making cities more resilient involves starker trade-offs in the developing world. On the one hand, urbanisation strips cities of their natural defences against disaster and exposes more people to loss of life and property when an earthquake or cyclone hits. On the other hand, urbanisation makes poor people richer. The density and infrastructure of cities makes people more productive and more able to afford the measures needed to keep them safe. So mitigation measures should not discourage people from crowding into vulnerable cities but rather establish incentives for cities and their inhabitants to protect themselves better. Many cities have tough building codes but fail to enforce them. The World Bank study argues that giving more urban dwellers title to their property would encourage investment in their safety, and lifting rent controls would encourage landlords to comply with building codes, since they could then recoup the cost. Ordinary infrastructure can be designed to double as disaster protection, ensuring that it will be properly maintained when the time comes. Two examples the World Bank gives are schools built on higher ground that double as cyclone shelters and a road tunnel in Kuala Lumpur that doubles as a flood-containment tank. As societies develop they can afford the human and physical infrastructure needed to protect against, and respond to, natural disaster. In time, last year's earthquake and tsunami and floods will be mere blips in the GDP of Japan and Thailand, thanks to the rapid reconstruction made possible by the same wealth that meant the disasters were so costly to start with. The lesson for poorer countries is that growth is the best disaster-mitigation policy of all. •

63 Also in this section 66 Carrefour fumbles 66 Why golden parachutes work 67 Fakes Lose favour in China 68 Schum peter: Romney the revolutionary

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Technological change

The last l(odal< moment?

NEWYORKANDTOKYO

Kodak is at death's door; Fujifilm, its old rival, is thriving. Why?

T ENIN is said to have sneered that a capiL talist will sell you the rope to hang him. The quote may be spurious, but it contains a grain of truth. Capitalists quite often invent the technology that destroys their own business. Eastman Kodak is a picture-perfect example. It built one of the first digital cameras in 1975. That technology, followed by the development of smartphones that double as cameras, has battered Kodak's old film- and camera-making business almost to death. Strange to recall, Kodak was the Go ogle of its day. Founded in 1880, it was known for its pioneering technology and innovative marketing. "You press the button, we do the rest," was its slogan in 1888. By 1976 Kodak accounted for 90% of film and 85% of camera sales in America. Until the 1990s it was regularly rated one of the world's five most valuable brands. Then came digital photography to replace film, and smartphones to replace cameras. Kodak's revenues peaked at nearly $16 billion in 1996 and its profits at $2.5 billion in 1999. The consensus forecast by analysts is that its revenues in 2011 were $6.2 billion. It recently reported a thirdquarter loss of $222m, the ninth quarterly loss in three years. In 1988, Kodak employed over 145,000 workers worldwide; at the last count, barely one-tenth as many. Its share price has fallen by nearly 90% in

the past year (see chart on next page). For weeks, rumours have swirled around Rochester, the company town that Kodak still dominates, that unless the firm quickly sells its portfolio of intellectual property, it will go bust. Two announcements onJanuarylOth-that it is restructuring into two business units and suing Apple and HTC over various alleged patent infringements-gave hope to optimists. But the restructuring could be in preparation for Chapter 11 bankruptcy. While Kodak suffers, its long-time rival Fujifilm is doing rather well. The two firms have much in common. Both enjoyed lucrative near-monopolies of their home markets: Kodak selling film in America, Fujifilm in Japan. A good deal of the trade friction during the 1990s between America and Japan sprang from Kodak's desire to keep cheap Japanese film off its patch. Both firms saw their traditional business rendered obsolete. But whereas Kodak has so far failed to adapt adequately, Fujifilm has transformed itself into a solidly profitable business, with a market capitalisation, even after a rough year, of some $12.6 billion to Kodak's $220m. Why did these two firms fare so differently? Both saw change coming. Larry Matteson, a former Kodak executive who now teaches at the University of Rochester's Simon School of Business, recalls writing a report in 1979 detailing, fairly accurately,

how different parts of the market would switch from film to digital, starting with government reconnaissance, then professional photography and finally the mass market, all by 2010. He was only a few years out. Fujifilm, too, saw omens of digital doom as early as the 1980s. It developed a three-pronged strategy: to squeeze as much money out of the film business as possible, to prepare for the switch to digital and to develop new business lines. Both firms realised that digital photography itself would not be very profitable. "Wise businesspeople concluded that it was best not to hurry to switch from making 70 cents on the dollar on film to maybe five cents at most in digital," says Mr Matteson. But both firms had to adapt; Kodak was slower. A culture of complacency Its culture did not help. Despite its strengths-hefty investment in research, a rigorous approach to manufacturing and good relations with its local communityKodak had become a complacent monopolist. Fujifilm exposed this weakness by bagging the sponsorship of the 1984 Olympics in Los Angeles while Kodak dithered. The publicity helped Fujifilm's far cheaper film invade Kodak's home market. Another reason why Kodak was slow to change was that its executives "suffered from a mentality of perfect products, rather than the high-tech mindset of make it, launch it, fix it," says Rosabeth Moss Kanter of Harvard Business School, who has advised the firm. Working in a one-company town did not help, either. Kodak's bosses in Rochester seldom heard much criticism of the firm, she says. Even when Kodak decided to diversify, it took years to make its first acquisition. It created a widely ad- ~~

The Economist January 14th 2012

64 Business An ugly picture Kodak's:

employees, '000

share price, $

100

150

80

120

60

90

40

60

20

30

0 -nTmnnrnnnnnrrrr~~~~ O

1973

80

90

2000

12

Sources : Company reports; Thom son Reuters

~ mired

venture-capital arm, but never made big enough bets to create breakthroughs, says Ms Kanter. Bad luck played a role, too. Kodak thought that the thousands of chemicals its researchers had created for use in film might instead be turned into drugs. But its pharmaceutical operations fizzled, and were sold in the 1990s. Fujifilm diversified more successfully. Film is a bit like skin: both contain collagen. Just as photos fade because of oxidation, cosmetics firms would like you to think that skin is preserved with anti-oxidants. In Fujifilm's library of 200,000 chemical compounds, some 4,000 are related to anti-oxidants. So the company launched a line of cosmetics, called Astalift, which is sold in Asia and is being launched in Europe this year. Fujifilm also sought new outlets for its expertise in film: for example, making optical films for LCD flat-panel screens. It has invested $4 billion in the business since 2000. And this has paid off. In one sort of film, to expand the LCD viewing angle, Fujifilm enjoys a10o% market share. George Fisher, who served as Kodak's boss from 1993 until1999, decided that its expertise lay not in chemicals but in imaging. He cranked out digital cameras and offered customers the ability to post and share pictures online. A brilliant boss might have turned this idea into something like Face book, but Mr Fisher was not that boss. He failed to outsource much production, which might have made Kodak more nimble and creative. He struggled, too, to adapt Kodak's "razor blade" business model. Kodak sold cheap cameras and relied on customers buying lots of expensive film. (Just as Gillette makes money on the blades, not the razors.) That model obviously does not work with digital cameras. Still, Kodak did eventually build a hefty business out of digital cameras-but it lasted only a few years before camera phones scuppered it. Kodak also failed to read emerging markets correctly. It hoped that the new Chinese middle class would buy lots of film. They did for a short while, but then decid-

ed that digital cameras were cooler. Many leap-frogged from no camera straight to a digital one. Kodak's leadership has been inconsistent. Its strategy changed with each of several new chief executives. The latest, Antonio Perez, who took charge in 2005, has focused on turning the firm into a powerhouse of digital printing (something he learnt about at his old firm, Hewlett-Packard, and which Kodak still insists will save it). He has also tried to make money from the firm's huge portfolio of intellectual property-hence the lawsuit against Apple. At Fujifilm, too, technological change sparked an internal power struggle. At first the men in the consumer-film business, who refused to see the looming crisis, prevailed. But the eventual winner was Shigetaka Komori, who chided them as "lazy" and "irresponsible" for not preparing better for the digital onslaught. Named boss incrementally between 2000 and 2003, he quickly set about overhauling the firm. Mount Fujifilm He has spent around $9 billion on 40 companies since 2000. He slashed costs and jobs. In one 18-month stretch, he booked more than ¥250 billion ($3.3 billion) in restructuring costs for depreciation and to shed superfluous distributors, development labs, managers and researchers. "It was a painful experience," says Mr Komori. "But to see the situation as it was, nobody could survive. So we had to reconstruct the business model." This sort of pre-emptive action, even softened with generous payouts, is hardly typical of corporate Japan. Few Japanese managers are prepared to act fast, make big cuts and go on a big acquisition spree, observes Kenichi Ohmae, the father of Japanese management consulting. For Mr Komori, it meant unwinding the work of his predecessor, who had handpicked him for the job-a big taboo in Japan. Still, Mr Ohmae reckons that Japan Inc's long-term culture, which involves little shareholder pressure for short-term performance and tolerates huge cash holdings, made it easier for Fujifilm to pursue Mr Komori's vision. American shareholders might not have been so patient. Surprisingly, Kodak acted like a stereotypical change-resistant Japanese firm, while Fujifilm acted like a flexible American one. Mr Komori says he feels "regret and emotion" about the plight of his "respected competitor". Yet he hints that Kodak was complacent, even when its troubles were obvious. The firm was so confident about its marketing and brand that it tried to take the easy way out, says Mr Komori. In the 2000s it tried to buy ready-made businesses, instead of taking the time and expense to develop technologies in-house. And it failed to diversify enough, says Mr Komori: "Kodak aimed to be a digital com-

pany, but that is a small business and not enough to support a big company." Perhaps the challenge was simply too great. "It is a very hard problem. I've not seen any other firm that had such a massive gulf to get across," says Clay Christensen, author of "The Innovator's Dilemma", an influential business book. "It was such a fundamentally different technology that came in, so there was no way to use the old technology to meet the challenge." Kodak's blunder was not like the time when Digital Equipment Corporation, an American computer-maker, failed to spot the significance of personal computers because its managers were dozing in their comfy chairs. It was more like "seeing a tsunami coming and there's nothing you can do about it," says Mr Christensen. Dominant firms in other industries have been killed by smaller shocks, he points out. Of the 316 department-store chains of a few decades ago, only Dayton Hudson has adapted well to the modern world, and only because it started an entirely new business, Target. And that is what creative destruction can do to a business that has changed only gradually-the shops of today would not look alien to time-travellers from so years ago, even if their supply chains have changed beyond recognition. Could Kodak have avoided its current misfortunes? Some say it could have become the equivalent of "Intel Inside" for the smartphone camera-a brand that consumers trust. But Canon and Sony were better placed to achieve that, given their superior intellectual property, and neither has succeeded in doing so. Unlike people, companies can in theory live for ever. But most die young, because the corporate world, unlike society at large, is a fight to the death. Fujifilm has mastered new tactics and survived. Film went from 6o% of its profits in 2000 to basically nothing, yet it found new sources of revenue. Kodak, along with many a great company before it, appears simply to have run its course. After 132 years it is poised, like an old photo, to fade away. •

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66 Business

The Economist January 14th 2012

Carrefour

Bread, cheese, new boss? An ailing store needs fresh blood

T AST summer, amid rumours that he was Labout to be sacked, Lars Olofsson was given another six months to revive Carrefour, the world's second-biggest retailer. His time is up. Carrefour's performance has grown mouldier since then-and not in a good way, like Roquefort cheese. In November 2on it lost market share in France, its home market, which accounts for 42% of sales. This came after several profit warnings, a string of u-turns and a Brazilian merger plan that ended in failure. Carrefour's shares fell by 45% between January and December last year. Another profit warning may come on January 19th, when the firm will announce its quarterly resultsand possibly Mr Olofsson's future. Carrefour's woes are not all the chief executive's fault. Mr Olofsson took over a struggling firm with a passe business model that mainly operates in a stagnant part of the world. However, he compounded these problems with inept management. A gifted marketer, he can make unrealistic goals sound reachable; but he cannot make them so. His plans for Carrefour have had to be revised more than once. Mr Olofsson is under pressure from Bernard Arnault, the boss ofL VMH, a luxury-goods group, and Colony Capital, a property-investment firm. The two jointly own 16% of Carrefour's shares and 22% of the company's voting rights through Blue Capital, an investment vehicle. The stake they bought in 2007 has halved in value, so they are urging Mr Olofsson to pep up the stock price quickly. This makes it harder for him to devise a long-term strategy to turn around the sausage-laden supertanker. In the past, Carrefour had three strengths: low prices, a vast range of food, clothes and white goods, and the convenience of having all those things in one place. Today shoppers can find low prices and infinite choice online, so fewer bother to drive to an out-of-town hypermarket. European demography hurts Canefour, too. Populations are ageing. More people live on their own. And whereas big families buy in bulk, singles tend to shop locally, frequently and in small quantities. "Hypermarkets are not dead, but they are outdated," says Natalie Berg at Planet Retail, a research firm. Mr Olofsson has invested hundreds of millions of euros in a revamp called "Carrefour planet". The new stores boast "beauty areas" with gleaming cosmetics

Call that a bargain? Time to shop online counters and "organic areas" with mountains of organic food. Alas, building a "planet" shop costs twice as much as an ordinary hypermarket. And cash-strapped European shoppers want bargains, not overpriced vegetables. "This is not a good time to refit and renovate the stores," says Jerome Samuel of HSBC, a bank. Carrefour depends too much on products that are in long-term decline, says

John Kershaw at Bank of America Merrill Lynch. Its sales of white goods, books, ovos and electrical gadgets shrank by 20% over the past four years. It needs to offer cheap food, which never goes out of fashion. But its hypermarkets are 8.8% more expensive that the cheapest rival, according to J.P.Morgan Cazenove. As the biggest retailer in France, Carrefour has the clout to cut prices by more and for longer than its rivals. But it hasn't done so. The next boss of Carrefour is likely to be French. Thierry Breton, a former economics minister, could be a candidate. Georges Plassat, a former boss of Casino, another supermarket chain, has indicated that he wants to stay in his current job as boss of Vivarte, a retail group. Noel Prioux, the head of Carrefour France, is another possibility, though he started his current job only in June. Carrefour has a good business in emerging markets and owns property worth an estimated €17 billion. Having decided to pull out of markets where it is not in the top two, it has a hefty market share in 32 countries. Yet Carrefour is still concentrated in Europe, especially France. Growth in Asia cannot make up for flops at home. Indeed, if the company does not perk up soon, investors may demand that its fizzy emerging-market business be spun off from its flat European one. •

Golden parachutes

Rip-cord economics Pay-offs for the boss need to be better designed ICH rewards for departing bosses are not popular. After Sir Fred Goodwin led Royal Bank of Scotland into a ditch and dumped the bill on British taxpayers, he left with a pension of over f700,ooo ($98o,ooo) a year. The Sun, a tabloid, said he had "screwed the nation". Yet golden parachutes have their uses. If well-designed, they align the boss's interests more closely with those of shareholders. Suppose, for example, a takeover is brewing. Takeovers are usually lucrative for shareholders of the target firm: in America between 1990 and 2008, they have received a median premium of 35%. But the boss's interests are quite different. If the firm is acquired, he is likely to be fired. A golden parachute can persuade the boss not to obstruct a takeover. But their notoriety dissuades firms from using them. Dirk]enter of Stanford University and Katharina Lewellen of Tuck Business School find that golden parachutes are rarer and stingier than they should be. To test whether bosses block takeovers, they looked at what happens

R

when they are nearing retirement, and therefore have no future career to sacrifice. Using data on American public firms from 1992 to 2008, they found that companies with a boss aged 65 or over were so% more likely to be taken over. Another paper, by Eliezer Fich and Ralph Walkling of Drexel University and Anh Tran of Cass Business School, found that when golden parachutes are larger, proposed mergers are more likely to be completed, but buyers pay less for the shares of the target firm. The data from Mr ]enter and Ms Lewellen show that when the boss of the target firm is old, buyers pay an average premium of 26%. For younger bosses, the premium is 33%. This makes sense. If younger bosses are more reluctant to sell, it will cost more to overcome their objections. So boards must strike a balance. If the boss's golden parachute is too miserly, he may block a deal that would benefit shareholders. If it is too generous, he may fail to negotiate hard with potential buyers. As with real parachutes, poor design can have serious consequences.

The Economist January 14th 2012

Business 67

Brands in China

Pro logo

HONG KONG

Chinese consumers are falling out of love with fakes

'l '1 ]HEN Da Vinci, a retailer of expensive

VV imported furniture, opened its new showroom in Shanghai recently, it spared no expense. The gallery, over 10,000 square metres spread over four stories, was filled with extravagant pieces from brands such as Armani Casa and Versace Home. The theme of the event was zhen de jia bu liao (roughly: "what is genuine cannot be counterfeited."). Yet Da Vinci is embroiled in a scandal. CCTV, an official media outlet, alleged that some of its imported kit may actually have been made locally, shipped overseas or to a bonded warehouse, then brought back into the country to earn an undeserved "imported" seal. The firm hired a public-relations agency to put a more positive spin on the story. Da Vinci claims this involved paying $15o,ooo through a broker to a journalist who, it alleges, threatened to run more damaging stories if not paid off. All parties involved deny wrongdoing. An initial official ruling seemed to clear Da Vinci, but in December the Shanghai authorities slapped fines on the firm for alleged misdeeds including improper labelling. Da Vinci now says it will take the authorities to court to clear its name and has filed a police complaint against the broker and journalist over what it says was an extortion plot. Whatever the truth behind this murky affair, it has revealed something about

The real bling

I

First get rich, then get real Respondents in China who say they are willing to buy fake jewellery, %

Chinese luxury-goods market, $bn 15

50

12

40

30 20

10 0

0 2007

08

09

10

11

Sources: Bain; McKinsey

how the attitudes of Chinese consumers are changing. Counterfeiters are no longer popular. Not long ago, Chinese shoppers applauded the fakers for saving them money. Now they scorn them. If it's a fake, the well-heeled sneer, you can't flaunt it. Fakery is not dead, of course. In 2009, roughly 30% of mobile phones in the country were thought to be shanzhai-a popular term for clever fakes. The Business Software Alliance, a trade group, claims that nearly four-fifths of the software sold in China in 2010 was pirated. In December the us Trade Representative issued its annual report on the world's most "notorious" counterfeit markets. Of the 30-odd markets identified, eight were in China. Some, such as Beijing's Silk Street market, are well-known. The report also points the finger at Taobao, an online marketplace owned by Alibaba, China's biggest e-commerce firm. That may be unfair. Tao bao has clamped down so hard recently that it is enduring protests by angry vendors. Still, as China grows richer, life is growing harder for fakers. A recent study of China's luxury market by Bain, a consultancy, concludes that "demand for counterfeit products is decreasing fast." McKinsey, another consultancy, found that the proportion of consumers who said they were willing to buy fake jewellery dropped from 31% in 2008 to 12% last year. This is good news for all brands, not just the blingy ones. "Consumers are looking for the real thing, and they are increasingly willing and able to afford it," say the authors. Cash-strapped youngsters still love counterfeits, says Chen]unsong of the China Europe International Business School. But those over 30, if they have a bit of mon-

ey, have become extremely brand-conscious. There is a "comparison culture", he observes. People are ridiculed if spotted with a fake Gucci handbag. Another reason why fakers are under pressure is that Chinese firms now have intellectual property of their own to protect. Brands such as Lenovo (a computer firm) and Haier (a maker of everything from fridges to air-conditioners) are highly valuable and therefore worth defending. The more Chinese innovators gripe about fakery, the more strictly the government enforces the law. It just announced that it aims to stamp out counterfeit software in government offices by the end of this year. Even sceptical foreign manufacturers believe China is changing. Douglas Clark, an expert on China's intellectual-property regime, points to a survey by the Eu-China Chamber of Commerce suggesting that counterfeiting, long the first or second gravest concern of its members, is now third, fourth or not even ranked. Tougher law enforcement has helped, he says, but so too has the fact that foreign firms have learned how to cope with fakes. Some have set up their own branded retail outlets to control distribution. GlaxoSmithKline, a British drugs giant, has introduced fake-proof "e-coding" of pills. Chinese consumers are realising that brands are not just about showing off. They can also send useful signals about quality. A Coke probably won't poison you because it would cause billions of dollars of harm to the Coca-Cola brand if it did. In December China suffered another scandal involving tainted mille Shoppers instantly shunned the local firm involved. Nestle, a Swiss food giant, saw an opportunity. It announced this week that with its local partners it will invest some $400m to boost its dairy operations in China. •

... and the bonfire of the bogus

The Economist January 14th 2012

68 Business

Schumpeter I Romney the revolutionary Mitt Romney's career says a lot about how American business has changed

N A Republican primary field full of radicals, Mitt Romney is the Ilutionary. establishment candidate. Yet earlier in his career he was a revoHard though it may be to imagine Mr Romney waving a pitchfork or manning a barricade, Schum peter is not joking. As a businessman, Mr Romney was at the heart of three revolutions. The first was the rise of meritocracy in corporate America. In the 1950s and 1960s many people thought management was just a matter of applied common sense. Companies wanted their executives to be "well-rounded men", not rocket scientists. But the 1960s and 1970s saw the rise of a new kind of brain-intensive company: private-equity outfits such as Kohlberg Kravis Roberts and strategy consultancies such as the Boston Consulting Group (BCG) and its stepchild Bain and Company. These companies valued analytical skills above all else-certainly above experience or golf handicap. Bruce Henderson, BCG's founder, recruited the smartest kids from the nation's best business schools. Mr Romney was the archetype of this new breed: he graduated in the top 5% of his class at the Harvard Business School. The earnest young man also loved looking under the hood of companies to see how their wiring might be improved. He joined BCG in 1975 and left a couple of years later to join the even more brain-obsessed Bain and Company. The second revolution, as Benjamin Wallace-Wells wrote in New York magazine, was the idea that a company's purpose is to make money for shareholders. Post-war American capitalism was dominated by managers, not shareholders. These salaried sultans ruled over sprawling conglomerates with elaborate hierarchies and ornate headquarters. The three-martini lunch was de rigueur. And why not? American business was on top of the world. Wall Street was a complacent club. Japanese companies were not even on the radar. But by the time Mr Romney came of age in the 1970s this comfortable world was crumbling. Post-war prosperity had given way to stagflation. The Japanese had started to run rings around slow American giants. And in 1976 a brilliant article by two business academics, Michael Jensen of Harvard and William Meckling of the University of Rochester, offered a radical diagnosis. Corporate America had a principal-agent problem, they said. Agents (ie, managers) were feathering their own nests rather than

serving the interests of their principals (shareholders). The solution was to force managers to focus on shareholder value. Bill Bain heartily agreed. He had left BCG because he was frustrated with a business model which hinged on consultants producing a report and then moving on to a new client. He wanted to forge more intimate relations with fewer companies. And he took this line of thinking a big step further. Why not go the whole hog and invest money in the firms you advised? Why not buy out bad managers and let your brilliant young consultants rebuild their companies from the ground up? The result was Bain Capital, a company that Mr Romney ran from 1984 to 1999, earning a fortune estimated at $2oom. Bain Capital was a wallet-bursting success. It turned $37m of capital under management in 1984 into $5oom in 1994 (and $66 billion today). It kick-started businesses such as Staples (which now has 2,000 stores selling office supplies) and the Sports Authority. But it was also a symptom of a wider change. It was not just people like Mr Romney who were pushing American companies to shape up. It was also the new rigours of global competition. Firms of every description sought to squeeze out inefficiencies, sell off non-core businesses and close redundant operations, all in the name of shareholder value. The third revolution was the shift from manufacturing to services. George Romney, Mitt's father, made solid things for 23 years, running the American Motors Corporation for eight of them. Such careers are now unusual. Bright, ambitious young Americans seldom spend their whole lives making products with ball bearings in them. Bain Capital "re-engineered" 150 companies in a bewildering variety of industries during Mitt's tenure. Mr Romney and his ilk have made corporate America more efficient. But for many people this has involved an upending of the natural order of things, with young men with flip-charts wandering into proud firms and telling veteran managers what to do. As a candidate, Mr Romney trumpets his 30 years of experience in business. With the economy in such trouble, he argues, America needs a corporate troubleshooter in the White House, not a former community organiser. His opponents put it differently. Even some Republicans are painting him as a heartless corporate raider who has torn apart firms and families to make money for shareholders. Just as the 2008 election involved a debate on race relations, so the 2012 election will involve one on American capitalism. How ruthless, exactly, do voters want it to be? The debate will be driven by emotions, not facts. The former are easy to inflame; the latter tricky to pin down. Did Mr Romney create 100,000 jobs while at Bain Capital, as he claims, or destroy more? Without knowing what would have happened in the absence of Bain's intervention, one can only guess. Mr Romney says he made firms more productive, thus enriching America. His rivals-even Newt Gingrich, an unlikely sans-culottes-gripe that he enriched himself. A tale of two visions Still, it is a debate worth having. Mr Obama wants to curb capitalism's excesses. Mr Romney offers, in his own words, "a clear and unapologetic defence" of "the American ideals of economic freedom". He even tried to explain the virtues of profits to an Occupy Wall Street heckler. This year's election will not just be about Mr Obama. Voters will have their say on capitalism, too. • Economist.comfblogsfschumpeter

69 Also in this section 70 Buttonwood: The euro' s descent 71 Recapitalising Europe's banks 71 An tiber-review of the crisis 72 After Hildebrand 72 Golf: a good walk amortised 73 What Japan's trade deficit presages 74 Free exchange: Economic ideas and political constraints

For daily analysis and debate on economics, visit Economist.comfeconomics

China's property market

Marriages and mergers HONG KONG

China's housing downturn will benefit state-owned developers OULD the arrival of the year of the dragon rescue the country's beleaguered C property developers? As Chinese new year approaches later this month, tens of thousands of couples are preparing to marry under what is considered an auspicious sign. To win over a bride in a country undersupplied with women, it helps a lot if the aspiring groom first proves his worth by buying a home. China's developers need all the help they can get. Keen to cool overheating residential-property markets, the central government has restricted purchases of multiple homes, demanded larger down-payments and curtailed opportunities for speculators to "flip", or quickly sell on, properties. It has curbed developers' access to bank lending and cut off credit from new trust companies. It is also encouraging the use of property taxes like those introduced in Shanghai and Chongqing last year. The government remains committed to policies of this ilk. Taken together, these measures have splashed cold water on the market. Price growth has been slowing since early 2010 (see chart). Analysis by Soufun Holdings, the country's largest property website, suggests that prices fell during December 2011 in 6o of the 100 cities it monitors. Land prices are falling fast, too. A recent survey of leading developers by Standard Chartered indicates that land prices are a third

off their peaks of late 2010. There are also reports of land auctions run by local governments-a prime source of assets for developers and of funding for local exchequers-failing across the country. All of which presages an overdue consolidation of the industry. One harbinger of the bloodshed to come is a row that erupted in Shanghai just after Christmas. SOHO China, a big developer, announced that it would buy a so% stake in prime property near the city's Bund promenade. It agreed to pay roughly 1 billion yuan ($158m) to Greentown China Holdings and nearly 3 billion yuan to Shanghai Zendai Property, two smaller de-

I

When the going gets tough China: 35-dty residential-

five largest developers' market share

property price index* %change on previous year

%of total

35 30

14

12 10 8

25

20

15 10

4

5

2

0

0

+

+

2009

10

Sources: GaveKal-D ragonomics; HSBC

11 * Th ree-m ont h

movi ng average

velopers. This outraged Fosun International, a conglomerate that owns the other half of the property, which claimed it had the right of first refusal and is now threatening legal action. The row is revealing for several reasons, and not only because such public brawls are unusual in China. It serves as a good example of past excess: the property in dispute became the city's most expensive when, in 2010, Shanghai Zendai paid 9.2 billion yuan for it in an auction. That the two smaller firms agreed to sell their crown jewel hints at the liquidity squeeze now facing weaker developers. And the squabble between the bigger players shows that there are cash-rich developers primed to take advantage of the tumult. The scope for consolidation is huge. There are over 30,000 property developers in China. Many of these are small local firms that cannot command the access to credit, economies of scale or geographic diversification that big firms can. Analysts at Citibank estimate that the biggest 100 or so firms control only a quarter of the sector, with the next soo firms commanding perhaps 10% to 15% more. But consolidation is gathering pace (see chart). The obvious losers from this process will be firms that are heavily leveraged. HSBC estimates that the average gearing for leading listed developers rose from 47% in 2010 to 56% last year (before tightening measures hit home). That average masks wide variations, however: China Overseas Land & Investment (cou), a state-run goliath, has a leverage ratio of only 36%, whereas Shimao, a smaller rival, has one of 77%. Analysts from Standard & Poor's, a ratings agency, have run stress tests on the balance-sheets of leading developers and conclude that a 30% drop in contract sales from 2011levels could push many weaker ~~

70 Finance and economics ~ firms to the

brink. What about the winners? Conventional wisdom maintains that the big listed developers will best the unlisted developers, which are seen as having murky accounts and weak access to capital markets. Not necessarily, argues Andrew Lawrence of Barclays Capital. He sees an analogy with Britain's frothy property market in the 1960s, when it was the flashy listed firms that overloaded their balance-sheets with debt, whereas the unlisted firms stayed trim and came out on top. He thinks much the same may happen in China. Another bit of conventional wisdom

The Economist January 14th 2012 holds that property developers focused on booming provincial cities will do much better than those with eyes on the biggest "Tier-1" markets like Beijing and Shanghai. One reason to think so is that the edicts issued by the federal government to curb market fervour are enforced with vigour only in the largest cities. But it is just possible that the downturn could lead to a reversal of fortunes. Markets outside the big cities are often very thin, with few secondary buyers and little investment from other parts of the country. A sharp drop in prices and confidence could lead to a frightening freefall. Private-

ly built housing in peripheral markets is also more vulnerable to cannibalisation by the vast amount of subsidised "social housing" being built by the government. Pointing to Beijing's speedy rebound from an earlier property downturn in 2008, analysts at Citibank argue that the leading markets may have a natural floor for prices even in the worst environment. If so, firms like China Resources, Longfor and cou, which are well positioned in the big cities, may weather the storm better. This is especially true if there is a flight to quality. As the number of defaults and failed projects increases, buyers (who typi-

Buttonwood I Traders are picking on the euro again

ALTHOUGH 2011 was filled with headJ-\..lines about the potential demise of the single currency, the euro did not actually fare that badly in the foreign-exchange markets. Its trade-weighted decline for the year was only 3.3%. But traders went into 2012 betting on a further fall. Figures from the Commodity Futures Trading Commission showed a record short position in early January. Sure enough, the euro slipped below $1.27 in the year's first trading days, before recovering slightly. Before predicting a collapse in the euro's value, however, it is worth remembering a couple of salient facts. Markets often make sharp moves in the first days of January that are not sustained in the rest of the year. The euro fell by 3.6% against the dollar in early 2011 before stabilising. The presence of so many bearish bets is a classic contrarian signal that all the bad news may be in the price. Secondly, foreign-exchange markets are an "ugly contest" in which traders and investors have to pick the least-worst currency. Most developed countries would like to see their currencies fall in order to help their exporters. Switzerland is trying to cap the level of the franc. Japan has repeatedly intervened to prevent the yen from strengthening too far. America has seen its debt downgraded by Standard & Poor's and runs its fiscal policy via a series of nth-hour compromises. So what explains the current bias against the euro? There is some evidence that central banks are losing enthusiasm for diversifying their reserves into euros. Between the third quarter of 2009 and the same period last year, the euro's share of central-bank reserves fell from 27.9% to 25.7% and the dollar's proportion nudged up slightly from 61.5% to 61.7%. It seems as if central banks have been spreading their

net more widely into the likes of the Australian and Canadian dollars. There have also been signs that the American economy is doing rather better than its European counterpart. Whereas the euro zone may already be in recession, America could enjoy a year of "trend" growth. The labour market is improving, as are other signs of confidence such as house purchases and car sales. In addition the link between the dollar and the "risk on/risk off" trade may be weakening. Ever since the financial crisis, the dollar has tended to do best when investors are cautious (the risk-off phases) and to fall when they are feeling optimistic. Perhaps American fund managers were selling dollars to buy foreign assets when in upbeat mode and bringing their money back home at more downbeat moments. But their appetite for foreign equities may be waning, especially since Wall Street outperformed European stockmarkets in 2011. So far in 2012 both equities and the dollar have risen. For much of 2011 the euro also had a clear yield attraction over its main rivals (the dollar, yen and sterling). But two rate

cuts in the autumn have brought eurozone rates down to1% and further cuts are expected later this year. There is talk that the euro is now being used for carry trades, whereby investors borrow in a low-yielding currency (like the euro) and invest the proceeds in a higher-yielding asset, such as the Australian dollar. Some believe that the European Central Bank will eventually be forced to adopt quantitative easing (QE) as the only way of helping the region out of its debt crisis (the recent provision of three-year liquidity to the banks is a step along that road). It is hard to be sure whether such a move would be bullish or bearish for the currency. The conventional assumption is that creating more currency is bad for its value: QE in America is generally agreed to have been negative for the dollar. But if QE is perceived to stabilise the European economy, it could end up being positive for the euro, at least in the short term. As far as European economies are concerned a moderate decline in the euro would probably be good news, as it would deliver a modest stimulus at a time of turmoil. Few want to see the euro regain the heights of $1.60 reached in 2008. The big risk, of course, is of a break-up of the euro zone, with Greece being the obvious candidate to depart first. The potential for contagion in the other peripheral economies means that such a move would almost certainly precipitate a wider banking crisis. Although the euro might still survive in the core countries like Germany and the Netherlands, Mansoor Mohi-uddin at UBS is surely right when he says that "the prospect of a stronger euro shorn of its weakest links would take years to materialise." A break-up would turn a decline into a rout. Economist.comfblogsfbuttonwood

~~

The Economist January 14th 2012 ~

cally pay for homes before they are built) may well favour bigger developers with strong brands and stronger balance-sheets. In any contraction, big and diversified firms that have little debt and access to cheap capital will come out on top. On that basis, the biggest winners of the coming shake-out are likely to be firms that are state-owned or that have strong links to the government. The likes of COLI and Poly Real Estate Group enjoy official patronage and access to subsidised credit. Of the 20 biggest developers, as measured by yuan sales, ten are wholly or partially controlled by state entities. That share will rise. •

European bank capital

Byhookorby crook Banks in Europe scrape together the extra capital they need

HE idea of getting Europe's banks to T plump up their cushions of capital to help restore confidence seemed sensible enough last year when it was championed by the IMF and then adopted by the European Banking Authority (EBA). But the journey to higher capital levels matters as well as the final destination. If banks with big shortfalls (see chart) simply slim their balance-sheets, that could hurt the flow of credit. It is better for Europe's economies, if not for bank shareholders, if lenders raise the cash from investors. So the difficulties that have beset UniCredit, Italy's biggest bank by assets, as it tries to plug a gap of €8 billion ($10.2 billion) are particularly ominous. UniCredit's shares slumped by almost half after it approved a deeply discounted rights issue earlier this month, though they have recovered a tad since. The slide seems to have been exacerbated by a number of factors. These include the huge size of the rights issue as well as the nature of UniCredit's existing investor base: many of its shares are held by charitable foundations which do not have the cash to exercise their rights to buy more stock, even at a discount. Nevertheless, the sharp fall has spooked investors and other banks that had been contemplating rights issues. "This is the most systemically important deal that any of us have ever done," says someone involved in the capital-raising. "It is going to be seen as a litmus test of the willingness of investors to recapitalise banks." For UniCredit, at least, the pain will probably now tail off. The rights issue is unlikely to fail completely, since at worst its underwriters will be forced to buy some shares. But its travails will encourage

Finance and economics 71 An fiber-review of the crisis

TheLodown NEW YORK

A finance professor turns to literary analysis

T BEGAN as a review of three books on ICurrently, the financial crisis for a wonky journal. the book count stands at 21 and although the official publication date is still in the future, the draft• already has a life of its own in policymaking circles. In 2010 Andrew Lo, a professor at MIT's Sloan School of Management, was asked by the journal of Economic Literature to write a review of three or four of the more important academic books on the crisis. The initial sample, he thought, was too small. There were lots of useful books on the topic, from journalists as well as academics. Widening the spectrum would also highlight areas of disagreement between authors. In that, he certainly succeeded. Among the more minor debates is when the crisis began: was it 2006, when America's housing market peaked; 2007, when money-market liquidity froze; or 2008, when Lehman Brothers collapsed? But the biggest source of contention is over what caused the wheels to fall off. Several of the books blame Fannie Mae and Freddie Mac, America's housing-finance giants. Others cite everything from global capital flows, lousy regulation and shareholders' incentives to regulatory capture, banks elsewhere in Europe to find other ways to reach their new capital targets. Spain's two biggest banks, Santander and BBV A, had to raise almost €22 billion between them to meet the EBA's core Tier-1 threshold of 9%. To do so they are relying on everything from asset sales and retained earnings to strategies that will irk customers. Santander, for instance, sold convertible bonds to retail investors four years ago. It is now turning them into shares, boosting its capital but also hitting

I

Hole lot of trouble European banks' capital shortfalls September 30t h 2011, €bn

0

4

Banco Santander (Spain)

UniCredit (Italy) BBVA (Spain)

-

Dexia (Belgium/France)

-

-

Commerzbank (Germany) BPCE (France) Banca Monte dei Paschi (Italy} Deutsche Bank (Germany) -

Source: European Banking Authority

8

12

16

inequality and "predatory borrowers" who gamed the system to extract credit. More disturbing still is that even some basic facts are not agreed upon. Mr Lo cites one trope as an example: that a rule change by the Securities and Exchange Commission in 2004 allowed brokerdealers in the United States to take on lots more debt in the run-up to the crisis. In fact, he writes, the rule change did not undo any restrictions on leverage, and some had higher debt ratios in the late 1990s than in 2006. Even in the best of circumstances, understanding the crisis would be difficult, Mr Lo writes. Many of the people who were well-placed to see what happened have reasons to shift blame. And the financial system is extraordinarily complex. The review will not satisfy those looking for definitive answers. But that is the point. "My goal was to expose economists to the breadth of explanation, in the hope of sparking enough cognitive dissonance and annoyance to have them dig deeper," he says. He should keep adding to the book count. ............................................................. . * "Reading About the Financial Cri sis: A 21-Book Review" by Andrew Lo . www.argentumlux. org

many Spaniards in the pocket. Silly accounting rules also help the banks. This week BBV A wrote down the value of its American business, saying the outlook for profits there was souring. This sorry news had the perverse impact of raising BBV A's core capital by about €400 billion because it increased the losses it can set aside against tax on future profits. Other banks are using similar techniques to boost capital. Commerzbank, Germany's second-largest bank, caught analysts by surprise when it said on January 9th that its efforts to raise an extra €5 billion in core capital were "well under way". Many had previously expected it to go cap in hand to Germany's bail-out fund. Instead it now hopes to raise capital through asset sales, deleveraging and tax losses. Several lenders are thought to be tweaking their models to reduce their "risk weightings", the amount of capital they must set aside against specific assets they have on their balance-sheets. Banks cannot be blamed for using every trick in the book to avoid asking investors for more money, especially given the woes ofUniCredit. But it is hard to see how nifty accounting will restore confidence and thaw out private funding markets. •

72 Finance and economics The Swiss National Bank

Damage control BERLIN

The Swiss central bank is also a victim of its president's demise HATEVER further details emerge about personal trades made by PhilW ipp Hildebrand, ex-president of the Swiss National Bank (SNB), who resigned on January 9th, the central bank itself is now under huge pressure to restore its credibility. Then-person bank council reacted weakly on August 16th when Mr Hildebrand reported a foreign-exchange trade, initiated by his wife on a personal bank account. The council did not immediately investigate whether the transaction breached the SNB's code of conduct, and did not order him to reverse it. Only four months later, in December, did the council react to press reports and initiate an inquiry by PWC, the bank's auditor. Even then it chose to overlook concern in the auditor's report that this trade was "awkward". Part of the explanation may be the peculiar Swiss attitude to bank secrecy. The Hilde brands' trading came to light because an employee at his private bank leaked the information. A straw poll this week suggested that a majority of the Swiss public views whistle-blowing as no excuse to breach bank secrecy, and regrets the departure of Mr Hildebrand. The council's failings may also reflect the strangeness of the SNB itself. Its shares, 52.7% of them owned by the Swiss cantons and cantonal banks, are listed on the Swiss stock exchange. There are also around 2,200 private shareholders (one of the biggest, with 5.6% of the bank, is Theo Siegert, a German, though his voting rights are limited to 100 shares). Of the n members of the bank council, six are elected by the fed-

THOMAS JORDAN Thomas the bank engine

The Economist January 14th 2012 era! government and five by the shareholders. They have to be Swiss citizens and well-versed in finance. The incumbents are a very Swiss mix of provincial heavyweights, bankers and businessmen-a recipe for cosiness and conflicts of interest. The scandal has nonetheless reminded the SNB how important the perception of unimpeachable integrity is to the reputation of a central bank. There have been calls for the resignation of bank-council members, but since these demands come from far-right politicians they have been largely discounted. But the government will ask experts to advise it on how the SNB's governance might be changed. In the meantime, the council itself has the job of proposing a candidate to fill the gap left by Mr Hildebrand on the bank's three-person governing board. The federal government can only accept or reject the council's proposal, not propose its own candidate. Once the post is filled the government will select a president and a vicepresident from the three. The odds-on favourite to succeed Mr Hildebrand is Thomas Jordan, the current vice-president (and interim head). Unlike Mr Hildebrand he has no private-sector experience, being an academic and financial civil servant through and through. That may suit the SNB after Mr Hildebrand's talk this week of his "dollar lifestyle". And Mr Jordan's intellectual capacity to head one of the world's most respected central banks is not in question. Mr Jordan is also helped by the fact that the SNB has been doing its main job pretty well while he has been on the board. Bold decisions like the one in September to put a ceiling on the Swiss franc are open to criticism, and helped to make the Hildebrands' trading look so iffy. But the bank has emerged from the crisis as one of the most effective at promoting stability, according to a study by the Federal Reserve Bank of New York. Mr Jordan can take some of the credit for that. •

PHILIPP HILDEBRAND

Agood walk amortised

Putters aflutter TORONTO

Canadians debate tax and golf OLF is Canada's most popular sport to play, ranking above ice hockey. G Enthusiasts boast that Canada has the highest percentage of golfers per head of any country. That helps to explain why a campaign has teed off to change the treatment of golf under the tax code. In Canada business entertainment is tax-deductible. People can write off half their restaurant bills or box seats at a hockey game if they helped to woo clients or seal a deal. It is forbidden, however, to deduct golf expenses. A 1972 law designed to crack down on tax abuses prevented golfing, yachting and hunting lodges in particular from being tax-deductible, so that the wealthy could not put personal luxuries on expenses. But discriminating against golf does not sit well with to day's players. "We just want equity and fairness," says Gary Bernard, the boss of the PGA of Canada, an association of golf professionals. The National Golf Course Owners Association (NGCOA) has launched a campaign to right the injustice. Two dozen or so members of parliament and senators (many of whom have golf courses in their districts) now support the cause. There is hope it could make it into the 2012 budget this spring. They have some cause for optimism. Other countries, including America and Britain, allow "green fees" (ie, what you pay to play) to be treated as a business deduction. As part of its post-crisis stimulus package, America even offered a tax credit if you bought certain kinds of electric golf carts. Jeff Calderwood, the head of NGCOA, reckons the change would cost the government less than C$2om ($19.6m) in forgone tax revenues. That's small change to the government but could make a big difference to golf courses. The typical course makes only around C$1.5m in annual revenue. But to bring this topic up now, as Canada grapples with budget cuts, could end up pitching other sports into the rough. Lisa Philipps, a law professor at York University in Toronto, says advertising the unfair treatment of golf may simply cause legislators to reconsider whether entertainment should be tax-deductible at all. It is always hard to know how much business is really talked about between quarters-or putts. And voters may not like the sound of high -flyers writing off the cost of their boxes at hockey games, let alone their hard work on the greens.

The Economist January 14th 2012

Finance and economics 73

Japan's trade balance

Seeing red

After half a century of trade surpluses,Japan is now in deficit

are not for ever. In the IplusMBALANCES 1980s and 1990s, Japan's huge trade surwas a popular target for American and European protectionists. No longer. Provisional estimates suggest that Japan's merchandise trade moved into the red in 2on-its first annual deficit (excluding freight costs) since 1963. Japan remains the world's biggest net foreign creditor. Income from its assets more than offset the trade gap, keeping its current account in surplus, equivalent to about 2% of GDP (down from 5% in 2007, see chart). That surplus, however, could also disappear within a few years. Is that good news or bad? Last year's trade deficit partly reflected some temporary factors, notably the earthquake and tsunami which disrupted production and exports. Imports were inflated by higher oil prices and larger imports of energy following the shutdown of nuclear-power plants. But if, as seems likely, many plants stay closed, future energy imports will remain high. The stronger yen and weak overseas demand will also keep squeezing exports. Until2009 exports had been buoyed by an abnormally weak yen, as foreign investors borrowed in yen to invest in higher-yielding currencies. But that carry trade has now been unwound as interest rates elsewhere have plunged. The stronger yen and high corporate taxes are also encouraging manufacturers to shift production abroad. J.P. Morgan forecasts that by 2014, 76% of Japanese car firms' production will be based overseas, up from 49% in 2003. As well as curbing exports, this could also lift imports if some car models are only made abroad. If Japan's trade deficit widens, the fate of its current-account surplus will depend on foreign-investment income (interest payments, profits and dividends). This rose sharply until2007 but has since fallen as a result of low interest rates and the global downturn. If firms reinvest more of their overseas profits instead of repatriating them, this might further erode foreign income over the next few years. Even if net income stays constant, Masaaki Kanno of J.P. Morgan forecasts that Japan's overall current account will be in deficit by 2015. Some economists disagree: global growth and Japanese exports could be stronger than Mr Kanno assumes. But there are powerful structural reasons to expect Japan's current account to move towards deficit. A nation's current-account

balance reflects the gap between domestic saving (by households, firms and the government) and investment. Historically, the Japanese were keen savers, with national saving greater than investment. But a rapidly ageing population saves less because people draw down their assets when they retire. The more retired folk there are relative to workers, the lower the saving rate. Japan's household-saving rate has fallen from 14% of disposable income in the early 1990s to only 2% in the past couple of years. The government's budget deficit (10% of GDP in 2on) also counts as negative saving. The current account has remained in surplus because shrinking household saving has been offset by a surge in corporate saving. Since 1990 Japanese firms have swung from being big borrowers to big savers as they sought to repay debts. Wage moderation and low interest rates lifted their profits, and they invested less. As the population continues to age, households' saving rate is likely to turn negative. Firms are also unlikely to keep piling up cash as much as they are now. Profits are being squeezed and they may invest more abroad. If private saving shrinks while the government borrows heavily, Japan will inevitably move into current-account deficit and become a net importer of capital. A shrinking surplus would be good news for Japan and for the rest of the world if it were caused by a strong rebound in domestic consumption and investment. Instead, it mainly reflects weaker exports and higher energy imports, which will bring little benefit to other rich economies. It will also weaken Japan's growth. Over the ten years to 2010, net exports accounted for half of Japan's real GDP growth. To

I

Sushinomics Japan,% of GDP

4

+ ------------------------~ 0

1985

90

95

2000

05

11 *

Sources: Haver Analytics; The Economist

*The Economist estimate

fill the gap,Japan would need structural reform to boost domestic spending. Even more worrying are the implications for financing Japan's government debt. Its net debt-to-GDP ratio-more than 130% in 2on, according to IMF estimates-is second only to that of Greece. Yet]apanese bond yields are among the world's lowest largely because it has a big current-account surplus and willing domestic investors (unlike other fiscal sinners such as Italy and Greece). Around 95% of Japan's sovereign debt is owned by domestic investors. But if Japan's current account moves into deficit the government will need to rely more on foreign investors, who are likely to demand higher yields. Catalyst or catastrophe A sudden rise in bond yields could seriously worsen the government's debt dynamics. A mere one-percentage-point increase in yields would cause the interest bill to double, requiring a bigger reduction in the rest of the budget deficit simply to stabilise the debt-to-GDP ratio. Higher yields would also imply big losses for Japanese banks and pension funds. If banks are forced to cut their lending, this would depress growth and lead to a withdrawal of liquidity from global capital markets. If, on the other hand, the government takes action to put fiscal policy on a sustainable long-term path by raising taxes and trimming spending, bond yields might rise only modestly. Unlike euro-area economies, Japan's debt mountain reflects low taxation as much as unsustainable spending. The government has ample room to increase taxes, particularly on consumption, but lacks the political will to do so. Indeed, while borrowing costs are so low, politicians have had little incentive to take unpopular action. A serious threat of higher bond yields because of a looming current-account deficit might prod the government to raise taxes and push through structural reforms. If it does not act, a current-account deficit and an unsustainably high public debt are the ingredients of a potentially lethal cocktail. •

74 Finance and economics

The Economist January 14th 2012

Free exchange \ The Beltway constraint Economists have lots of good ideas. To make a difference now, they must be politically feasible

HE annual meeting of the American Economic Association T functions a bit like a large, rumbustious diagnosis session. The world economy is rolled in on a gurney, prodded and (AEA)

poked, and declared to be suffering from a host of conditions. Yet the awareness that economists are not doctors has been rather slow to creep into the profession. Doctors may order a treatment (even the wrong one) and feel reasonably confident it will be administered. Economists cannot. The crisis in the euro zone is an acute case. Ideas for fixing the problem are plentiful. But the best economic policies may never see the light of day because of the brittle and baffling world of European politics. This year's gathering in Chicago provided several examples of the profession's awkward relationship with political realities. In a thought-provoking lecture Maurice Obstfeld of the University of California, Berkeley pointed out that the euro crisis had decisively undermined the notion that large current-account deficits don't matter as long as governments budget wisely. That's because private foreign debts often become sovereign obligations in a crisis as governments face pressure to offer bank bail-outs. His conclusion was that financial globalisation-and, in particular, the running up of big cross-border liabilities-may require a corresponding globalisation of governance, including international deposit insurance. Yet few things seem less likely. In another talk, Emmanuel Farhi of Harvard University mooted an idea for boosting an economy in a "liquidity trap", in which the central bank has already slashed interest rates to zero and can cut no more. The central bank might boost the economy by encouraging a bit of inflation, he said, but that would be a second-best solution. Better to adopt a programme of "unconventional fiscal policy" like raising future consumption taxes and cutting taxes on labour income. But Mr Farhi's assessment of what was second-best ignored the relative freedom of action of an independent central bank compared with elected governments. Robert Hall of Stanford had a different take on political constraints. He agreed with Mr Farhi that a little inflation could go a long way, but dismissed this option as futile. Since a reasonable central bank would obviously choose a smidgen more inflation in return for much lower unemployment, and the reasonable Fed had not, it must be beyond the Fed's power to raise prices. Given

the Fed's ability to create money at will, a discussion of the political animosity it generates (not least among Republican presidential candidates) would be useful. The importance of the political economy did get some attention. A paper presented by Atif Mian of the University of California, Berkeley, Amir Sufi of the University of Chicago and Francesco Trebbi of the University of British Columbia, laid out why good policy is often most difficult to implement in the wake of a financial crisis. When crisis strikes, asset prices tumble. Debtors who borrowed against these assets must then tighten their belts. A recession may follow if there is not an offsetting burst of spending by creditors. They may instead grow more cautious, especially if repayment of their loans looks doubtful. The authors write that a redistribution of wealth from creditors to debtors could potentially benefit both groups by averting a deep downturn. Yet even though debtors are many, such redistributions are few. Effective lobbying by a few, concentrated creditors helps hold back a populist tide: a few powerful banks, for instance, may be better able to influence legislators than millions of homeowners. As both debtors and creditors fight to protect their interests, political battles intensify. In America an effort to reduce households' mortgage obligations helped launch the tea-party movement of small-government conservatives. The euro zone's troubles, too, boil down to a poisonous battle between lenders and borrowers. The authors study a 70-country sample of financial crises assembled by Carmen Reinhart of the Peterson Institute for International Economics and Kenneth Rogoff of Harvard U niversity, and find that polarisation usually rises after crises. Voter identification moves away from the middle and closer to extremes. Support for governments shrinks and ruling coalitions become more fragmented. Good policy is harder to implement. Out of the ivory tower The economics profession may still be unrealistic about politics but it is now taking a more clear-eyed view of its members' incentives. Many economists do consultancy work for financial institutions or other firms while also offering public-policy advice or publishing research. This year the AEA officially asked members to divulge such potential conflicts. It will also require disclosures from economists submitting articles to its journals, which will be made clear at the time of publication. Change is needed. Economics has internalised the views of rich patrons, according to Luigi Zingales of the University of Chicago. His scathing analysis of journal publications revealed that papers providing justification for high executive pay were 55% more likely to be published than those opposed, and were more heavily cited by others. Technology, at least, is helping to keep the profession more honest. Bloggers, well-represented even among a record estimated attendance of around 11,500 delegates, provide a source of public oversight and a way to popularise neglected ideas. In a session on the increasing importance of the medium, Alex Tabarrok of George Mason University hailed blogging as "the return of political economy", a reference to the nineteenth century when economics was more conversational and relevant. In recognition of this shift The Economist is changing the name of this column from "Economics focus" to "Free exchange", linking it more closely to our blog of the same name. In economics, as in politics, greater scrutiny can only help. • Economist.comfblogsjfreeexchange

A380 FROM NFW YORK TO

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JANUARY

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Also in this section 77 Tiger bush and Leopard skins 77 Abolishing the Leap second 78 A trap for bed bugs

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

Military technology

Magic bullets Smart ammunition is about to make things a lot more dangerous for guerrillas fighting regular troops N WARFARE, an outgunned force that Isuch manoeuvres to shoot from behind cover as rocks or the rim of a ditch can often save itself from an otherwise nearly certain rout. That, at least, was the opinion of Carl von Clausewitz, a Prussian general whose treatise "On War" was the handbook of many 19th-century military men. And modern ones, too. Almost two centuries after Clausewitz committed his thoughts to print, underdog forces such as the Afghan Taliban continue to make deadly use of the art of concealment against technologically superior armies. But not, perhaps, for much longer. For a collaboration between A TK, an American firm, and Heckler & Koch, a German one, has come up with a rifle that negates the advantage of cover which Clausewitz described, by borrowing an idea from one of his contemporaries, Henry Shrapnel. The XM25, as the new gun is known, weighs about 6kg (13lb) and fires a 25mm round. The trick is that instead of having to be aimed directly at the target, this round need only be aimed at a place in proximity to it. Once there, it explodes-just like Shrapnel's original artillery shells-and the fragments kill the enemy. It knows when to explode because of a timed fuse. In Shrapnel's shells this fuse was made of gunpowder. In the XM25 it is a small computer inside the bullet that monitors de-

tails of the projectile's flight. A handful of XM25S are now being tested in Afghanistan by the Americans. So far, they have been used on more than 200 occasions. Most of these fights ended quickly, and in America's favour, according to Lieutenant-Colonel Shawn Lucas, who is in charge of the weapon's field-testing programme. Indeed, the programme has been so successful that the army has ordered 36 more of the new rifles.

A new equaliser Each rifle bullet is programmed, before it is fired, by a second computer in the rifle itself. To determine the distance to the target, the gunman shines a laser rangefinder attached to the rifle at whatever is shielding the enemy. If that enemy is in a ditch, a nearby object-a tree trunk behind or to the side of the ditch, perhaps-will do. Looking through the rifle's telescopic sight, the gunman then estimates the distance from this object to the target. He presses a button near the trigger to add that value to (or subtract it from) the distance determined by the rangefinder. When the round is fired, the internal computer counts the number of rotations it makes, to calculate the distance flown. The rifle's muzzle velocity is 210 metres a second, which is the starting point for the calculation. When the computer calculates

that the round has flown the requisite distance, it issues the instruction to detonate. The explosion creates a burst of shrapnel that is lethal within a radius of several metres (exact details are classified). And the whole process takes less than five seconds. Just how the turn-counting fuse works is an even more closely guarded secret than the lethal radius-though judging by the number of failed attempts to hack into computers that might be expected to hold information about it, many people would dearly like to know. Certainly, the trick is not easy. An alternative design developed in South Korea, which clocks flight time rather than number of rotations, seems plagued by problems. Last year South Korea's Agency of Defence Development halted production of trial versions of the K-11, as this rifle is called, and announced a redesign, following serious malfunctions. The XM25, in contrast, appears to work well. It is accurate at ranges of up to soo metres. That is almost as far as America's main assault rifle, the M-16, can shoot conventional bullets with accuracy. More pertinently, it is nearly double the range of the AK-47, a rifle of Soviet design that is used The Richard Casement internship We invite applications for the 2012 Richard Casement internship. We are looking for a would-be journalist to spend three months of the summer working on the newspaper in London , writing about science and technology. Our aim is more to discover writing talent in a science student or scientist than scientific aptitude in a budding journalist. Applicants should write a letter introducing themselves and an original article of about 600 words that they think would be suitable for publication in the Science and Technology section. They should be prepared to come for an interview in London or New York, at their own expense. A small stipend will be paid to the successful candidate. Applications must reach us by February 3rd. These should be sent to: [email protected]

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The Economist January 14th 2012 ~ by

many insurgent groups. And according to Sergeant-Major Bernard McPherson, part of the XM25'S development programme in Virginia, it is receiving rave reviews from soldiers in the field. It is also inspiring imitation. Though several European countries are planning to buy the XM25, some of them, including Germany, are working on weapons that operate in the same way, but fire 40mm rounds. Such bullets are easier (and less expensive) to make than 25mm rounds. But starting with a smaller design increases the usefulness of the technology. It is easier to enlarge components than to shrink them, so the XM25 bullet design could, without

Science and technology 77 too much trouble, be made to fit ammunition intended for weapons with largerbore barrels. ATK has already begun modifying the technology to fit in the shells fired by marine-corps artillery pieces, according to Jeff Janey, the firm's vice-president of business development. None of this is cheap. An XM25 with a thermal sight and a four-round magazine is reckoned by informed observers of the field to cost about $35,000. The bullets, which have to be made by hand at the moment, clock in at several hundred dollars each. But the price of a bullet could fall to as low as $25 when A TK switches to automated production. And even at its current

price, both gun and ammunition compare favourably with alternative methods of dealing with dug-in gunmen. The most reliable of these is an airstrike. But that is costly. Grenade launchers, mortars and conventional artillery are cheaper, but more likely than a single explosive bullet to cause collateral damage. The upshot, then, is that though Clausewitz has had a good run, his advice in this regard could soon become redundant. In coming years, those who fight technologically advanced armies would be wise to note that ducking for cover-one of the oldest ploys in combat-will no longer offer the sanctuary it has in centuries past. •

Mathematical ecology

Leap seconds

Spot checl<

Their time has come

BOSTON

An illuminating parallel between cat coats and vegetation patterns

IGER bush gets its name because the bands and patches of trees and T shrubs found in arid climes often grow in ways that, viewed from above, look like the stripes and spots on feline coats. If what Bonni Kealy of Washington State University told a meeting of the American Mathematical Society and the Mathematical Association of America, held in Boston on January 4th-7th, is right, the moniker is more apt than its inventors could have known. Dr Kealy and her colleague David Wollkind believe that in both cases nature is using the same copybook: one written in algebra. (The chapter on nonlinear partial differential equations, to be precise.) Animals' variegated coats are thought to be the result of what is known as a reaction-diffusion process. This is a tug-of-war between two chemicals' tendency to spread throughout an environment and their propensity to react in such a way that each turns into the other. Such a contest can lead to stable, and often complex, arrangements of the chemicals' relative concentrations. If the environment being spread through is an animal embryo and the reagents are hormones that trigger the differentiation of the body's pigment-producing cells, the upshot is a distinct pattern of pigmentation. Since animal coats and tigerbush patterns look alike, Dr Kealy and Dr Wollkind reasoned that the ways they are produced might be akin, too-at least mathematically. To test their theory, the two researchers first needed to find ecological equivalents of the differentiation-triggering chemicals: two things whose relative concentrations affect the shape of patches of vegetation and which like both to spread and to transmute into one anoth-

er. Water and plants, it seems, fit the bill nicely. Each is essential to the development of tiger-bush formations. Each tends to spread: water by seeping across the soil; plants by ejecting seeds or spores. Less obviously, each in effect turns into the other. Plants grow by taking water from the soil, and when a plant dies it frees water which it would otherwise consume. This insight allowed Dr Kealy and Dr Wollkind to create equations that, once plugged into computer simulations of reaction-diffusion processes, produce all manner of lifelike tiger-bush schemes, including the most intricate sort. Earlier models, which tried to use water flow and plant growth to explain how the tiger bush got its stripes, failed to account for all but the simplest patterns. Dr Kealy's model, by contrast, is spot-on.

Leopard country?

Are leap seconds about to be abolished?

HE phrase "clockwork universe" is T more than a pithy tribute to the exactitude of physics. For thousands of years, the movement of the heavens (or rather, as was eventually realised, the movement of the Earth within the heavens) served as exactly that-a clock. It still does. Even the hyper-accurate atomic clocks now used to record the passage of Coordinated Universal Time (uTc), the globe's official standard, regularly defer to the addition of socalled leap seconds. These are introduced every so often by the time lords of the International Earth Rotation and Reference Systems Service. Their purpose is to match the relentless stream of regular 86,4oo-second days that pour out of atomic clocks with the slight irregularities that the Earth experiences in its rotation around its axis. But possibly no longer. Next week, the International Telecommunication Union (ITu) is meeting in Geneva, and one of the items on its agenda is the abolition of the leap second. If the assembled delegates vote in favour, then the next leap second (which will be added one second before midnight on June 30th, causing clocks set to UTC to display 23:59:59 for two seconds instead of one) will be one of the last-and the answer to the question "what time is it?" will have ceased to have anything to do with the revolutions of the heavens. Worrying about a few stray seconds may remind some readers of medieval debates about the precise number of angels that could be crammed onto the head of a Apology In "The value of a good editor" (January 7th), we unwittingly proved the point of the title by referring to Joshua Rosenthal of the University of Puerto Rico subsequently as "Ms Rosenthal". The gender-identifying appellation had been intended for his colleague, Sandra Garrett. Apologies to both.

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78 Science and technology

I

The Economist January 14th 2012

Wonky clockwork Change in the Earth 's rotational period* Milliseconds 4

0

~~~~~~~~~~~~~ 4

1800

50

Source: Metrologia

~ pin .

1900

50

2000

*Compared wi th sta ndard day of 86,400 seconds

But, say the abolitionists, time-even small amounts of it-does matter. America's Global Positioning System satellites, for instance, do not add leap seconds to their internal clocks, and are therefore out of step with UTC . Receivers on the ground can correct for that discrepancy. But the satellite-navigation systems being launched by China, Europe and Russia use still other definitions of time, so exceptions to UTC are proliferating. That has led to worries that mismatched time signals could cause navigation problems, since even smallerrors in a time signal would mean positions being off by tens of metres. Electronic communication is another area where leap seconds are unwelcome. Days in which it is a second before midnight on two occasions can confuse software that relies on accurately timed messages to function. Workarounds exist, but they cause problems of their own. After some of its computers failed to cope with a leap second in 2005, Google, a search-engine firm, has begun running its computer clocks slowly for a short period before one is due, making the change gradual instead of instantaneous. But, notes Peter Whibberley of the National Physical Laboratory (NPL), Britain's official measurements lab, that means that while the correction is being applied Google's watches are out of sync with everybody else's. And because leap seconds are needed irregularly their insertion cannot be automated, which means that fallible humans must insert them by hand. Opponents of abolition say such problems are overstated. Engineers are used to dealing with the vagaries of leap seconds, according to Markus Kuhn, a computer scientist at the University of Cambridge. He thinks that a lot of those who worry about leap seconds do not actually have much experience of how things like satnav systems really work. And the switch would not be without problems of its own. Astronomers would be particularly cross: they rely on time having some connection with the movement of the heavens, so that their computers can point their telescopes at the correct patch of sky at a given time

every night. A few years down the line, says Dr Kuhn, people may find that automated commercial satellite dishes, which also rely on an astronomical definition of time to spot their quarry, start to fail. Fixing them could mean wading through millions of lines of ancient computer code. In the longer term, more dramatic effects would appear. Over the decades, centuries and millennia, atomic time would begin to diverge blatantly from solar time because the Earth's rotation, besides being irregularly variable, is also gradually slowing down (see chart). In about 2,000 years the two measurements would be roughly four hours out of kilter. Eventually, atomic clocks would say it was midday in the middle of the night. That may seem like a distant worry, but measurements of time can endure for a long time. It has been customary to divide a day into 24 hours for at least 4,000 years, for instance. The final objection is emotional. "Do we really", ask the leap seconds' defenders, "want to abandon the sun-based reckoning that humans have relied on for their entire recorded history?" Sadly for the traditionalists, the odds seem stacked against them. An internal ITU poll, conducted last year, found that, of the 16 countries (out of 192) that bothered to reply, 13 were in favour of abolishing leap seconds, whereas only three-thought to be Britain, Canada and China-wanted to keep them. The clockwork universe, then, has had a good run. But its mainspring may be about to break. • Bed bugs

A new debugger

How to get rid of bloodsucking insects

EW things destroy the reputation of a F high-class hotel faster than bed bugs. These vampiric arthropods, which almost disappeared from human dwellings with the introduction of synthetic insecticides after the second world war, are making a comeback. They can drink seven times their own weight in blood in a night, leaving itchy welts on the victim's skin and blood spots on his sheets as they do so. That is enough to send anyone scurrying to hotel-rating internet sites-and even, possibly, to lawyers. New York is worst-hit at the moment: neither five-star hotels nor top-notch apartments have been spared. But other places, too, are starting to panic. Hotel staff from Los Angeles to London are scrutinising the seams of mattresses and the backs of skirting boards, where the bugs often

hide during the day, with more than usual zeal. But frequently this is to no avail. Bed bugs are hard to spot. Even trained pestcontrol inspectors can miss them. What is needed is a way to flush them into the open. And James Logan, Emma Weeks and their colleagues at the London School of Hygiene and Tropical Medicine and Rothamsted Research think they have one: a bed-bug trap baited with something the bugs find irresistible-the smell of their own droppings. The reason the bugs are attracted to this smell is that they use it to navigate back to their hidey-holes after a night of feeding. To develop the bait for the new trap, Dr Weeks therefore analysed the chemicals given off by bed-bug faeces and attempted to work out which of the components were acting as signposts. She did this by puffing air collected from a jar containing bed-bug faeces into a machine called a gas chromatograph, which separated the components from one another, and then through a mass spectrometer, to identify each component from its molecular weight. Having found what the smell consisted of, she wafted the chemicals in q uestion, one by one, at bed bugs that had their antennae wired up to micro-electrodes, to see which of them provoked a response. The result, the details of which the team is keeping secret for the moment for commercial reasons, is used to bait a trap, designed by Dr Logan, that is about the size of a standard mouse trap and has a sticky floor similar to fly paper. And it works. To paraphrase the slogan of Roach Motel, a brand of traps aimed at a different sort of insect pest, bed bugs check in, but they don't check out. The new trap could be used both to assess whether a hotel room or apartment is infested and also to kill the insects without dousing everything in insecticide-which is, in any case, an increasingly futile exercise, as many have now evolved resistance. Ralph Waldo Emerson, a 19th-century American sage, is supposed to have said that if a man built a better mousetrap than his neighbour, the world would make a beaten path to his door. Dr Logan and Dr Weeks are about to find out if the same thing applies to bed-bug traps. •

79

The haj

Also in this section

Journey of faith

80 Youth orchestras in Venezuela 81 Prosecuting al-Qaeda

Putting on the West's first big exhibition about the haj has been a challenge

N JUNE 2009 Neil MacGregor, the direcISaudi tor of the British Museum (BM), flew to Arabia, his first visit to the heart of the Islamic world. He wanted the blessing of the Saudi royal family. Mr MacGregor and Venetia Porter, the BM's keeper of Islamic art, spoke to the chairman of the Saudi Commission for Tourism and Antiquities, Prince Sultan bin Salman (known locally as the "astronaut prince" for being the only Saudi to have travelled in space). They also met Princess Adila bint Abdullah, a daughter of the king and one of the few princesses with a public role in Saudi Arabia, and her husband, Prince Faisal bin Abdullah, the new minister of education. At each meeting they outlined in detail the BM's ambition: to put on the West's first big show about the haj, the annual holy pilgrimage to Mecca. All three royals were enthusiastic, which meant the project also had the king's support. Conscious of the bashing that Islam had taken in the West since Saudi-born hijackers flew their planes into the twin towers in New York nearly a decade earlier, they saw the power of cultural diplomacy. A show that emphasised the ancient tradition of the haj, one

of the five pillars of Islam, would be a source of pride for Muslims and a clear reminder of Saudi Arabia's pre-eminent position in the Islamic world. But organising the show has posed considerable challenges. The BM had to deal with 40 individual lenders from the Netherlands to Timbuktu, numerous different government ministries in Saudi Arabia and a nervous Saudi embassy in London. The idea of portraying in a Western museum something as holy to Muslims as the haj took some getting used to, and there wasn't much to go on. Two shows-one on pilgrimage, in Christianity and Judaism as well as Islam, at the Ashmolean Museum in Oxford in 2006 and another on pilgrims' writings at the Islamic Arts Museum Malaysia in Kuala Lumpur in 2009-were the closest precedents. The potential for error or offence was considerable. Terrified of being blamed if anything went wrong, conservative Saudi officials shied away from taking responsibility. Negotiations over the loan of antiquities from the earliest haj route, from Kufa (in present-day Iraq) to Mecca, proved especially complicated, as did agreeing what profile to give the sponsor, HSBC Amanah,

on the exhibit labels. (For a bank to sponsor an exhibition about a religion that forbids charging interest was particularly delicate.) Even after the intervention of a royal aide-Faisal bin Muammar, director of the King Abdulaziz Public Library in Riyadh-it was only when the final shipment of loans left Saudi Arabia for London just before Christmas that the museum was certain the show would come off. And what a show it is. Visitors are taken on a journey to the city Muslims call Makka al-Mukarrama (Mecca, the Blessed), just as pilgrims have done for hundreds of years and as Prince Charles will when he formally opens the exhibition later this month. A large black cuboid, hung with intricately woven Islamic textiles, rises at the heart of the show in the centre of the BM's circular reading room. It represents the ka'ba (pictured above), the black stone that the prophet Abraham is said to have built and which pilgrims circle seven times as part of the haj ritual. Through the ages, pilgrims have journeyed to Mecca via several routes. Mansa Musa, the king of Mali, became famous throughout medieval Europe and the Islamic world when he travelled across the

~~

80 Books and arts ~ Sahara from Timbuktu to Cairo

and then to Mecca in 1324, accompanied by 6o,ooo followers and 300 pounds of gold, which he distributed along the way. Millions more pilgrims have travelled by road from Istanbul and Damascus or by dhow and steamship from Singapore and Mumbai, tacking carefully around the coral outcrops of the Red Sea. A long maritime chart from about 1835 written in Gujarati, Hindi and English shows what a fraught journey it was. At least they had charts. Before Islam Mecca had been an important site for pilgrims from north and central Arabia. They had many deities including Allah, but once a year, during a sacred month, they travelled, following the stars, to the city to worship Allah alone. Mecca became an important commercial centre. The revelation starting in 610 of Islam to the prophet Muhammad, with Allah as its only god, transformed Mecca into the holiest city in the Islamic world. The exhibition concentrates on this earliest pilgrim route, the 900-mile (1,448-km) road from Kufa, where pilgrims gathered from Iraq, Iran and Central Asia before making the journey south to Mecca. In the late eighth century Zubaida, the wife of the Abbasid caliph, Harun al-Rashid, ordered the construction of wells along the route, as well as forts, beacons, milestones and resting places for the month-long journey across the desert. She went on the haj five times and gave her name, not just to the route itself, but also to the irrigation system known as the spring of Zubaida on the plain of Arafat, outside the city. Muslims are obliged to go on the haj at least once in their lifetime. So many pilgrims want to make the journey that the Saudis now impose strict national quotas (calculated according to national populations) on pilgrims. Once arrived, they begin their rituals: the changing into simple white clothes, the tawaf or circumambulation of the ha'ba, the drinking at the sacred Zamzam well, the prescribed running and collecting of pebbles, the shaving or cutting of one's hair and the renewed commitment to the principles of Islam. To most it is a transcendent experience. Muhammed Ali, the boxer, who made the haj in 1989, said afterwards: "I have had so many nice moments in my life. But the feelings I had standing on Mount Arafat on the day of the haj was the most unique." Rich as the BM exhibition is, much has inevitably been left out. Other than a maquette of the area around the ha'ba, there is little about how the site has grown or about the nightmarish logistics of welcoming nearly 3m pilgrims at a time to Mecca, nor about the horrific accidents that occasionally happen. A stampede "Hajj: Journey to the Heart of Islam" will be at the British Museum from January 26th until April 15th

The Economist January 14th 2012

caused more than 300 deaths in 2006, while in 1979 militants took over the grand mosque and were evicted by force. It would be interesting also to know more about the changes wrought by the quota system, which suddenly saw tens of thousands more Muslims from Indonesia and Nigeria where before they had come mostly from Saudi Arabia's Arabic-speaking neighbours. Little attention has been paid to the economic effects of the haj, in Saudi or in the pilgrims' homelands, and on how the pilgrimage is likely to develop in future. A small section at the end exhibits the contemporary art the pilgrimage has inspired. Each of these areas could be the focus of another show. Now the first big step has been taken, perhaps more will follow. •

Youth orchestras in Venezuela

The music man Changing Lives: Gustavo Dudamel, EL Sistema, and the Transformative Power of Music. By Tricia Tunstall. W. W. Norton; 320

pages; $26.95. To be published in Britain in April; £17.99

N THE debate on the value of arts lessons Ifrom in schools, one killer argument comes a place that few know much about. Some are familiar with Venezuela's oil, natural beauty, high crime rates and comicopera rulers. But the country is also home to el sistema, a network of youth orchestras founded in 1975, which has lifted innumerable children from overcrowded barrios and turned them into successful professional musicians. Its star graduate is Gusta-

vo Dudamel (pictured left), who, among other things, is the music director of the Los Angeles Philharmonic. This month he begins an ambitious programme to honour the centenary of Gustav Mahler's death, conducting all of the composer's symphonies with both the LA Philharmonic and the Simon Bolivar Symphony Orchestra of Venezuela, his alma mater. The sistema concept is going places, with new pilot projects in Brazil, Scotland and other countries with inner-city deprivation. E! sistema's near-mythological reputation has been reinforced by the proselytising enthusiasm of Claudio Abbado, Sir Simon Rattle and others, as well as some wishful thinking in rich societies that art can cure all ills. Its founder, Jose Antonio Abreu, has even been tipped for the Nobel peace prize. Yet there has never been a dispassionate study of Mr Abreu's method and results. Tricia Tunstall's new book is the first to document the process that Mr Dudamel describes airily as "creating miracles". An American music teacher, Ms Tunstall went to Venezuela with Jamie Bernstein, daughter of the late composer and conductor, Leonard Bernstein, and collected data and observations. She supports the grand claims with numbers. In a nation of 29m, she reports that some 370,000 children now participate in el sistema, singing and playing classical music for several hours each day after school. (Ms Tunstall concedes that these figures are "slippery", as it is hard to get an accurate head count from remote Andean villages.) The programme runs on an annual budget of $12om, most of it from the government. Ms Tunstall says the drop-out rate among e! sistema students is less than 7% compared with 25% nationally. Although it is impossible to know whether el sistema alone creates good students or whether it tends to attract those who are naturally disciplined, fans of the system say standards are high and advancement swift, and that making music keeps kids out of street gangs. Edicson Ruiz, sent by his mother to a Caracas nucleo (learning centre) at 12, now plays the double-bass in the top-flight Berlin Philharmonic Orchestra. Gabriela Montero, who gave a solo concert with the Bolivar Symphony when she was eight, is now a star pianist. Besides cultivating musical excellence, Mr Abreu arranges to provide his charges with affordable instruments. Some have also learned how to craft them for themselves, allowing for an alternative profession. Mr Abreu explains toMs Tunstall that he was inspired by a Paris-trained piano teacher in his boyhood town, Barquisimeto, who transcribed Mozart's Jupiter Symphony for seven pianos. "We were always playing for each other, and for other people, always enjoying it," he recalls. "I never had the pressure of a severe, hard music ~~ teacher on my back."

The Economist January 14th 2012 ~

As a student in a Caracas conservatory, he rejected rigid convention in order to achieve what he calls "social transformation through music". The kids in his first youth orchestra were from the poorest of the poor. Eduardo Mata, a Mexican conductor, galvanised them with Latin American scores. But the driving force was always Mr Abreu, who persuaded politicians of all stripes to help expand the system across the land. "No one says no to Maestro Abreu," Ms Tunstall is told. It could not have been easy to ask hard questions about a man renowned for redeeming children, but Ms Tunstall tells a vivid story. Meanwhile Mr Dudamel, Mr Abreu's apostle, has brought the sistema to tough areas of Los Angeles, and another nucleo has opened in Brooklyn. Whether these schools can flourish without hands-on charismatic leadership remains to be seen. Glasgow and Rio will be watching too. •

Prosecuting al-Qaeda

A tricky business Justice and the Enemy: Nuremberg, 9/11, and the Trial of Khalid Sheikh Mohammed. By William Shawcross. PublicAffairs; 256 pages; $26.99 and £18.99

HE trickiest part of fighting al-Qaeda in T the aftermath of the New York attacks came right at the beginning. What to do with prisoners? Your reviewer was camped outside the fortress of Kala-i-Jangi in northern Afghanistan in November 2001 when captured fighters staged an uprising that left hundreds dead, killed by the very Americans who were trying to interrogate them. Prisoners in the "war on terror" were always trouble. One can trace a line from this blood-splattered fortress across the globe to Guantanamo Bay in Cuba, taking in Abu Ghraib in Iraq. Then there are the "extraordinary renditions", whereby America delivered prisoners to torturehappy allies worldwide, "black sites" where Americans carried out "enhanced interrogation techniques", and Saddam's curtailed trial and botched execution. In his new book, "Justice and the Enemy", William Shawcross says, "it was immediately clear that captured enemies in this war were not like conscript prisoners of previous wars who were often relieved to be safe in POW camps." But that judgment seems odd. British and American POWs made numerous (and celebrated) escape attempts. The Taliban, some of whom were indeed relieved to be incarcerated rather than dead, acted like many armies have before it. Its recruits surrendered

Books and arts 81 when faced with overwhelming force and escaped when they got the chance. Mr Shawcross has written extensively on Cambodia, site of a gruesome genocide. His father was Britain's main prosecutor at the Nuremberg trials where the leading Nazis were confronted with their sins. He is steeped in the subject of mass slaughter and its perpetrators and should be an expert. Here he uses the Nazi trials as a frame for viewing the legal troubles of the Bush administration, drawing strong parallels with al-Qaeda trials. He says "at Nuremberg our civilisation designed a vehicle to anathemise men imbued with evil". He is not alone in reflecting on the trials' significance. Barack Obama, who studied Nuremberg in law school, has said, "what made us different was that even after these Nazis had performed atrocities that no one had ever seen before, we still gave them a day in court." Yet these were not civilian trials but military tribunals with limited legal rights for the defendants. Some called them victor's justice. A book that draws lessons from the past should offer some clear conclusions. One problem with "Justice and the Enemy", however, is that it lacks much in the way of original research on al-Qaeda. Other than a single "personal conversation" with a CIA officer, the source list contains no new material. A bigger problem is that Mr Shawcross's comparison is of limited use. The West's enemy is not a single, mostly unified nation. Al-Qaeda is a loose network of stateless actors who may not even be aware that rules of war exist. The word means "the base" in Arabic and that is all it is. It cannot be cleansed and resurrected the way Germany was. The other difference with the 1945-46 trials is that today's conflict is not over. When deciding what to do with prisoners

Convicts of interest

a balance needs to be struck between justice and expediency; combatants in custody may have information that could affect the outcome. What should be done with them? Mr Shawcross admits the difficulties encountered at Nuremberg when trying to put enemies on trial. What he fails to clarify is why Nuremberg vanquished the Nazis and gave the world a modern template for dealing with genocide, but was then rarely repeated. A handful of Khmers Rouges were tried, but prominent mass murderers, such as Pol Pot and Mao Zedong, escaped justice. The author seems keener to score points against all those who roundly condemn President George Bush's strategy. Mr Shawcross is eager to tell his readers that on the whole prisoners in Guantanamo have been better treated than at Nuremberg. "Food was prepared according to halal dietary requirements," he says admiringly. That may be so, but it is hardly enough to justify the prison's modus operandi. Still, he is right when he says that dealing with humankind's most prolific killers is far more difficult than critics give the Bush administration credit for. Some say the administration should have chosen between military tribunals and civilian trials. Mr Shawcross feels that both are necessary. The latter are preferable as they show off the values that the West is defending, but in some cases the armed forces' concerns must come first. The current "war" is fought both on battlefields and in civilian arenas. Horses for courses. America should forge ahead and prosecute those who attack it, he says, though he doesn't go as far as pointing out that it cannot expect to win much sympathy in the process. Meting out justice to extremists is a messy task. •

Also in this section 83 Mike Mayo's memoirs 83 Why all business is Local 84 Entrepreneur-heroes 84 How to shine in interviews

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

Setting a price on the future

The mathematics of markets

The formula that changed finance PTIONS and futures are almost as old as trade itself. From the farmer who 0 sold his crop before the harvest to the merchant who bought at a set price in the future, the forerunners of today's markets can be traced to ancient Greece and Rome. Yet for centuries these markets remained stunted because of a simple question of valuation. What is the right to buy next year's olive crop worth? Answering this question took centuries of study of physics, botany and mathematics. When solved, it changed finance for ever. The tale includes a fascinating succession of people who tried doggedly to master probability and markets. It is engagingly told by George Szpiro, a mathematicianturned-journalist, who flits between biographies and formulae. He begins with the futures and options markets of the tulip bubble of the 1630s. He looks at Napoleon's attempt to regulate trading with a modern-sounding ban on futures contracts and short sales. And he explores those whom history has forgotten, such as Jules Regnault, a self-taught broker's assistant who started working on the Paris Bourse in 1862. After seeing how share prices changed over time, he wrote a book on the subject and made a fortune trading shares. Regnault's writings have been largely forgotten, but his work foreshadowed modern financial theory. Another great mind whose work was

Pricing the Future: Finance, Physics, and the 300-Year Journey to the Black-Scholes Equation. By George Szpiro. Basic Books; 298 pages; $28 and £18.99

lost was Wolfgang Doblin. The son of a prominent German novelist of Jewish descent, Doblin fled Berlin to Paris in the 1930s. He obtained his PhD in mathematics at the Sorbonne, where he soon established himself as a pioneering mathematician and innovator in the field of probability. With war approaching, Doblin joined the French army in a gesture of gratitude to the country that had sheltered him. In his billet on the front-lines, he scribbled on a cheap school notebook, sketching out a formula that he sealed in an envelope and posted to the Academie des Sciences in Paris. Soon after, with his regiment surrounded and the French army in retreat, he burned his personal papers and, fearing what would happen if was captured by German soldiers, shot himself. The envelope lay sealed in archives until May 2000, when it was found to contain the mathematical tools to describe the random movements of particles. Calculations such as these transformed people's understanding of physics and provided an important building block of the so-called Black-Scholes equation.

That equation, which Robert Merton, Myron Scholes and Fischer Black worked out in 1973, turned out to be a breakthrough that promised accurate assessments of the value of options, which are the right (but not the obligation) to buy or sell something at a particular price on some future date. Mr Merton and Mr Scholes were awarded the Nobel prize for their work on this in 1997. Black, who died in 1995, was also credited for his contribution. The equation's publication led to a flowering of options markets and an explosion of trading on them. It also transformed investment banking and stockbroking. The affable trader who calculated prices and odds by the seat of his pants on the trading floor, much as a gambler did at the poker table, was supplanted by the "quant", a mathematician with a room full of computers and reams of data. Yet the model has deep failings. BlackScholes assumes that movements in share prices, like those of particles suspended in liquid, can be plotted using a Gaussian, or bell curve, distribution. Yet finance is filled with "fat tailed" events that occur far more frequently than predicted by this model of the physical world. Black-Scholes reached its zenith in 1998,just before the collapse of Long-Term Capital Management (LTCM), an investment firm backed by the two Nobel prize-winning economists. LTCM failed when the yields on bonds issued by countries such as Russia and America began to diverge, something the models said was virtually impossible. A decade later the great financial crisis was ushered in by the simultaneous collapse of house prices across America, another event that the mathematical models said was virtually impossible. In both instances, financial firms quickly found themselves racking up daily losses that the ~~

The Economist January 14th 2012 ~

computers said should occur only once in millions of years. "Pricing the Future" is at its best when it skips through the parallel developments in physics, mathematics and economics that led to the equation, a development that Mr Szpiro compares to the discovery of the structure of DNA or Isaac Newton's laws of motion. Unfortunately, Mr Szpiro's narrative dodges some important questions that it ought to have delved into in detail. In just four pages the book describes, almost as an afterthought, the failings of the Black-Scholes model and the history of the past decade since the collapse of LTCM. Black-Scholes may well have been a great achievement, but histories of the financial crisis will treat it less than kindly. The quest to tame risk and price the future is far from over. •

Wall Street analysis

In need of therapy Exile on Wall Street: One Analyst's Fight to Save the Big Banks from Themselves. By Mike Mayo. Wiley; 208 pages; $29.95 and £19.99 IKE MAYO likes to ask blunt questions about issues that no one else M will touch. To some, his queries are sparklers that light up dreary quarterly earnings calls between the heads of major banks and financial analysts; to others, they come from nowhere, rockets that bring down banking's high-fliers. Mr Mayo is a well-known bank analyst who currently works for Credit Agricole Securities usA. He has been a star attraction at half a dozen firms, is beloved by the media, followed by clients, and loathed by whatever institution happens to have earned his derision. This approach has cost him a succession of jobs, but it has not stopped him from having a successful career. There are many reasons for this. Mr Mayo hates being criticised, but has few reservations about criticising others. He has a deep belief in capitalism, but holds many of its leading practitioners in contempt;J.P. Morgan's Jamie Dimon is almost alone in drawing praise. He writhes if he feels his employers are disloyal, yet shows little loyalty himself, seemingly always on the prowl for a better opportunity. Such qualities are vital in a profession where objectivity is important and constantly tested. For the friendly analyst there are gourmet meals, rides on private jets, subsidised nights at strip clubs and, with luck, a bigger slice of profits. By contrast, when in 1999 Mr Mayo issued a 1,ooopage report, telling the industry he covered

Business books quarterly 83 Global marketing

Local heroes All Business is Local: Why Place Matters More Than Ever in a Global Virtual World. By John Quelch and Katherine Jocz. To be published in America and Britain in February by Portfolio; 256 pages; $25.95 and £14.99

"I

HAVE written this book as an antidote to conventional wisdom that the world is flat and that globalisation should preoccupy us all," says John Quelch, dean of the CEIBS, China's foremost business school. This is, at most, an age of semi-globalisation, argues Mr Quelch, who has co-written his book ~ith Katherine Jocz, a research associate at Harvard Business School, predicting that the world will never be entirely global or local. Company bosses who focus too much on glamorous global strategy and the big picture risk getting burned in a world where the vast majority of business transactions are local. Mr Quelch is one of a small but increasingly vocal group of academics who see great virtues in globalisation but warn of the pitfalls of a single-minded focus on a global, interconnected world. An expert in marketing and branding, he uses his insights to give companies pointers about how they can navigate a world where location can matter more than ever. The world's best global brands, he says, are also the world's best local brands. McDonald's has a global marketing slogan ("I'm Iovin' it") and a global look with the omnipresent golden arches, but its menu is attuned to local palates and customs. In Vienna McDonald's serves a Wiener Fruhstuck with dark bread rolls and Austrian-style coffee, in Delhi a vegetarian burger and in Bangkok a McSpicy Chicken Burger. To make his case Mr Quelch explores what he calls the "psychological place",

that the good times were over, the consequences were uncomfortable. The report made his reputation but cost him his job. In describing his struggles in the intervening years, he writes: "Large banks have enough clout to beat the living daylights out of anybody who gets in the way-politicians, the press, or analysts like me." Markets can be equally unkind. Some of his best calls, notably a persistent scepticism about Citigroup, took years to be proved right. If he had run his own fund, Mr Mayo says, he would have made a lot of money over time, but "I probably would have folded several times as well." Sometimes, notably in the case of Lehman

which means consumers' mental associations with places. He then goes into the "physical place", looking at the ways the environment influences a consumer's needs and wants. He also discusses the virtual and physical marketplaces. Of the four Ps of marketing (Product, Price, Promotion and Place) it is place that matters most, says Mr Quelch. In China Western companies do well only if they understand the local distribution system and select the right suppliers in a very fragmented market. In other words they need huge amounts of local knowledge to succeed. The authors, who write with authority, make essentially one point. It is an important one and the numerous examples of Western companies' failures to set up shop profitably in China show how tricky it is to get it right. Reading this book will make them aware of the complexity of a world that is at once flat, spiky, globalised and local.

Brothers, his view proved too optimistic. But why, overall, aren't the big financial firms, and the analysts who cover them, better at the job? Mr Mayo offers the usual reasons: corruption, lousy disclosure, ridiculous compensation packages for incompetent managers who are overseen by incompetent regulators, conflicts of interests that are little short of rife. All of this he illustrates with names and dates, a close-up view of venality that, by itself, makes "Exile on Wall Street" a story worth reading. Since the financial crisis, Mr Mayo's 1999 report has become the conventional wisdom. To create another stir, he may need to become positive. •

84 Business books quarterly Entrepreneurs

Headbanging World Changers: 25 Entrepreneurs Who Changed Business As We Knew It. By John Byrne. Portfolio; 256 pages; $26.95 and £19.99

ERO-WORSHIP is out. Most serious writers are more interested in "forces" and "factors" than in heroes and heroines. And even biographers specialise in exposing feet of clay. Lord Acton's dictum that "great men are almost always bad men" has become a commonplace. Yet one group has escaped from this general cynicism: entrepreneurs. Company executives may be boring Gradgrinds, bankers the spawn of the devil and politicians crooks and liars. But all agree that entrepreneurs are a cut above the rest of mankind. The obvious reason for this is that entrepreneurs represent the creative side of "creative destruction": it is not hard to see how Richard Branson and Steve Jobs have made the world a better place, or even Howard Schultz, the founder of Starbucks. A less obvious reason is that entrepreneurs appeal to our anti-establishment instincts: some of the very emotions that lead us to dislike chief executives and bankers also lead us to admire entrepreneurs. They are impatient with stuffy conventions. They turn the world upside-down. And they get fabulously rewarded for their efforts. John Byrne's "World Changers" is a classic exercise in hero-worship. The author provides some interesting insight into what makes entrepreneurs tick. They come in a dizzying variety of shapes. John Mackey, the co-founder of Whole Foods, was a hippie. Fred Smith, the founder of Federal Express, served in the marines during the Vietnam war. Narayana Murthy, the co-founder of Infosys, was a former leftist who found himself on the wrong side of the Bulgarian police. But three things seem to unite them. The first is that entrepreneurs routinely see opportunities where everyone else sees problems. A surprising number of great companies were born out of fury and frustration. Reed Hastings got the idea for Netflix when a video-rental agency presented him with a $40 late fee for "Apollo13". This opportunism melds with determination to produce a powerful cocktail of self-belief. Jeff Bezos continued to work away at his idea for an online bookshop even after his company, which remained in the red for its first six years, had been widely dismissed as Amazon.toast. The second is an ability to live with risk and failure. Entrepreneurs do not go out of their way to court risk for its own sake.

H

The Economist January 14th 2012

Many of them are far more conscious of risk than more conventional business people. Mr Hastings started working on the next iteration of Netflix almost as soon as he established his company because he knew that the internet would destroy his business model. But they accept that risk comes with success. Again and again entrepreneurs have been willing to bet their futures on what sensible people might dismiss as a crazy idea. The entrepreneur's hall of fame is full of teenage flakes and college dropouts. The third feature uniting them is a determination to run their own lives. Most entrepreneurs have a problem with authority. They would rather fail as their own boss than succeed as second-incommand. A striking number of them come from difficult backgrounds. Ted Turner's father, whom the boy worshipped, sent him to boarding school at the age of four and beat him with a coat hanger, for example. A disproportionate number suffer from dyslexia (Richard Branson and Charles Schwab are prominent examples). Had "World Changers" continued in this vein it might have been a fascinating book. Mr Byrne is one of the most knowledgeable business writers around-a longterm writer for Business Week and the editor-in-chief of Fast Company. And he has been interviewing entrepreneurs for most of his professional life. But here he soon runs out of steam. He contents himself with printing his own interviews with his 25 world changers (or sometimes clipping together bits of other people's interviews) rather than writing interpretative essays. And he confronts them with soft questions. The likes of Bill Gates and Mark Zuckerberg deserve to be admired. But 276 pages of hero-worship, particularly when so much of it comes in the form of the heroes blowing their own trumpets, can wear a little thin. •

Job interviews

Application Are You Smart Enough to Work at Google? By William Poundstone. Little, Brown; 290 pages; $19.99

l'I ]HOM to hire is one of the great

VV problems organisation-man faces. If he gets it wrong he may be forced to share a confined space for an indefinite period with someone deficient in wit, aptitude and hygiene, with nothing but a flimsy partition for protection. If he gets it wrong in a different way, tomorrow he may be fired by today's meek applicant. Each industry has its own method for hiring: Britain's spy service sometimes physically roughs-up new recruits to see how much they enjoy that sort of thing. Candidates for more everyday roles within the civil service are given a bulging in-tray filled with documents of varying importance, and not enough time to clear it. To judge by "Are You Smart Enough to Work at Google?"-which combines anecdotes from current and former employees of Silicon Valley firms, with a potted history of the pop psychology and practice of interviewing, and lots of brainteasers of a sort favoured by interviewers at Googleplenty of firms treat graduate recruitment the way Alfred Hitchcock treated blondes. Inexperienced Tip pi Hedrens can be made to squirm. They get asked impossible questions by stony-faced interviewers who offer them no feedback or encouragement, leaving the baffled victims feeling stupid and a little sweaty. This approach is used only on people starting out on their careers, when the power of interviewer over interviewee is at its greatest. By the time candidates have more professional experience they can expect to be treated more like Grace Kelly. At the end of this ordeal, once "the package" (a dossier of 40-50 pages on each applicant) has been considered and Larry Page, Google's chief executive, approves the decision, the firm's new employee can boast of working at an interesting place with lots of other clever people. Sometimes, though, the rigorous hiring process does such a good job of signalling that a career at Google is desirable that actually starting work there can be anticlimactic. One former worker in Google's People Ops department (the section other companies call HR), told the author that, within days of leaving university, he went from reading the works of Jacques Derrida, an indecipherable theorist, to processing requests from Google employees wishing to move position within the organisation. He did not see this as a good thing. •

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The Economist January 14th 2012

Courses

87

OlU \lilA

II'A

IDB

International Financial Issues in Emer · Markets April2 -April6, 2012, Columbia University Campus, New York City An executive trainin g program aimed at hel pin g world practitioners design and implement macroeconomic and financial policies in a cohesive and comprehensive fashion based on stateof-the-art emerging market knowledge.

Co-Directors: Gu illermo Calvo, and Alejand ro I zquierdo. Co nfirmed speakers include Charles Calomiris, Guillerm o Calvo, Ernesto Talvi and Shang -Jin Wei (Columbia U niversity ); Carmen Reinhart (Peterson Instimre ); Enrique Mendoza ( University of Maryland ); Alejandro Izquierdo and Santiago Levy (IADB ); Vincent Re inhart (Morgan Stanley ). T he program will include distinguished keynote speakers. Co nfirmed key note speaker: George Kopits (Woodrow Wilson Center).

TOPICS include: • International liquid ity and vulnerabi li ty to financial crisis • International shocks and monetary, excha nge rate and fiscal responses • Financial Regulation • China, Brazil and the E uropean crisis • Debt, bonanzas and financial crisis in history • Ranking crisis development an d resolution • Debt Sustai.nability and Sudden Stop App lication deadli ne: Monday, February 13, 2012. Previo us programs have been oversubsc ribed . For updates and additi onal information , please \~sit our we bsite http://sipa.colum bia.edu/ifiem lADB will be offering tuition waivers for up to 15 policymakers from Latin America (see website for details)

CONTACT: Picker Cen ter for Exec utive Education 420 West 118th Street, New York, NY 10027 PHONE: 212-854-271 0 FAX: 212-854-0613 E -MAIL: [email protected]

CALL FOR APPLICATIONS TO THE DOCTORAL PROGRAM ON INFORMATION AND KNOWLEDGE SOCIETY AT THE INTERNET INTERDISCIPLINARY INSTITUTE OF THE OPEN UNIVERSITY OF CATALONIA IN BARCELONA The Open University of Catalonia (UOC) is a 100% internet-based fully accredited University operating from Barcelona and serving over 50.000 students worldwide, including a selective group of students enrolled in a PhD Programme on the Information and Knowledge Society. The Internet Interdisciplinary Institute (IN3) is one of UOC's research institutes and conducts frontier research on the interaction between information and communication technologies , society, economy and culture. The IN3 is located in Barcelona and is led by professor Manuel Castells, jointly with a distinguished faculty. The IN3 is accepting applications for the PhD Programme on the Information and Knowledge Society for the 2012-2013 academic year. Doctoral studies at the IN3 can be pursued in two modalities. The first one requires residence in Barcelona and full time presence at the IN3 . Successful applicants will receive a fellowship from the Institute to devote themselves full time to their study and doctoral dissertation . A second modality is conducted fully online for part-time students. The doctoral program offers two itineraries for specific fields of interest: information and knowledge society and network and information technologies. Prospective applicants will find in the IN3 web site (http://in3.uoc.edu) relevant information about the application procedure, the doctoral fellowships, and the content and organization of the doctoral program. The deadline for application is February 5th, 2012. Contact at: [email protected]

The Economist January 14th 2012

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Appointments Africa Rice Center (AfricaRice) is

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BY GOVERNMENT APPOINTMENT

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 Newspaper 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 January 14th 2012

Appointments

89

Senior Professor of Finance specialised in Capital Markets/ Asset Management- one vacancy in Singapore EDHEC-Rtsk Institute is part of EDHEC Business chool, one of Europ 's leading busmess schools and a memb r of the select group of academic mstttut1ons worldwide to hav earned th trip/ crown of international accreditations {MCSB, EOUI , As oc1ation of MBAs). Established tn 2001, EDHEC-Risk Institute has become the prenuer mternat1onal centr for financial r search and 1ts application to the mdustry. In partnership w1th large financial institutions, its team of 80 p rmanent professors. engineers and support staff imp/ ments six re arch programme and lev n r sear h cha1rs fo using on asset allocation and risk manag ment tn the traditional and alternative investment universes. The r suit of the resear h programmes and chairs are dis eminated through th three EDHEC-R1 k Institute locat1ons 1n London, Nice and ingapore.

With a PhD tn finance or econom1cs, the successful candidate will have demonstrated his/her ability to produce h1gh quality research and will have an outstanding rack record of interna ional publication. Research service will focus on asse management w1th spec1al emphas1s on asset allocation and portfolio construction and will be carried out within EDHEC-Risk Institute, a leading interna ional research centre for tndustry-relevant academic research. The successful candidate will teach in the As1an chapter of the EDHEC-Risk Institute PhD tn Finance programme, and w1ll act as a figurehead for the programme tn the region. The candida e will have demons ra ed his/her capacity o interact with the financial industry v1a research proJects and/or executive education, and the desire to pursue projects, as a member of EDHEC-Risk Institute, in collaboration w1th the tndustry. Salaries are at the top end of the range for similar positions and bonuses are available for both academic publications and involvement in EDHEC-Risk Institute's research projects.

• •• •

If you wish to apply for this position, please send an applicatiOn letter and C'l/ quotinq the reference 1111SPFSGP to Ms Sevcrine Anjubault: EDHEC Business School 400 promenade des Anglais BP 3116 - 06202 Nice ccdex 3 - France or to sevcrinc.anjubault@' cdhec-risk.com .

The Economist January 14th 2012

J\E DH EC ~ BUSINESS EQUIS

~

SCHOOL

go

Tenders S.Hd on the CondUSJOnofthe CioYemment of Republic of Serbia OS No: 3S1-..3Atnoto ~ted 10 June 2010 and .luMndment olllw Conduslon oftheGovtnvnent ofllepubloc ofSMlia OS No: 3S1-..S8512010 ~~~ 2~ June 2010

PUBLIC ENTERPRISE FOR OEVEI.Of'MEHT OF MOUNTAI TOURISM cSTAAA PI.A 1~. KH.IAZtvAC Kn,lilze-=. Milo.sa Obi Strftt no. I ~er. Pubfoc enterprise "Stara pl~lna"l

MINISTRY OF ECONOMY AND REGIONAL D£VEL.Of>MEHT !MI!Vllf krafP Al4tllsandra No. 1 S,llelgrada

ln~tlonwhh

announos

PUBLIC INVITAllOH

for pattld P4tlon In prooss of d114tlon In management of~uon faobtlft - HotcllnowrwrshopofflepublocofSerbla loated on Jabucko fliVIliSI~ in " of Stara p~M\In.l.

Oetlll!d lnforrnAIJOI'I on the Subject of the Pubic: lnv'ltltiOI\ lmttuetlon to bidden and dr.tfl of~ on .,.nieipatQ~ in ll\ll\lgefMI1I of operations of IIUOIM'IOdatlon t •ties - Hotclloated on Jabudco ravn1st~ ;are lnt~ral.,.n of the docunwntaiJOI'I. of the Pubfoc lmntauon whiCh stlall be available to alllntemted paniCipMtts In the PubliC Invitation after signing of Confident ty A9fHmentand paymtnt of~

for the PubliC ltMQtlon dOC:Ume'IUitlon

of

Fee for the Publ lmttltlon docum«nUillon IIT'Qints to I .000.00 E\JR (say: one thousand Euto>) In dinar counm 'Rlue caJaN It'd at the .-age udwo"!!f! ,.. ss.ance of lhe lniiOia

UOnol S.nlt of Serbia on the ~w of

2. lnformltlon on lhe Hotl'l loc.lted on Jabucko ravniJt !Jtuilted 1 one of !he tnO$l beauttfullocaliOns of tile Stant planln&. Q ~ Jlbucko tliYftlm. Hot Slllt>eb l.lSO

Slara planina Hotel & SP4 b a lout Still tloteiii«D
TM hotti twa to!M of 380 beds In !~available,_ Including double lOOmS. SUitM. and a lwwry JUJte. AddibonalamMttles indud thtee con etfnee tla f4!StaUtltt11. ~bar, d\lldttn's playroom. sk.lt rln WI! ss &spo ctmlle wrttl an Indoor pool. Nitdr~l salor1, A ~office. ICIIIYefllf 5llop, ~do nq stcn. perfuma 5llop, pharm.cy, 24-l>our d>t!clt II\ and an underground

pancrng gatlge with '47 114

pot

3 Enutled to wbmll wtlttf!ll bids a~ A.lnteres ~ paniCipanu which fulfil the t'ollowtng c.ondrt1on p;rytMnl of 1M lOt lhe PubliC kwltatJOn docutnt!f'ltatlon: Sionlnq of ConfideniYloty Ag~ ment; fulfilment of the following cond1ttoM;

4 Putchalit' of docutnf!IIUitJon of Public invltatlon; ~reby, the Publoc tntt'l'pflSf! .Stara piM\Inao lnYI es al tnterest~ le9al entitles to submtt wnttl'n requests for polrchasinq the Public lnvlta on ~tabon
Wtilten req

t for Jl"rdlaslng tile Public lrwltltlon documrntatlon sNI be submlued by post. e-mail or by ~

Invitation

to the follOWing add

Publk~.SW. pilonln. Kl1juwK,Inondtof'llceln ......... ~ ~-3, fu:+ll11121 11461, 11000~ ll4plblicofs.bla, £.mioll:mlllca.~

wottl reference to: Request forJl"teNseoiPu

I'IYita

.on documentation tllePublk lrMtaiJOI'I No:JPSPOOI/12•

HN•

Upon re<@ipt of ttle ttquf!S autllorized person of the lotemted al entoty shall be pmen ~ th the lrwooce for the P4ymf!llt of the I for Publoc I!Mtatlon documentatiOn nd Confodenwlity AgMml'f\ shall be sent by post, or by fa for ~ TM 5lg~ Conlidentllloty ~~~ sllall be without delay sent by fu or post to PubliC f!lltetprise •Stan plan~N> to the abow stated ldd
Deadline for subm siOn of wnnen bids for partl(JP4t.onln the~ of the operat.on of the KCOmtn
6

~1/Bid bonct

As a precondition for submission of written bids. 11 Is reqUited ID pay a deposo or to submila bid bond for ttle P4nlc:ipat.onln ttle proass of Publ Invitation In the amount of EUII20,000.00 (wy twenty mous.nd Eui'OS).

7 Questions and llddotlonal •xplanat)QM:

F« any question f't9lltding

os Pub41c tnYJtatiOrl. cont.Kt ttle persons liSt~ below, In Serbian or Eng!

Dltectot of Publ otnt.erp
lang~

Lawyet

1\b

S'lte'tisln PoP4dk

M lia Radelta Vol'todk

Telephone:+li1112626SH;fn:+ll1112111461

T4tlephon .+311111626SM:Fn:+ll111 :UI1461

E-maft m.Uka.vojvocll Public ent rprts. ..Stara plan inA• Knju.evac, Brandl ofllca n llelgrade , z.gnbaclta StrHt no. 3, 11000 llelgracl

"-pu

JI>Jtantptln na.n

of Sotfbla

If necesSif)', the Pubft ftltt'IJlflSf! .Stant planonao ~ ttle right ID amend the ~tes, ct.adl net and/or reqwemeots of this Publlc invitatiOn •nd CliU541dto ftJd nts by theM amendments.

The Economist January 14th 2012

Tenders

91

NIGERIAN ELECTRICITY REGULATORY COMMISSION EXPRESSION OF INTEREST (EOI) FOR THE SELECTION OF CONSULTANTS TO PROVIDE AUDITED FINANCIAL REPORTS FOR PHCN SUCCESSOR COMPANIES

PREAMBLf

The Nigerian Electricity Regulatory CommiSSIOn ( ERCl was established by the Electric Power Sector Reform IEPSRl Act 2005 and offiCI lly inaugurated on 31st October 2005. The CommiSSion (NERCl as the regul tor for the electticrty 1ndustry 1n NJQena carnes out amongst others the functions of rJCeflSing as well a tanff senmg nd pnc1ng for electnc•ty serv•ces as part of 1t m ndate. Wlthm that legal framework. NERC. m v1 w of the continuous default by the license to exerci the•r statutory duty to appomt external auditors, is exerc1smg 1ts powers under the rm and condit1on of the1r hcenses to authorize tatutory aud•ts of the accounts and finances of Power Holdmg Company N•gena (PHCN) successor com pam The affected com pan•

• which are allmcorporat d as Pubhc L1ab1hty Compan1

(PLCs), are as listed below.

1.

Seven (7) Succe sor Generation Compan1es IAfam. Egbin, Geregu. Kainji/Jebba, Sapele, Shiroro and Delta);

2.

The Transm1

3.

Eleven (11) Successor OistnbutJon Companies tAbuja. Benin. Eko, Enugu, lbad n. lk Ja. Jos, Kaduna, Kano, Port-Harcourt and Yolal.

10n Company of N1gena (TCN); and

OBJECTIVE OF THE EXERCISE The objective of th• exerci 1 to und rtake tatutory nnu I aud1t of lithe above 19 companies. for ch financi I year betwe n their respective dat of incorporatton and 31 t December. 2011 o to prov•de cred•ble data to assi NERC d termine the extent or the~r compliance w1th the as well as other matters related to proper corporate governance. term of their licen SCOPE OF SERVICES As required for companle5 mcorporated in Nigerta under the Compam and Alii d M rs Act (CAP 20 LF.N 2004), these udit will involve conducting md pend nt examinations of the f1nanc•al statements of the compames after which an udit report mcluding a signed opmion Will be issued by the external aud1tor. Spec•f•cally, statutory annual audits for the above mneteen compan•e for the tated penod w•ll be underta n With a vi w to enabling th auditors form n opinion a to wh ther or not. 1.

Proper accounting record hav be n kept by the companie ' and proper returns have been received from bu mess um accounung un1ts;

and other self

2.

The companie ' balance s

et and profit and loss accounts are m agreement with th accounting record and return ;

3.

All mformauon and explanations which are considered necessary for the purposes of the aud1t have been obtamed by them;

4.

Th polic•es and manner of financiaVaccounung operations follow and conform with be t obtainable bu 1nes pracuc s and reqUirements; and

5.

Whether commensurate value has

atutory

n derived from all transactions.

EUGIBIUTY CRITERiA Each of the compan •es Will be audited by a firm with at lea t 15 years po t t bh hment experience, 5 of wh1ch mu t be related to public enterpn s •n Ni ri or other developing econom1 s. Expen nces of aud•tmg companies quoted on Stock Exch nges anywher m the world especi lly 1n the electric power sector w•ll be an add d advantage. Pre-qu lification of firm for tender w1ll be b sed on Quality and Cost Based Selecuon (QCBSl method but short-listed firms will be r qwred to prov1d further evtd nee m suppon of the~r technJCal and financ1al capabthty at Requ st for Proposal g in line w1th the Public Procurem nt Act 2007 and th Pen ion Reform Act 2004. SUBMISSION OF EXPRESSIONS Detailed terms of reference for the assignm nt and the application form can be obtained at the NERC webs1te www.nercng.org. Any enquines in regard of this EOI should be directed to [email protected]. The closing d te for submt ion of xpre ions of interest is 12noon Nig rtan time 111 m GMll on 23 January 2012. Complet d applicatiOn form are to be scann d and sent to procurem nt@n rcng.org. The CommiSSIOn 1s not bound to short-list any firm and reserves the nght to annul the b•dding process at any time without mcurring any cost or 1gning any reason thereof. Signed: Dr. SamAm di Ch irm n/CEO. Nigeri n Electricity Regul tory Comm sion

The Economist January 14th 2012

.

92

. . .

.

Economic data %change on year ago

Gross domestic product latest

United States China Japan Britain

qtr*

2011 I

Industrial production latest

Consumer rices Unemployment latest 20111 rate*,%

Current-account balance

Budget balance

Interest rates,%

latest 12 months, $bn

% ofGDP 20111

10-year gov't bonds, latest

%of GDP 20111

-8.7 -3 .1 -466.8 03 1.90 +2 .0 +1.7 +3 .7 Nov +3.4 Nov +3 .0 8.5 Dec +9 .5 +9 .2 +12 .4 Nov +4 .1 Dec +5 .6 6.1 2010 +259.3 03111 +2 .9 -1.8 3.57 6.32 6.60 +5.6 -0.6 -4.0 Nov -0.5 Nov -0.3 4.5 Nov +130.8 Nov +2.4 -8.3 0.97 76.9 83.3 +2 .3 +0.9 -1.7 Oct +4.8 Nov§ +4.4 8.3 Octll -70.6 03 -2.5 -8.8 2.01 0.65 0.64 ~~c!! ___ .±.?,i~ _ __:i:L'i_ .±.2.l. _ _ _ .:!j~~ - .±.2..1!:!!>v_ _:t-b.9_ __ l:~ ~ --- -j_9,ZSll _ _ .:.?:2_ ___ -~Q_ __ .1_.~ ---- _l.QE ___ Q;.~ -4.1 1.84 10. 3 Nov +1.3 Oct Euro area +1.4 03 +0.6 +1.4 +2.8 Dec +2 .5 -83.2 Oct -0 .5 0.77 0.79 -3 .6 3.20 +1.4 +2 .9 Austria +3 .0 Oct +3.6 Nov +3 . 2 +2 .9 03 4.0 Nov +10.5 02 +2 .6 0.79 0.77 -3.8 -0.5 +2.0 Belgium 7.2 Novll +1.6 0.77 +1.9 03 +3 .3 +0.3 Sep 4.29 0.79 +4.8 Sep +3.5 Dec -2.5 -5.8 -65 .3 Nov 9.8 Nov France +1.5 03 +2. 2 0.77 +0. 9 Nov +2.5 Dec 3.16 0.79 +1.2 +1 .6 Germany +2.5 03 +2.0 +3.0 +3 .6 Nov +2.1 Dec +2.4 6.8 Dec +189.6 Nov +5.2 -1.0 1.81 0.79 0.77 Greece -5.0 03 na -5 .3 -7 .8 Nov +2.4 Dec +2 .9 17 .5 Sep -28.9 Oct -8 .4 -9.5 33.48 0.79 0.77 Italy +0.2 03 -0.6 +0.5 -4.1 Nov +3.3 Dec +2 .8 8.6 Nov -78.9 Oct -3 .7 -4.0 6.97 0.79 0.77 Netherlands +1.1 03 -1.0 +1 .5 +1 .1 Oct +2.4 Dec +2 .4 5.8 Novtt +66 .6 03 +6 .7 -4.2 2.18 0.79 0.77 ~~n_ _ _ _ .!Q~~ -- .!!il_.:t.O.:.§. _ _ _ :],Qt:!£_v_ .±_2_i.Q!oc_ _:t-~1_ __21,2._N ~ --- -2_4_,Q~t _ _ 3~ --- -,£;'2.._ __ _2.2_? ____ _Q.z:l ___ Q;.71. _ Czech Republic +1 .2 03 -0.3 +2 .1 +5 .4 Nov +2 .4 Dec +1.9 8.6 Dec -5 .6 03 -3 .1 -4.6 3.62 20 .4 18.6 Denmark +0.1 Q3 -2 . 2 +1.0 -0.1 Nov +2.5 Dec +2.7 4.2 Nov +22.1 Nov +5.8 -3.9 1.68 5.86 5.70 Hungary +1.4 03 +2 . 2 +1.5 +3 .0 Oct +4 .3 Nov +3 .9 10.6 Novtt +1.8 03 +1 .5 +1.2 9.65 246 211 Norway +3.8 03 +5.8 +0.8 -1.2 Nov +0.2 Dec +1.4 3.3 Oct§§ +70.2 03 +13.6 +13.1 1.97 6.04 5.91 Poland +4.2 03 na +3 .8 +8.7 Nov +4 .8 Nov +3 .9 12 .1 Novll -26 .1 Oct -4.8 -6 .0 5.79 3.52 2.94 Russia +4.8 03 na +4.0 +3.9 Nov +6.0 Dec +8.5 6.3 Novll +86 .3 03 +5.0 -0.8 4.73 31.8 30.2 Sweden +4.6 03 +6.6 +4.3 +0.2 Nov +2.3 Dec +2.8 6.7 Novll +39.7 03 +6.4 nil 1.66 6.93 6.77 Switzerland +1.3 03 +0.9 +1.8 -1 .4 03 -0.7 Dec +0.3 3.1 Dec +95 .7 03 +13 .2 +0 .8 0.68 0.96 0.97 !\Jrkey +8 ,_2_03 na !]. 5 :!:§. 4 ~Ev +10~ Dec +6.3 8.8Sei!** -Z?,&~v ..::J.8 -1 .8 9.57 1.!!§ 1,5.Q. Australia +2.5 03 +3 .9 +1 .8 +0 .8 03 +3 .5 03 +3 .5 5.3 Nov -32 .6 03 -2 .2 -2 .6 3.91 0.97 1.01 Hong Kong +4.3 03 +0.4 +5.4 +0.3 03 +5.7 Nov +5 .1 3.4 Novtt +13 .6 03 +4.2 +1.8 1.41 7.77 7.77 India +6.9 03 na +7 .6 +5 .9 Nov +9.3 Nov +9 .0 10.8 2010 -46 .4 02 -3 .5 -5.4 8.44 51.9 45.1 Indonesia +6.5 03 na +6.5 +8.0 Oct +3.8 Dec +5.3 6.6 Aug +3.6 03 +0 .4 -1.0 4.11 1tt 9,160 9,030 Malaysia +5.8 03 na +4.5 +1 .7 Nov +3.3 Nov +3.3 3.0 Oct +32.7 03 +10.4 -5.6 2.97 ttl 3.14 3.06 Pakistan +2.4 2011.. na +2 .4 -1.5 oct +9.7 Dec +12 . 2 5.6 2010 -0.2 03 -1.3 -5.9 14.79 1tt 90.1 85.7 Singapore +3 .6 04 -4.9 +5 .1 -9 .6 Nov +5.7 Nov +5 .1 2.0 03 +49 .2 03 +17.7 +0.6 1.50 1.29 1.29 South Korea +3.5 03 +3.3 +3 .8 +5.6 Nov +4.2 Dec +4.2 3.1 Dec +25 .1 Nov +2 .0 +2.4 3.74 1,159 1,119 Taiwan +3.4 03 -0.6 +4.4 -3 .6 Nov +2.0 Dec +1 .5 4.3 Nov +38.6 03 +8 .0 -2.7 1.31 30.0 29 .1 Thailand ;!].5 03 +2 .1 +2 .5 -1§~Nov +3.5 Dec__+~20. 1L_Sep _ _ _+] ?:.!Nov_ _ +4.1 _ _ -2.9 _ _l.25 31.8 lQ,i Argentina +9.3 03 +4.5 +8.5 +0 .8 Nov +9.5 Nov* .. +9 .9 7.2 Q311 nil 03 -0 .3 -1.4 na 4.31 3.98 Brazil +2.1 03 -0.2 +3 .0 -2 .5 Nov +6.6 Nov +6 .7 5. 2 Novll -49 .3 Nov -2.2 -2.7 11.54 1.81 1.67 Chile +4.8 03 +2.6 +6.3 +2.0 Nov +4.4 Dec +3 .2 7.1 Novttll -1.2 03 -0.5 +0.2 2.34ttt 506 491 Colombia +7.7 03 +7 .1 +5.1 +5.0 Oct +3.7 Dec +3 .4 9.2 Novll -9.6 03 -2.7 -2.5 3.59 1tt 1,852 1,860 Mexico +4.5 03 +5 .5 +3.9 +3 .2 Nov +3.8 Dec +3.3 5.0 Novll -10.0 02 -1.9 -2.9 6.22 13.7 12.1 ~~~e~ __ .:!j1._ ~ _ _ .!:!!1_ .±.2~ _ _ _ .±.?:2_~_+1!J_,Q.Q!Oc_ .:f:?£:_3_ _ _ .!!.:~~ ---+1.6.,Q.Sll _ _ .:':§~ ----2, ~ __ _§_.2? !.!!_ ___ .2· ~ ----~ Egypt +0.3 02 na +1 .8 -1 .8 02 +9 .5 Dec +10 .2 11.9 Q3 11 -4.1 02 -1 .7 -10 .0 8.69 1tt 6.04 5.80 Israel +5.1 03 +3 .4 +4.4 +5 .5 Oct +2.6 Nov +3.3 5.6 03 +1.8 03 -0.1 -2.8 3.46 3.85 3.55 Saudi Arabia +6.7 2011 na +6.7 na +5.2 oct +4.9 na +75 .3 2010111 +25 .9 +14.3 na 3.75 3.75 South Africa +3 .1 03 +1.4 +3 .1 +1 .1 Oct +6 .1 Nov +5 .0 25 .0 0311 -11.6 03 -4.1 -5 .5 8.05 8.13 6.83 +1.5 +9.1 -0.7 +0.5

03 03 03 03

*%change on previous qua rter, annual rate. tThe Economist poll or Economist Intelligence Unit estimate/forecast. tNational defi nitions §RPI inflatio n rate 5.2 in November. **Year ending June. ttLatest 3 months. II Not seasonally

adjusted. §§Centred 3·month average. ***U nofficial estimates are higher. ttiDollar-denominated bonds.

Ill Esti mate.

The Economist January 14th 2012

Economic and financial indicators 93

Markets

%change on Dec 31st 2010 Index one in local in $ Jan 11th week currency terms United States (DJIA) 12.449.5 +0.2 +7 .5 +7.5 China (SSEA) 2,384.4 +4.9 -18.9 -15.4 Japan (Nikkei 225) 8.447.9 -1.3 -17.4 -12.9 Britain (FTSE 100) 5,670.8 nil -3.9 -5.7 ~'!!d~(~I?_TS1) ___ ll,.?§QJJ _ 2:!].1_ _ _:8.:§. _ -111. Euro area (FTSE Euro 100) 758.6 -0.2 -15.2 -19.8 Euro area (OJ STOXX 50) 2,339.5 -0.4 -16.2 -20.8 Austria (ATX) 1,894.0 -2.3 -34.8 -38.3 Belgium (Bel20) 2,140.3 +0.9 -17.0 -21.5 France (CAC 40) 3,204.8 +0.4 -15.8 -20.3 Germany (DAX)* 6,152.3 +0.7 -11.0 -15.9 Greece (AthexComp) 629.1 -5.0 -55.5 -57.9 Italy (FTSE/MIB) 14,882.4 -2.9 -26.2 -30.2 Netherlands (AEX) 311.7 -0.9 -12.1 -16.9 Spain (Madrid SE) 843.3 -1.8 -16.0 -20.6 Czech Republic (PX) 890.6 -4.0 -27.3 -33.2 Denmark (OMXCB) 368.6 +2.1 -13.7 -18.2 Hungary (BUX) 16.759.5 +1.1 -21.4 -33.6 Norway (OSEAX) 450.6 +0.4 -7.4 -10.9 ~land ~~) ____ fl,2j~ _ ..:1.1._ _ :.?_1.;Q _-33.7 Russia (RTS, $terms) 1.452.7 +1.3 -14.6 -17.9 Sweden (OMXS30) 1,009.6 +0.3 -12.6 -15.3 Switzerland (SMI) 6,008.0 -0.8 -6.7 -8.9 Turkey (ISE) 51.410.4 -0.2 -22.1 -35.7 Australia (All Ord.) 4,242.9 +0.1 -12.5 -11.8 Hong Kong (Hang Seng) 19,151 .9 +2.3 -16.9 -16.8 India (BSE) 16,175.9 +1.8 -21.1 -32.1 Indonesia (JSX) 3,909.6 +0.1 +5.6 +3.8 ~~~a_Q
I

Big Mac index The Economist's Big Mac index is based on the theory of purchasing-power parity: that, in the long run, exchange rates should adjust to equal the price of a basket of goods and services in different countries. Our basket consists of one McDonald's Big Mac, and we've compared it with the average price in America, $4.20. According to our burgernomics, the Swiss franc is 62% overvalued: the exchange rate that would equalise the price of a Swiss Big Mac with an American one is 1.55 francs to the dollar; the actual exchange rate is only 0.96. The cheapest burger is found in India, where it costs just $1.62. Big Macs aren't sold in India, so we've taken the price of a Maharaja Mac, made with chicken instead of beef.

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Switzerland

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60

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Australia

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Canada

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Brazil

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United States

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Japan

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Britain

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China

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India For more countries see: Economist.comfbmjan12 Source: McDonald's; The Economist

• At market exchange rate (Jan 11th 2012) tWeighted average of member countries

The Economist commodity-price index

%change on Dec 31st 2010 Index one in local in$ Jan 11th week curren cy terms United States (S&P 500) 1,292.5 +1.2 +2.8 +2.8 United States (NAScomp) 2.710.8 +2.4 +2.2 +2.2 China (SSEB, $terms) 221.8 +4.6 -30.2 -27.1 Japan (Topix) 733.5 -1 .3 -18.4 -14.0 !!!~~(~~~~tl_OQ} .J..Q5~ __ni!_ _ _:8_:2_ _·1]~ World, dev'd (MSCI) 1.204.3 +0.1 -5.9 -5.9 Emerging markets (MSCI) 948.7 +1.2 -17.6 -17 .6 World, all(MSCI) 305.6 +0.2 -7.6 -7 .6 ~o!!_d!_o!!_!!~(Ci!j!)!.O.!!.J.I)_ _ 2?l:? _ ..:.Q.i_ _ ..:!:_5.:.?_ _ ~·2 EMBI+ (JPMorgan) 597.2 -0.6 +8.3 +8.3 Hedge funds (HFRX) 1,119.1 +0.5 -8.1 -8.1 Volatility, US (VIX) 21.1 +22.2 +17.8 (levels) CDSs, Eur (iTRAXX)t 176.3 +2.0 +68.5 +59 .4 CDSs, NAm (CDX) t 116.0 -3.3 +36.2 +36.2 Carbon trading (EU ETS) € 7.0 +7.5 -50.3 -53.0

2005=100

*Total return index. tcredit-default-swap spreads, basis points. Sources: National statistics offices, central banks and stock exchanges; Bloomberg; CBOE; CBOT; CMIE; Cotlook; Darmenn &

Curl; EEX; FT; HKMA; ICCO; !CO; ISO; Jackson Rice; JPMorgan Chase; NZ WoolServices; Thompson Lloyd & Ewart; Thomson Reuters; Urner Barry; WSJ; WM/Reuters

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60

Other markets

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Jan 3rd

Jan 10th*

%change on one one month year

Dollar index __ _}~,2_ __ l§i_6__ __:ri_2_

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£2q£ - - - - _j'Q.? :2.. - - ~i_8_- __:+-~2-- ~·E.. Industrials f\~l . __Nfat..

.. )59.,8. . .. 163.. 5... 1_77._0 152.5 156.7

Metals Sterling index All items 213 .9 Euroindex All items 175.1 Gold l.Rer oz 1,604.0 West Texas Intermediate 103.1 $per barrel

+2 .9 Jl..2 :t3..7 . .. ~_3 1._2 -18.6 +2.5

216.8

+4.5

-15.1

179.6

+6.8

-14.6

1,638.1

-1.3

+18.9

102.3

+2.6

+12 .2

*Provisional !Non-food agriculturals.

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

'{

Ronald Searle Ronald Searle, artist, limner of St Trinian's and St Custard's, died on December 30th, aged 9L Nigel Molesworth of St Custard's writes ART is for weeds and sissies whose mater .1'"\.hav said Take care of my dear little Cedric, he is delicate you kno and cannot stand a foopball to the head. Whenever anebode mention Art they all sa gosh mikelangelo leenardo wot magnificent simetry of line. Shurely the very pinnackle of western civilisation etc.etc. Pass me my oils Molesworth that I may paint my masterpeece. The headmaster sa gosh cor is that the medeechi venus hem-hem a grate work so true to life reminds me of young mrs filips enuff said. Molesworth sa on the contry the most beatiful form in art is a Ronald Searle GURL from St Trinian's in a tunick with black suspenders and armed with a hockey stick to beat the daylites out of another gurl or maybe just a teacher chortle chortle. Mr Searle sa he hav based her on his sister Olive. She hav wild platts and an empty gin bottle in her pocket a sack of poysinous todestools two sticks of dynamite and possibly a hippo on a lede while an old crone alias a teacher sa from a window Elspeth put that back AT ONCE. Or she will be sharpening a massiv knife on a grinder with grusome heads of gurls on a shelf behind and the headmistres will be telling the surprized parent this is Rachel, our head gurl, ha ha ha. We offer every attention to your prescious chicks including drunken orgeys wiches sabbaths every

form of the subjunctive in fr. or lat. and coffin-making for a modest charge. The luvely creaturs of St Trinian's so pleased the publick that Mr Searle sa, people think I have drawn nothing else, I am sick to dethe of them, so he began in 1953 to draw from Geoffrey Willans words the farest forms of St Custard's, viz, Peason my grate frend who hav a haircut like a chimney brush, fotherington-tomas with curlie hair who believe in fairies, Molesworth 2 my younger bro who is uterly wet and a weed and Grimes the headmaster, alias soho sammy with a face of evil unparralled. Not to mention Me n. molesworth brave and feerless wot a noble BOY in his yellow blazer and his cap at a rakkish angle, a gift to Art with the lite of geenius gleeming from his glasses and an expreshun that strike fear into every teacher in the skool. Mr Searle hav drawn too the charming scenes of the place, viz, the headmaster's office with escape runways, the many varities of Kane one with telescopic sights, the Glurk and Lesser Titwort as found in Botany, the hairy gerund as found in lat. chiz chiz, Matron smoking in her room ahem, a corner of the playing fields with pouring rane and a ghastly THING with many feet and claws that is Molesworth 1 about to curse the skool for EVER. Mr Searle left skool at 15 cheers cheers. He was office boy for a solicitors but he

could not stop drawing, even on leegal dokuments scratch scratch, is that a kartoon you have done my lad, yes it is a fantasy of the future Molesworth, wot a horrible thing I think you had better leave. Cambridge Art Skool and then in the war camooflaging pill-boxes as haystacks, how about sum more straw round the doorway, perhaps a dunghill outside, how artistick feel free. A mistery voyage to Singapore then followed drawing all the way, but then come the Japs invading, Boom KABOOM!! achach-ach-ach-ach, motorbikes roring by, urum-urum-urum-uraaaaaa, too late, into prison camp, still drawing. He staid four yeres there and was six stone when he left. A wunder he could smile agane after seeing men die all around him from cholera or torchure with bodes like sticks, but what he drew afterwards had a savvage melankoly underneath it as the art master sa, old majors with large noses and small handkerchiefs, dogs that are undoutedly plotting an evil de de, lugubrioos couples dancing hem-hem, criket bats and balls killing players at a single blo, a man catching music like flys in ajar, a child-hater selling balloons that carry the pathetik little weeds faraway. Yet in 1961 tired of drawing for Punch or roming America for Holiday magazine he zoomed across to France, where there were long thin men in berets long thin loaves of bred and many swurly balconys besides the usual sad dogs, maniack cats, mademoiselles with long eyelashes ahem who sa, how about a good time will you have a glas of Champagne. And he looking autour de lui sa Houp-la I am so happy here pore as a mouse in my attick in Paris and then on my hilltop in Provence, I will never return to boring old Blighty, but I will work for Le Monde and Le Figaro Litteraire, and also Life and the New Yorker. For I recall that for my first t.v. over there I was paid $1,000 a minit, super smashing good show. And he drew New York City as per ushual very tall and thin and inky humans with bodies still like sticks scowling among the skycrapers but also collossal painted butterflys flutering by, hullo clouds, hullo sun, and giant flowers of many coluours sprowting out of desks. And his Nature was v. grand and beattful red and blue while the spiky tarts and bisnessmen raced round not seing it or ruining it all. And speking of Life, sa silently the long black undertaker in his tall black hat sitting by the grave, I do not think much of that as a titel for a magazine, why not Dethe, but Dethe where is thy sting, where Grave thy victory cry Molesworth (over the WHACK of the Kane), when everbode still kepe larffing at the world Mr Searle hav made. •

Congratulations to the

2012 Kauffman Prize Medal Recipients

Erik Hurst and Tobias Moskowitz Erik Hurst is the V. Duane Rath Professor of Economics and the John E. Jeuc Faculty Fellow at the University of Ch1cago Booth School of Business. An expert in entrepreneurship, macroeconomic policy and housing markets, Hurst researches barriers to entrepreneurship, entrepreneurial finance, and household consumption and financial behavior. Tobias Moskow1tz 1s the Fama Fam1ly Professor of Finance at the University of Chicago Booth School of Business. An expert in entrepreneurial finance, finandal markets and investments, MoskoWitz researches the returns to pnvate business ownership, the political economy of finandal regulation, corporate finance and finanoal networ s. The Ewing Marion Kauffman Prize Medal for Distinguished Research in Entrepreneurship is awarded annually to recognize scholars under age forty whose research has made a Significant contributiOn to the body of literature in entrepreneurship. It includes a $50,000 cash pnze. Thisyear he pnze is being shared by two outstanding scholars.