5
9 The world this week
On the cover The cracks appear in Vladimir Putin's Russia: leader, page 13. Routine election fraud turns into full-scale protest, page 55. The upheavals in Russia show how hard it is, 20 years after the system collapsed, for the country to put away its Soviet past, pages 27-30
Leaders 13 Russia's future Cracks appear 14 The rise of political Islam And the winner is .. . 16 Ten years of China in theWTO Shades of grey 16 Another EU summit Beware the Merkozy recipe 18 Video games The serious business of fun Letters 20 On the London Stock Exchange, roundabouts, bond markets, Thomas Cook, diasporas
49
Briefing 27 Russia The Long Life of Homo Sovieticus
52
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Volume 401 Number 8763
First published in September1843 to take part in "a severe contest between intelligence, which presses forward, and an unworthy, timid ignorance obstructing
50 51
54 54
United States 31 The election Barack Obama chooses his ground 32 Stimulus and the economy Looking up 32 Transport in Georgia Spare a penny? 34 Technology and dvil liberties Don't shoot 36 Detroit nears bankruptcy Nowhere to run 36 Insider trading and Congress Capitol crimes 38 Tort reform Closing the Lottery 40 Lexington The wretched Middle East
our progress. "
Editorial offices in London and also: Atlanta, Beiji ng, Berlin , Brussels, Cai ro, Chicago, Hong Ko ng, Johan nesburg, Los Angeles, MexlCo C1ty, Moscow, New Delhi, New York, Paris, Sa n Francisco, Sao Pau lo, Singapore, Tokyo, Washington DC
Asia 45 China's economy and theWTO All change 46 Chinese politics and theWTO No change 47 Japan's energy crisis Nuclea r winter 47 Market reform in India Off t heir trolleys 48 Banyan Hornets' nest in Pakistan
The Americas 41 Canada and the United States The bo rder two-step 42 Colombia's floods That damned Nina 42 Mining in Peru Doing the Conga 44 Publishing in Latin America A Literary deficit
Middle East and Africa Political Islam Everywhere on the rise Israel and the Isla mists Oh no! But Let's talk Religious Israelis They're on the ri se too Uncertainty in Iran Did they really mean this? Congo's election It could get worse South Africa's courts President v judges Special report: Video games All the world's a game After page 54
Europe 55 Political crisis in Russia Voting, Russian-style 56 Germany's debt brake Tie your hands, please 56 France and Germany No thanks for the memories 57 Italy's budget Saving Italy 58 Romania's economy Buckle up 58 Macedonia Call it what you want 59 Charlemagne Those obstructive Brits
The Arab spring PoliticaL Islam is on the march-and the West must keep its nerve: Leader, page 14. The Middle East votes for Islamists, page 49. Israel's fears, page 50, and its own fundamentalists, page 51. Why America can never escape the Middle East: Lexington, page 40
Barack Obama The president offers America a new square deal for his re-election campaign, page 31. Anew round of stimulus might help him, page 32
China The world is richer because China was Let into the World Trade Organisation. Now the world's biggesttrader needs to grow up: Leader, page 16. The impact on China of joining the WTO ten yea rs ago , page 45 .The BRICs are also ten years old: Economics focus , page86
~~
Contents continues overleaf
6 Contents
The Economist December lOth 2011
Britain 61 Reforming welfare Nice work if you can find it 62 Shrinking cigars Up in smoke 63 Bagehot God in austerity Britain
Euro crisis The flaws in the Merkozy plan : leader, page 16. The sovereign bond markets hope for a solution, page 79 . Italy's budget, page 57. The British problem: Charlemagne, page 59 . Lessons from the Great Depression, pages 76-78
Special report Video games will be the fastest-growing and most exciting form of mass media over the coming decade: read our special report after page 54. Abit of the entertainment business that many other firms can learn from: leader, page 18
International 65 City building Hong Kong in Honduras 67 Free cities Honduras shrugged Business 69 Macau's gambling industry Awindow on China 70 American telecoms A breath of fresh airwaves 71 Thomson Reuters Screen test 71 Advertising Publicis's durable boss 72 Biotech patents Taking it personally 73 Carmakers Revenge of the petrolheads 74 Schumpeter University challenge Briefing 76 Lessons ofthe 1930s There could be trouble ahead Finance and economics 79 Europe's debt crisis Scaling the summit 80 The IMF and the euro Cash for credibility 80 Mexico's plunging peso jArriba, arriba! 81 Buttonwood The equity gap
Books of the year The best readsof2011, in ourview, page 91. What we wrote when we weren't in the office, page 96
82 Financial accounting Tax cuts that hurt 82 Private equity One careful owner? 84 Helping the poor to save Small wonder 86 Economics focus The BRICs atten Science and technology 87 30 printing The shape of things to come 88 Arthritis Botox as pain relief 90 Human evolution The first mattresses 90 Another Earth? Home away from home Books and arts 91 Books of the year, 2011 Page-turners 96 Books by Economist writers Pens and ink 104 Economic and financial indicators Statistics on 42 economies, plus our monthly poll of forecasters Obituary 106 Socrates Football's philosopher
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9
Politics
Ahead of a European Union summit, Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, called for changes to the European Union treaties to enforce tighter fiscal rules. The pair said they wanted all eurozone countries to introduce laws limiting government deficits, and for spendthrifts to be punished. David Cameron, the British prime minister, came under pressure from Eurosceptic members of his Conservative Party to hold a referendum on any new treaty. In Russia's parliamentary election the ruling United Russia party of Vladimir Putin won just under half the votes, less than it had expected. After widespread reports of voting irregularities Moscow saw its biggest political protests in years. Several prominent opposition figures were arrested and jailed. Elections were held in Croatia and Slovenia. Both were won by centre-left parties; as predicted in Croatia's case, but surprisingly in Slovenia's. Italy's new prime minister, Mario Monti, announced a new austerity budget of €30 billion ($40 billion) in tax rises and spending cuts. The welfare minister broke down in tears as she announced a big shake-up of Italy's generous pension system. After a world-record 541-days, Belgium finally formed a government, under pressure from the markets. The new prime minister is Elio di Rupo, a Socialist from the Walloon (French-speaking) community.
Fundamentalist concerns The Muslim Brotherhood won an even bigger proportion of the vote than predicted in the first of three sets of votes for Egypt's parliament, getting 37% in party lists but raising its seat tally to 46% after a series of run-offs in single-member constituencies. The Salafists, a more extreme group of Islamists, surprised pollsters even more, getting 24% of the vote on party lists and 21% overall after the run-offs. The Brothers said if they won they would not team up with the Salafists but would form a coalition with secularists. The voting is due to end in mid-January. Kuwait's emir dissolved parliament amid a crisis over allegations of corruption. Elections will be held within 6odays. The United States opened a "virtual" embassy for Iranians that offers them services such as visa information. The real American embassy in Tehran has been closed for more than 32 years. Meanwhile, Iran claimed to have shot down an American drone over its eastern border. Laurent Gbagbo, the former president of Cote d'Ivoire, appeared at the International Criminal Court in The Hague. The first former head of state to go before the court, he was charged with crimes against humanity in the aftermath of a disputed presidential election a year ago.
of Mazar-i-Sharif as worshippers gathered, and were a rare form of sectarian violence in the country. The next day, 19 people travelling in a minibus were killed by a roadside bomb in Helmand province. India's communications minister asked Google, Facebook, Yahoo! and Microsoft to screen user-generated content for offensive material before it goes online. The move is aimed at protecting the sensibilities of Indians from blasphemous material, though the volume of content posted online by India's 1oom internet users makes any such regulation impossible. Japan's Fukushima nuclear plant, which was seriously damaged after March's earthquake, was found to have sprung a leak. Some 45 tonnes of contaminated water spilled out of the plant into a nearby wastewater area. Thailand jailed a Thai-born American citizen for two-anda-half-years for criticising the monarchy. Joe Gordon uploaded a blog post about the king written from Colorado, but was arrested when he entered Thailand.
The leaders of 33 countries met in Caracas to found the Community of Latin American and Caribbean States (CELAC). They condemned the American economic embargo against Cuba and supported Argentina's claim to the Falklands (Malvinas). But they did not support a plan by the host, Venezuela's Hugo Chavez, to give CELAC a permanent secretariat or budget. Canada's prime minister, Stephen Harper, and America's president, Barack Obama, signed an agreement called Beyond the Border under which Canada will share information about people entering and leaving the country while the United States will ease some security checks on cross-border trade.
Progressive values Barack Obama went to Kansas, deep in the Republican heartland, to give a big speech on the economy, in which he attacked Republican economic policy and said America was at a "make-or-break moment for the middle class". Mr Obama laid out his case in the same town where Teddy Roosevelt called for a progressive "new nationalism" in 1910.
The new battle of Cajamarca Peru's new president, Ollanta Humala, declared a state of emergency in the northern department of Cajamarca and sent troops to quash protests against Minas Conga, a $4.8 billion gold and copper mining project.
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Two bomb blasts in Afghanistan killed 59 people on the most important day of Muharram, a Shia festival. The bombs exploded near religious sites in Kabul and the northern town
Brazil's Senate approved a reform of the country's Forest Code, reducing the amount of forest cover farmers are obliged to maintain, but requiring them over 20 years to replant areas illegally deforested. This came as the government announced that deforestation in the year to July had fallen to the lowest level since satellite monitoring began 23 years ago.
Herman Cain "suspended" his campaign for the Republican presidential nomination, in effect ending his candidacy. Newt Gingrich is likely to be the main beneficiary of his withdrawal from the race. RodBlagojevich was sentenced to 14 years in prison for a range of crimes, including trying to sell Mr Obama's old Senate seat. He is the second consecutive former governor of Illinois to be jailed for corruption.
~~
10 The world this week
Business Standard &Poor's put 15 of the euro zone's 17 members on negative credit watch (Cyprus is already on the list and Greece is at risk of a default). Along with Italy and Spain, s&P threatened to downgrade its ratings for AAA countries such as France and even Germany, and gave warning that it might also cut the credit rating of the European Financial Stability Facility. Its decision caused outrage in Brussels, with some politicians accusing s&P of retaliating against European proposals to curtail the influence of ratings agencies. s&P cited the increased systemic risk of a failure of the eurozone. The unemployed count America's unemployment rate fell sharply to 8.6% in November, the lowest it has been since March 2009. Much of the decline is due to more people simply giving up looking for work and leaving the labour market, but revised data also showed that job growth was stronger throughout the autumn than had previously been thought. A study prepared for an American natural-gas trade body by IHS Global Insight forecast that shale gas will account for 6o% of all natural-gas production in America by 2035 and support 1.6mjobs. The study projected that capital spending in American shale gas would amount to $1.9 trillion between 2010 and 2035. MidAmerican Energy, a holding company controlled by Warren Buffett's Berkshire Hathaway, said it was buying the Topaz Solar Farm in southern California, which will be one of the largest photovoltaic power plants in the world when it is completed. MidAmerican's boss, Greg Abel, said Topaz shows that solar energy is commercially viable. But following the Solyndra scandal, which cost taxpayers a fortune, spats over green subsidies show no sign of cooling.
The Economist December lOth 2011 BP accused Halliburton, one of its main contractors in the stricken Deepwater Horizon project, of destroying test results from the cement that Halliburton used on the rig before it exploded. A court in New Orleans is to hear claims for damages related to the resulting oil-spill disaster in the Gulf of Mexico. Halliburton said that BP had chosen to "mischaracterise" the tests, which have "little or no relevance to the case".
I
A panel investigating an accounting scandal at Olympus produced a damning report on the Japanese company's management, which it described as "rotten". Headed by a former judge on Japan's Supreme Court, the panel detailed the scheme that executives allegedly used to hide investment losses by parking them in offshore funds. Olympus, which commissioned the report, is being investigated in Japan, America and Britain. The entire board is expected to step down soon.
which reached15 billion app downloads in July. Research In Motion said it was writing down its inventory of BlackBerry PlayBooks by $485m because of the steep price discounts being offered by retailers for the tablet. It is another blow for the maker of the BlackBerry, which is struggling in the market for smart devices. The PlayBook hit the stores at $500 but can now be bought for $200. RIM's share price has fallen by 70% so far this year.
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Brazil's economy was all but flat in the third quarter compared with the previous three months (but grew by 2.1% compared with the same quarter in 2010). The global slowdown has hurt capital spending and the industrial sector in Brazil, but most analysts were surprised by the quarter's plunge in consumer spending, which accounts for 6o% of the economy.
Two big online gaming firms set the price range for their respective initial public offerings later this month. Nexon, which attracts nm players a month, hopes to raise $1.2 billion on the Tokyo Stock Exchange in what will be Japan's biggest IPO of the year. Zynga, which boasts 26om garners, hopes to raise a similar amount as it floats 14.3% of the company, giving it a market value of around $7 billion. Both are expected to be heavily oversubscribed. App, app and away! Google marked the download of the 10-billionth app from its Android store; it sold the 9-billionthjust a month ago. It is catching up fast with Apple,
A closed shop India's government backtracked on its recent decision to open up the country's retail industry to foreign supermarkets in the face of protests whipped up by politicians. Indian shoppers would have benefited from lower prices and investors had celebrated the proposed reforms. But middlemen, who would have suffered, objected. In China competition regulators approved Nestle's acquisition of Hsu Fu Chi, which makes sweets and biscuits, in one of the biggest foreign takeovers of a Chinese firm. Other economic data and news can be found on pages 104-105
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13
The cracl<s appear Vladimir Putin should clean up the Kremlin and modernise the economy-for Russia's sake and for his own
USSIA'S elections are not in-
R tended to produce surprises,
just as its streets are not meant to heave with protesters and its politicalleaders are not supposed to be publicly booed. The country's "managed democracy", with the media muzzled, only tame opposition candidates allowed and widespread vote-rigging, is designed to hand big victories to Vladimir Putin and his United Russia party. Yet the Duma election on December 4th produced an upset: United Russia's share of the vote fell from 64% to under so%, giving it only a slim majority. Even more remarkably, demonstrators took to the streets in the biggest protests Russia has seen in years, chanting "Russia without Putin" before troops poured in to stop them (see page ss). Smaller protests took place in other cities. Now some 17,000 people have signed up for a protest on December 10th in Revolutionary Square, Moscow's main public space. The government has asked them to find a different location. These events constitute the biggest crack in Russia's regime since Mr Putin first came to power in late 1999. That they are happeningjust as he prepares to return next March for at least another six years as president is no coincidence. Mr Putin's power has rested on two foundations. One is that, despite his government's contempt for human rights and his tolerance of the kleptocracy around him, Mr Putin had legitimacy because he was personally extremely popular. The other is that, thanks largely to ever higher oil prices, he was able to ensure steadily rising living standards for Russians. Both foundations now look fragile. That does not portend an imminent end for Putinism; but for the first time, the prospect of a post-Putin Russia no longer seems fantastical. That should be a wake-up call for Russia's leader to embrace reform. The popularity stakes Mr Putin starts with certain strengths. His people are hardly yearning for liberalism: in a recent poll by the Pew Foundation, Russians, by a margin of 57% to 32%, preferred to rely on strong leadership rather than democracy to deliver good government. And by the standards of leaders elsewhere, Mr Putin still seems pretty popular, with approval ratings of around 40%. Nothing is likely to stop him winning the presidency in March. But opinion is clearly moving against him. Mr Putin, who is now prime minister, saw his popularity start to fall the moment in September when he announced his plan to swap jobs with Dmitry Medvedev, the puppet he installed as president after his first two terms ended in 2008. Soon afterwards Mr Putin was booed at a martial-arts contest-a staggering idea only a few months ago. He cancelled further public appearances, but the substitutes he sent were booed in his stead. This may not be a "Ceausescu moment", when a coddled dictator wakes up to popular fury. But it is still a big shock. A bigger problem for Mr Putin is that the demands of the economy and of his political operation are increasingly in conflict. In order to hold on to power, he has kept a tight grip on the
economy. As a result both Russia and the regime's patronage system remain heavily dependent on oil and gas. Corruption and inefficiency mean that the budget will not balance unless oil prices stay around $no a barrel-which, given the grim global outlook, they are not likely to. Capital and talent are fleeing an economy that offers few opportunities. Growth rates are likely to come down. Without rising living standards, resentment against the government is likely to swell. Twenty years ago, a similar contradiction between politics and economics brought down the Soviet Union (see pages 2730). Weirdly, Mr Putin seems to welcome comparison with this period. He touts as his new foreign-policy priority a "Eurasian Union" of former Soviet republics, and he lets his supporters praise the Brezhnev years-another period in which stability turned to stagnation. Yet he must fear the possibility that resistance to his regime, too, will grow. Can he avoid it? Mr Putin presents himself, first and foremost, as a strongminded patriot. If he has his country's interests at heart, he will respond to rising discontent by opening up the economy and curbing corruption. The criminal-justice system has become a tool of the Kremlin and its commercial allies. Russians of all sorts loathe such cronyism. Both Mr Putin and Mr Medvedev have talked about tackling graft, but done nothing. If they took action, they would lose some power, but win kudos. The alternative is more repression. The decision to call in the troops suggests this is Mr Putin's chosen route. He may entrench his hold in other ways-perhaps by distancing himself from United Russia, widely derided as "the party of crooks and thieves", or by dumping Mr Medvedev as prime minister. Seasoned observers also expect imagined threats to the state, to which the government reacts by cracking down. For a model, Mr Putin needs only to look next door to Belarus, where Alyaksandr Lukashenka clings on as Europe's last dictator. Such an approach may work, for a while. His regime has a tight enough grip on the security services to suppress dissent for some time. Yet as the old Soviet Union found (and today's Belarus is finding), economic problems make repression harder to sustain. With the internet watching, it is also difficult to keep engineering large-scale voting fraud. There is a growing risk of a social and political explosion in Russia, even if it is too early and the opposition is too disjointed for there to be much hope of a Russian spring. Don't bet on a falling tsar The idea has taken hold abroad that Mr Putin's regime, though mildly distasteful, provides stability. That has proved wrong. As many Western companies have found, Mr Putin has failed to build the rules-based system that provides the economic security foreign investors need. Nor, as recent events suggest, has he delivered a political equilibrium. It is not just this week's protests that are a reason for concern: rising lawlessness in the north Caucasus may cause problems notjustfor Russia, but for the entire region. Russia is not stable. It is rigid. Unless its tsar moves to reform his realm, it will become more dangerous-both for its neighbours and for Mr Putin himself. •
The Economist December lOth 2011
14 Leaders Isla mists, elections and the Arab spring
And the winner is ... Political Islam is on the march. The West should keep its nerve
~~~~~:j~ IS THE Arab spring turning into ~
bleak midwinter? Earlier this year the revolutions sweeping through the region seemed encouragingly modern and secular. Indeed, the young Facebookers and Twitterers braving the bullets in Cairo and Tunis seemed to give the lie to the dictators' claims that the only alternative to the thuggery of a strongman was mullah-led theocracy. But look across the Arab world today and political Islam has jumped to the fore (see page 49). Egypt offers the most dramatic example. The relatively mild-mannered Muslim Brotherhood, the best-organised of the Arab movements espousing an ideology that bases its message on the texts of Islam, is winning the three-stage election to Egypt's parliament by a wider margin than pundits predicted, with 46% of the seats so far. Far more frightening is the party coming second, with 21% of the seats. The Salafists, whose name denotes a desire to emulate the "predecessors" who were early followers of the Prophet Muhammad, decry alcohol, pop music and other aspects of Western lifestyle. They want to ban interest in banks, think women should cover themselves and stay at home, would segregate the sexes in public, might turn Christians, around a tenth of Egypt's Ssm people, into second-class citizens and denigrate Jews, not to mention the people of Israel. Assuming that the two Islamist parties do no worse in the next two rounds this month and next, generally in more conservative areas, they will control a clear majority of seats; the only question is whether the Brothers will keep their promise not to team up and rule together. Under a Crescent Moon In Tunisia and Morocco Islamists of a similar stripe to the Brotherhood have handsomely won elections. In Libya, with Muammar Qaddafi gone, they may yet do so too. In Syria they are prominent in an opposition front that may eventually displace Bashar Assad. And in Palestine the Islamists of Hamas, a branch of the Muslim Brothers that still on paper rejects the state of Israel, are as secure as ever in control of Gaza. Even in chaotic Yemen, an Islamist party might well emerge as the biggest party if elections are held as promised. In Iraq Muqtada al-Sadr, a fiery mullah, has the power to veto decisions he dislikes-and has succeeded in enforcing the removal of all American troops by the end of the year. Though unchallenged at any ballot box, the royal rulers of Saudi Arabia remain in hock to a deeply intolerant clerical establishment. Moreover, the two other great peoples of the region, the Turks and Persians, are both under the sway of governments with an Islamist label, albeit of wildly different hues. Indeed, political Islam now has more clout in the region than at any time since the Ottoman empire collapsed almost a century ago, and perhaps since Napoleon brought a modernising message to the Arab world when he invaded Egypt in 1798. All this is worrying, not just for secular liberal Arabs but also for the West. On the election trail, Barack Obama is being
attacked for his naive trust in the Arab spring and for not doing more to protect Israel. That will surely only increase as the scale of political Islam's success becomes evident. Are the sceptics who said that Arabs could not handle democracyand would inevitably elect nasty people who would never surrender power-being proved horribly right? The answer is no. Until the Brothers actually take power, it is hard to say with certainty where the dominant mainstream of political Islam stands. But most of the signs are that it is a long way from both its intolerant caricature and the tenets promoted by some of the Brothers' predecessors a generation ago. Indeed, the most striking feature of the Arab spring remains the complete failure of violently radical Islam. Al-Qaeda, the murderous perversion of Islam responsible for felling the Twin Towers and for countless other atrocities against Muslims as well as Christians and jews, has entirely failed to make its presence felt. As peaceful political Islam advances, alQaeda and its violent jihadi friends have retreated to the remotest patches of Yemen, Somalia and the Sahara desert. That would be small comfort for liberal Egyptians if the Brotherhood teamed up with the Salafists and then claimed a democratic right to expunge secularists from governmentand from most of Egypt's institutions. But that does not seem likely. The Brothers have repeatedly insisted that they will uphold the rights of women and religious minorities and respect the verdict of the polls, even if it goes against them. They say they will not enforce the veil or immediately ban alcohol. As in Tunisia and Morocco, they will seek to rule in coalition with secularists. As in Turkey, they want the generals who used to rule and persecute them to go back to their barracks. They will be keener to support the Palestinians than Hosni Mubarak was, but do not want to tear up the peace treaty with Israel. The main reason for Islamists' popularity is their hatred of corruption, the scourge of secular dictatorships throughout the region, and their promotion of justice and dignity, words that have resonated in the Arab spring even more than democracy. The Islamists appeal to the poor, often by providing a rudimentary welfare system via the mosque when state provision has been lacking. Their political appeal lies in their ability to get things done. Their Turkish counterparts offer a mostly hopeful example of vigorous democracy, free media and economic liberalisation, even if the Turkish prime minister has sometimes betrayed an unpleasantly authoritarian streak. Risky and messy None of this will be easy for outsiders. The foreign policy of Egypt, the Arabs' leading country, is likely to be less amenable to the West. Even mild-mannered Islamists may still prove narrow-minded on some scores. But that is no reason for the West to desert them, let alone hark nostalgically back to the era of secular strongmen. Democracy entails risks. It is often messy. Like people everywhere, Arabs may make bad choices. Political Islam comes in many shapes and guises. So far, the version emerging as predominant seems relatively benevolent. Grit your teeth and cautiously welcome it-in the hope that the Arabs turn away from the more malignant variety. •
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16 Leaders
The Economist December lOth 2011
Ten years of China in the WTO
Shades of grey It was right to let China in. Now the world's biggest trader needs to grow up
HINA'S efforts to join the World Trade Organisation Since WTO accession, $2010 trn (wTo) dragged on for 15 years, 1.6 long enough to "turn black hair 1.2 white", as Zhu Rongji, China's 0.8 former prime minister, put it. 0.4 (His own hair remained Politbu2001 03 05 07 09 10 ro-black throughout.) Even after membership was granted, ten years ago this week, Mr Zhu expected many "headaches", including the loss of customs duties and the distress of farmers exposed to foreign competition. Yet the bet paid off for China. It has blossomed into the world's greatest exporter and second-biggest importer. The marriage of foreign know-how, Chinese labour and the open, global market has succeeded beyond anyone's predictions. It is instead China's trading partners who now contemplate its WTO membership with furrowed brows (see page 45). They have a variety of complaints: that China exports too much, swamping their markets with cheap manufactured goods, subsidised by an undervalued currency; that it hoards essential inputs, such as rare earths, for its own firms; and that it still skews its own market against foreign companies, in some cases by being slow to implement WTO rules (notably on piracy), in others by suddenly imposing unwritten rules that are unfavourable or unknowable to foreigners. The meddling state lets multinationals in, only to squeeze them dry of their valuable technologies and then push them out. Much of this criticism is right. China made heroic reforms in the years around its WTO entry. That raised expectations that it has conspicuously failed to meet. It signed up for multilateral rules, but neglected the rule of law at home. Free trade did not bring wider freedoms, and even the trade was not exChina's foreign trade
C
actly free. It is in China's interest to liberalise its exchange rate further, to prevent local officials from discriminating against foreigners and above all to do far more to support the global trading system. The WTO is undermined when any member flouts the rules, never mind one as big as China. Too big to be a bystander-or to be kept out But China's sins should be put into perspective. In terms of global trade consumers everywhere have gained from cheap Chinese goods. Chinese growth has created a huge market for other countries' exports. And China's remaining barriers are often exaggerated. It is more open to imports than Japan was at the same stage of development, more open to foreign direct investment than South Korea was until the 1990s. Its tariffs are capped at 10% on average; Brazil's at over 30%. And in China, unlike India, you can shop at Walmart, most of the time. As for the hurdles foreign firms face in China, they are disgraceful-but sadly no worse than in other developing countries. The grumbles are louder in China chiefly because the stakes are higher. Foreigners may have won a smaller slice of China's market than they had hoped, but China is a bigger pie than anyone dared to expect. Had China been kept out of the WTO, there would have been less growth for everybody. And the WTO still provides the best means to discipline and cajole. Rather than delivering congressional ultimatums, America and others could make more use of the WTO's rules to curb China's worst infractions. So celebrate China's ten years in the WTO: we are all richer because of it. But, when it comes to trade, China's rulers now badly need to grow up. Their cheating is harming their own consumers and stoking up protectionism abroad. That could prove to be economic self-harm on an epic scale. •
The EU summit
Beware the Merkozy recipe The euro crisis cannot be solved by yet another one-sided solution HEN the history books are written, will December 8th-9th be seen as a turningpoint in the euro crisis? That is when Europe's leaders were due to meet for the latest in a string of much-ballyhooed summits at which they repeatedly promise big reforms to their rules to save the single currency. As The Economist went to press, the focus of this summit was already clear, thanks to a deal on December 5th between the two people who matter most: the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy. It will be all about tightening the euro's fiscal rules. The "Merkozy" duo have decreed that the priority should be a march towards
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greater fiscal discipline, to be enforced by strong referees. Yet such a priority is dangerously lopsided. If the euro is to survive, Europe needs a more balanced plan to build the fiscal and financial integration that matches today's monetary union. Finding ways to police governments and prevent fiscal profligacy is part of that. But it is only part; it is not the most important component; and, on its own, it is unlikely to work. A set of incomplete ingredients Consider, first, what Mr Sarkozy and Mrs Merkel have agreed to. By the end of March 2012 they want the European Union's member governments (ideally all27, but if need be only the 17 that are in the euro) to sign up to an overhaul of the fiscal rules. Euro members would enshrine both debt and deficit ceilings in their constitutions. The European Court of Justice would de-
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The Economist December lOth 2011
18 Leaders ~
termine whether this national legislation was sufficiently binding. Sanctions on countries that broke the ceilings would be more automatic than they are now. Whether or not all this requires a full-blown-and disruptive-change to the EU treaties is a matter of anxious debate. The president of the European Council, Herman Van Rompuy, thinks much can be done simply by changing a protocol; Mrs Merkel thinks that is not enough. The British prime minister, David Cameron, is already being awkward (see Charlemagne). But in any case such reforms, for all the political brouhaha surrounding them, will not be enough to solve the problem. The odds of deterring a malfeasant country with fines, however semi-automatic they may appear, are slim. And the flouting of fiscal rules was not the only, or even the main, cause of the problem in the first place. To day's crisis is less about fiscal profligacy than about investors' fears for the euro's sustainability and their flight from peripheral assets. In the short run an obsession with austerity could make matters worse by deepening recession. And without a framework for common financing, investors' confidence will not return. On this score the Merkozy vision offers nothing. Mrs Merkel persuaded Mr Sarkozy to rule out jointly issued Eurobonds.
He got her to water down the idea that private bondholders must take a hit whenever countries get into trouble. The hope seems to be that tough talk on fiscal discipline will be enough to persuade the European Central Bank that it should step in more boldly. Mario Draghi, the ECB president, has indeed hinted that a "fiscal compact" could elicit such help. But there is no strategy on the bigger question of how and how far euro-zone countries should go towards joint liability for some debts. This is crucial. The past ten years provide ample evidence that fiscal rules alone are not enough (and if you want to be really scared, look at Europe's experience in the 1930s of monetary rigidity without a lender of last resort-see pages 76-78). If, however, new stricter rules were combined with some form of joint liability, then there would be a reward for good behaviour and also a credible sanction: any country that overstepped its fiscal limits could not benefit from Eurobonds. That would still leave a lot of other things to do, including structural reforms to boost competitiveness and the creation of a truly European banking system. But the core of the solution has to be the link between good behaviour and joint liability. Otherwise this will be just another much-ballyhooed summit that fails to save the euro. •
Video games
The serious business of fun A bit of the entertainment business that many other firms can learn from
LD stereotypes die hard. Picture a video-game player and you will likely imagine a teenage boy, by himself, compulsively hammering away at a game involving rayguns and aliens that splatter when blasted. Ten years ago-an aeon in gaming time-that might have borne some relation to reality. But today a gamer is as likely to be a middle-aged commuter playing" Angry Birds" on her smartphone. In America, the biggest market, the average game-player is 37 years old. Two-fifths are female. Even teenagers with imaginary rayguns are more likely to be playing "Halo" with their friends than solo. Over the past ten years the video-game industry has grown from a small niche business to a huge, mainstream one (see our special report). With global sales of $56 billion in 2010, it is more than twice the size of the recorded-music industry. Despite the downturn, it is growing by almost 9% a year. Is this success due to luck or skill? The answer matters, because the rest of the entertainment industry has tended to treat gaming as being a lucky beneficiary of broader technological changes. Video gaming, unlike music, film or television, had the luck to be born digital: it never faced the struggle to convert from analogue. In fact, there is plenty for old media to learn. Video games have certainly been swept along by two forces: demography and technology. The first gaming generation-the children of the 1970s and early 198os-is now oveoo. Many still love gaming, and can afford to spend far more on it now. As gaming establishes itself as a pastime for adults, the social stigma and the worries about moral corruption that have historically greeted all new media, from novels to pop
0
music, have dissipated. Meanwhile rapid improvements in computing power have allowed game designers to offer experiences that are now often more cinematic than the cinema. But even granted this good fortune, the game-makers have been clever. They have reached out to new customers with new gadgets: Nintendo's Wii console showed that games with cross-generational appeal can make money faster than a virtual Rafael Nadal returns your puny serve. They have branched out into education, corporate training and even warfare, and have embraced digital downloads and mobile devices with enthusiasm. Big-budget shoot-' em-up franchises such as "Call of Duty" and "Halo" are still popular, but much of the growth now comes from "casual" games that are simple, cheap and playable in short bursts on mobile phones or in web browsers. "Angry Birds" has been downloaded so om times. On to the next level The industry has excelled in two particular areas: pricing and piracy. In an era when people are disinclined to pay for content on the web, games publishers were quick to develop "freemium" models, where you rely on non-paying customers to build an audience and then extract cash only from a fanatical few. In China, where piracy is rampant, many games can be played online for nothing. Firms instead make money by selling in-game perks and "virtual goods" to dedicated players. China is now the second-biggest gaming market, but does not even rank in the top 20 markets for the music business. As gaming comes to be seen as just another medium, its tech-savvy approach could provide a welcome shot in the arm for existing media groups. Time Warner and Disney have bought games firms; big-budget games, meanwhile, now have Hollywood-style launches. Homo ludens is here to play. •
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20
Measuring stock exchanges
What's sauce for the Greeks ...
SIR- You asserted that the merger of the financial exchanges in Tokyo and Osaka would create the world's thirdlargest market, overtaking the London Stock Exchange ("Listing, not keeling", November 26th). The statistics used to calculate this ranking measure only domestic and not internationa! market capitalisation of the world's exchanges. London remains significantly larger than the soon-to-merge Japanese entity. The omission of internationa! market capitalisation barely shifts Japan's combined standing, as the Tokyo Stock Exchange has only 12 internationa! listings and Osaka fewer than that. London is home to 326 international listings, which, when added to Loncion's domestic market capitalisation, gives a total value of $5.75 trillion, approximately $2 trillion more than the future Tokyo-Osaka exchange. One of London's abiding strengths is its openness to overseas companies, internationa! investors, entrepreneurs and ideas. To ignore that is to sell London short.
SIR- One could not help but notice the contradictory arguments put forth in separate leaders in your November 26th issue on the euro and the failure of the "supercommittee" in Washington to reach agreement on reducing America's deficit. The headline to your leader on the euro asked "Is this really the end?", and criticised Germany for refusing to take the pressure off indebted countries by backing Eurobonds. One page later, in "A downgrade for Congress", you came to the conclusion that it will take a "terrifying bond crisis" to force American politicians to act on the deficit. So in Europe, Germany is to remove all market pressure from debt-laden countries as soon as possible, but in America more bond market pressure is needed to enforce reform?
XAVIER ROLET
Chief executive officer London Stock Exchange Group Driven round the bend SIR- Residents of Indiana may think a traffic roundabout to be a novelty ("What goes around", November19th), but inN ew Jersey traffic circles have been in use during the 6o years that I have lived here. Despite this history, locals and visitors have never quite got the hang of them. An afternoon's entertainment can be had by setting up a chair and watching people attempting to navigate one. Some speed up and hope for the best. Some stop and get rear-ended. A few motor straight across the centre island. Some find it difficult to read signs while driving in a circle. This is always accompanied by horns, rude gestures and the sound of metal and plastic being deformed. ROGER TIMPSON
Short Hills, New Jersey
question of any tour opera tor's failure causing the CAA to collapse. ANDREW HAINES
Chief executive Civil Aviation Authority
London Over the hills and far away
MARTIN STOEBE
SIR- The Economist's continued defence of the value of migration in human development is impressive ("Weaving the world together", November 19th). However, your briefing could have gone beyond economics. Many of the most vibrant diasporas are those whose members have left conflict and crisis behind, Somalis, Afghans and Iraqis for instance. There is increasing evidence that these transnational diasporas' remittances, as well as the social capital and skills they accumulate through migration, play a vital role in preventing further displacements.
Hamburg
KATY LONG
Britain's aviation regulator SIR- You suggested that if Thomas Cook, a struggling travel agency with a big presence on the British high street, were to cease trading, the Civil Aviation Authority would "probably go under, too" ("A tour operator's travails", November 26th). This is not the case. The CAA runs the ATOL scheme, which protects package holidaymakers if their tour operator stops trading, repatriating them if they are overseas and refunding them if they are yet to travel. The scheme is backed by the Air Travel Trust Fund, which is financed by a £2.50 ($3.90) levy on every ATOL -protected holiday, bank borrowing facilities and a backup insurance policy. ATOL is a statutory scheme, created and backed by the government. As such, anyone booking an ATOL-protected holiday can be confident they will be looked after should their operator fail. The CAA is financed entirely separately to ATOL, with charges levied on industry for its regulatory services. Contrary to your claim, there is no
Department oflnternational Development LondonSchoolofEconomics SIR- The age of jet travel, transcontinental commuting and internet connectivity has no doubt enabled the spread of mass migration without migrants incurring the isolation and demoralising home sickness of the past. The a!most instantaneous opportunity to interact with family and business partners in distant countries confers mutual support. But I wonder whether this ease of access to the country of origin also reduces the incentive to socialise and mix with local communities in the countries that migrants have relocated to. Efficient transport and realtime communications with the folks back home could unintentionally make migrant communities more insular.
become a responsible and successful individual who adhered to the laws and customs of the adoptive country. I would never have thought of imposing customs from the society I left behind. Unfortunately, this notion seems to have become a thing of the past. ILONA DUNCAN
Heathsville, Virginia SIR -Your account of the politics of illegal immigration in the United States was woefully naive ("Crying wolf", November19th). You described illegal immigration as a "disappearing problem" that Republicans needlessly worry about. As a Hispanic-American who leans Democratic, I agree that most illegal immigrants have something to contribute. And yes, illegal immigration has, overall, been in decline. But you went further and seemed to be wholly against any attempt even to patrol or guard our borders. Additionally, you completely ignored the surging problem of the drug wars that have already scarred Mexico and are slowly seeping into the American south-west. Every day, drugs and weapons are smuggled into the country through vehicles, tunnels, or blatantly in plain sight. JOSEPH CARIZ
St Petersburg, Florida -I found your briefing on diasporas to be very interesting (I have recently returned to Indonesia after graduating from the University of Birmingham). But what I really enjoyed were the captions that peppered your article: "The immigrant song", "In through the out door", "Rambling on" and so on. I assume that you too are a big fan of Led Zeppelin. SIR
YOOPI ABIMANYU
Jakarta •
JOSEPH TING
Brisbane, Australia SIR- I arrived
in America with a suitcase and a dream 45 years ago. At that time one needed a sponsor or firm employment in order not to become a public burden. The dream was to
Letters are welcome and should be addressed to the Editor at The Economist, 25 StJames' s Street, London SWlA lHG E-mail: letters @ economist.com Fax : 020 7839 4092 More letters are available at:
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Women and work
Festival voices
Baroque ain't everything
Should more be done to increase women's participation in the workforce? Expert guests convene at our online debating site to discuss the motion "This house believes that a woman's place is at work". The floor is open for your comments, and the result depends upon your votes
Geoffrey HilL considered one of the best poets writing in English, is appearing at The Economist's inaugural Books of the Yearfestivalalong with Simon Sebag Montefiore, Janine de Giovanni and others. He spoke to us about politics, art and the impact of religion on his work
Who would swap Vienna for boring Geneva or grey Prague? Alas, companies locating a regional headquarters for central and eastern Europe are putting good communications, infrastructure and an internationally minded labour force ahead of grand opera and Sachertorte
Economist.comfdebates
Economist.comfmultimediafculture
Economist.comfnode/21541287
Europe: This time it's serious
Middle East: Portraits of a revolution
Business: Talking with Richard Branson
Our correspondent reports from the latest euro summit, as Angela Merkel and Nicolas Sarkozy present their plan to fellow leaders
AGerman-British artist has been painting Syrians during the uprising
Doing good does not have to hurtthe bottom line, say the authors of a new book about corporate philanthropy
Economist.comfnode/21541330
Economist.comfnode/21541331
Economist.comfnode/21541334 Asia: Bombay naval-gazing
Avideographic breaking down the November data on America's presidential election
ASunday afternoon spent by the Gateway of India, watching the gunboats, cameraphones and flying colours go by
Economist.comfnode/21541321
Economist.comfnode/21541251
United States: Jon Huntsman comes to town
Business education: No research required
Aphotographic look at a Republican candidate's tour of New Hampshire
Should it matter to students whether a business school has a strong research base? Our diaristthi nks not
United States: Amonth of surprises
Technology: RegulationVille
South Koreans are among the world's biggest consumers ofsmartphone apps, but mobile games have not really taken off-until now Economist.comfnode/21541275
Economist.comfnode/21541233
Economist.comfnode/21541322 Africa: Until death do us part
Abillcriminalising same-sex marriage in Nigeria could hinder the efforts of groups helping those most at risk of AIDS
Culture: Loonytunes
Economist.comfnode/21541328
Economist.comfnode/21541257
Companies sometimes choose rather odd music to accompany their adverts
Europe: The busy Balkans
The centre-left wins elections in Slovenia and Croatia; Macedonia wins an international-court ruling; and Serbia anxiously awaits a verdict on its EU bid Economist.comfnode/21541274 Links to all these stories can be found at Economist. com/ node/ 215413 51
23
Executive Focus Director Po itions at the Umted Nations (0-2) Do you drive for change and improvement without accepting the t tus quo? Do you have excellent m nagement and leadership kills? The United Nations is looking for dynamic, experienced leaders for the following positions in NewYork: • Director of the Field Budget and Finance Division in the Department of Field Support • Director of the Peacekeeping Financing Division in the Office of Programme Planning, Budget and Accounts These senior positions require representation before the United Nations legislative bodies as well as strategic direction for the development of International Public Sector Accounting Standards (IPSAS) and Enterprise Resources Planning (ERP). Education: A Master's degree or equivalent in management, accounting, finance, economics, business administration or a related area. Work experience: A minimum of fifteen years of progressively responsible experience in budgeting, finance or programme management. res ron I e
Applications ror
~.;ourageo .
Investment Climate Specialists IFC, a member ol th World Ban Group, IS the large global development In ubon focused on the pnvate sector in developmg countr1es We create opportun1ty for people to escape poverty and Improve the r 1 s We do so by prov!drng flllanctllg ID help busmesses employ more people and supply essential serviCes. by moblh21fl0 capital from others and by dehvenng ad\'lsory servas ID ensure sustainable development IFC manages the Investment Climate AdV150rY Sef\llces of the WOI1d Bank Group wfllch offers d1ent govemm nts a wide range of sef\llCes to !ISSist them n cmprovmg the legal and regulatOfy frameworks for doing buscness and attractJng Investment Our work focuses on several d mef1Slons. Bustness regulabon, trade log1st1CS. busln taxatiOn, Investment poiJCY, Insolvency, program 1n agnbu ine 1nf tructure nd oth r Industries, and pubUc-pnvate dlalogu . Improving e inv tm nt dtmate In Sub-Saharan Atr1ca IS a strategl prtortty !of the or1d Bank Group. To further scale up the tmpact and u ainabilrty of our work, the IFC IS reaultulQ Investment Climate Specialists who II deSign, tmplement and mon1tor investment dtmate reform programs. coordtnate relationships across the WOI1d Bank Group, With donors and other external takeholders. partiCipate In knowledge building and dl m1naoon. and prov!de guidance to staff and external consultants IFC reau
Country and Regional Zambia, Uganda, Gu nea, Cote d'lvoire, S erra Leone, Central Africa Program Managers Positions based 1n Lusaka & Kampala Pos. 112454; Freetown, COnakry & AbidJan Pos. 112453; Oouala Pos. 112452. Senior/Operations Officers
Agribu ine and Infra tructure Positlons based 111 Oakllr & Nairobi: Agnbusiness Pos. 112455 & 112456: Infrastructure Pos. 112457 & 112458 Regulatory Refonms - Bus ness Regulation lnve tment Policy, Debt Resolution, Business Taxation PoSitions based in Dakar & N8JI'Obr Debt ResolutJon Pos 112464. Busmess RegulatJon Pos. 112461 & 112462. Business TaxatJon Pos 112465. Investment Climate Programs - Private-Public Dialogue, Industry Investments, Economics PosltJOns based 111 Dakar & Natrobl' Pnvate PUbliCDialogue Pos. 112468; Industry Investments PrJ 112463. Econorm Pos. 112469 & 112470. lnfonmatlon Technology PosltJons based m Nairobi & Dakar or AcerB Pos 112459 & 112460.
All carldldate are e pected ID have an advanced university degree equrval nt to a ster' degree, 5 to 8 or more y rs ol profesSJonal e perieoce in an ea related to lnve tment Climate ISSUes. soltd expenence In the1r re pectJve It ld of experll , and be able d monstrate strong knowledge about Sub-Saharan Alnca For detailed jOb informabon and to apply on-line. pte vi I the IFC career website at www.ifc.org D adhne Is January 9, 2012
IFC offers rewaro'ng careers In a glObal enYironmen . Women are encouraged to apply.
The Economist December lOth 2011
24
Executive Focus F
BURGH
d
I
Appointment of the Head of the Business chool The Un1verS1ty ol Edinburgh Business School Is a dynam1c, growing School w1ttun the wood-leadmg Umversity of Ed•nburgh Offering a Wide ranging undergraduate degree portfoliO. high-quahty MSc programmes to a truly intemauonal student body, an MBA that ran s 13th n Europe and 88th 1n the world and a flounshmg PhD programme, the School IS eKc pt10nally well-positioned to conunue Its JOurney to establish 1tsell as a world-lead•ng School for Busmess at the heart of one of the world's most respected res arch ntensrve umvers1 es Th UntverSity Is se klng to appoint a new Head ol the Business School Cand•dates lor thiS pos1tlon Will be expected to demonstrate leadership of the h1ghest cahbr , strong research cred1b1hty, excellent representa!Jonal and ambassadonal qualities. a record of developtng and strengthening relationshipS with leacling busmesses. peer 1nslltut10ns and busmess schools whtlst lead1ng a team of academiC and admlmstratrve colleagues For further details and to apply, please vi it www.perret11aver.com'candidate , quoting reference 0953. Applications clo midday on Wednesday 11th Jan ry 2012. Comm• Equahty anc1 1ty The Unhl'efllty of Edonburgh IS a ch r a e body w h r~.stra oon number SC005336
reg
red 1n Sc:o
nd
International Oil Pollution Compensation Funds
HEAD, CLAIMS DEPARTMENT (Vacancy N°20 ll-06) The International Oil Pollution Compensation Funds (IOPC Funds) are three intergovernmental organisations (1992 Fund, Supplementary Fund and 1971 Fund) which provide compensation for pollution damage resulting from oil spills from tankers. Compensation is governed by an international regime elaborated under the auspices of the International Maritime Organization (IMO). At present, 105 countries belong to this regime. The IOPC Funds are administered by a joint Secretariat, based in London, with 32 staff members. Detailed information on the role ofHead, Claims Department, including the main duties and responsibilities, as well as qualifications and experience required, can be found on the Funds' website www.iopcfund.org. Applicants should have an advanced university degree or equivalent qualifications in an appropriate field (law/law of torts; finance; accounting; science) and significant relevant professional experience at a managerial level. Experience of working in an international environment; a solid foundation in the Civil Liability Convention and the Fund Conventions; experience in handling claims for compensation and technical knowledge and experience of the effects of oil spills on fisheries and aquaculture and coast related commercial activities are all essential requirements. There are various attractive benefits, including six weeks annual leave and a provident fund. Only candidates from 1992 Fund Member States will be considered. The working languages of the IOPC Funds arc English, French and Spanish. Fluency in English is required. Fluency in French and/or Spanish would be an asset. The post is to be filled as soon as possible. Salary is in accordance with Grade D.1 of the United Nations scale and is free of United Kingdom income tax. The dependency rate (D.1, Step 1) therefore starts at US$103,070 plus post adjustment of $76,168, i.e. a total of US$179,238 per annum whereas the single rate starts at US$95,270 plus post adjustment ofUS$70,404 i.e . a total ofUS$165,674 per annum. Applications must be accompanied by a copy of the IOPC Funds' Personal History Form. Please visit our website http:/ jww\v.iopcfunds. org/vacancies .htm. The completed IOPC Funds Personal History Form should be sent by e-mail to
[email protected] or alternatively posted to: Human Resources Manager, Finance and Administration Dept., International Oil Pollution Compensation Funds, Portland House, Bressenden Place, London SW1E 5PN. The deadline for the receipt of applications is 9 January 2012.
The Economist December lOth 2011
25
Executive Focus Exciting Career Opportunities in Nigeria Inter-Bank Settlement System Pic.
kPMh: cuttingrtrrougtrc:ompiexity '"
Nig ria tnt r·Bank Senlem nt Syst m CNIBSSl is a I ding payments and settlement institutiOn 10 Nigeria. Established in 1993, the Company is jointly owned by II licensed ban . Central Ban of Ntgeri and Discount Houses. It w s set up a a Bank10 Industry Sh red-Service to str amlin inter-ban payments nd settl ment mcch ni ms, nd to promote ectronic paymen in Nig ria. The Company also provid th mfr ructure for utom ted processing. lem nt of payments nd fund tr nsfer betw n ban , ockbfokers, discount houses nd card compani IBSS is currently implementing key str tegic tnltlattves atmed t re-posrtiOfllng and transform•ng the Company as a workl>dass payments and set1lement lnstrtut•on. In line with thi drive, the Company desires to recruit suit bly Q lifted, compet nt nd lf-moliv ted tndividu I to mlthe following management position ·
Chief Executive Officer (ES00614)
Executive Director, Operations Executive Director, Business General Manager, Finance & & Technology (ES00615) Development (ES00616) Admin (ES00617)
Reporting to the CEO, the candidate will be responsrble for II as· peels of IBSS operations and techno! ogv. tncfudtng technology infra rue ture, appiiC8tl()(l integratl()(l, operations certiftCallons, network management, security nd antr·fraud. he Will egtC provid global technical and dtrection for a h~ghly servic&<>riented NIBSS nd Oper uons. nd ensure ITIOO(h operations nd high· ilabil· ity of NIBSS' tnfr structure, tncludmg II terns nd pplication a ble ope ting enwonmen and xoell nt operational service in line With Sl.As ·A good ftrst degree 1n any related prov ed to cu tom8f dtscipline from a reputable ins(ttunon Cmanag m nt, economics or engineering). Relevant post-gr du ~ d r (s) •A good first degree in computer sci such as MBA Will be a disltnct advan ence. ngin nng or related techniC81 rage reid from a r putable institution. Rei ev nt p -graduate degr s) n or ·Minimum of 10 years' senior man· prof ion 1 certtftcations will be n ag ment xperi nee in payments or added advanta related tndustry Reporting directly to the Board of Di rectors, the successful candidate will be responsible for overseeing effecttve d Y·to ·day operattons of NIBSS and ensunng anai nment of strateg1c goals and targets He/ he will be n e pert n th paym nts sp ce and will lead NIBSS in executing •ts man· date, sa cmical enabler toward the re lisat•on of the country's paym nt systems v sion
•Expert knowledge nd appreciat•on of the payme busin , including em rging payment tr nds, regulatory polic•es. emerg•ng payment methods and schemes ·Vi ion ry nd
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·Mmtmum of 10 y ars' cogn te expe ri nee in telacommunication , ba ing, electroniC payments experience. prov n leadership and experience 10 operation / IT manag m nt roles
·Demonstr ble track-record of resu •n managingiove ing the manage-
R porting to the CEO. th sue· cessful candidate will be primarily focused on strategy, product development and managem nt. and sale relationship management H /she wtll be respons•ble for defining the appropriate bu tness model to support NIBSS' trategy, seNe as the prim ry pomt of cont ct for new and existing clients, and m nage all aspects of interaction with clients.
Oualifatioo IS. experience and llt1rbut •A good fi rst degree •n any related discipline from a reputable insu· tution. R levan post-gradu t degree<sl such as MBA wilt be a dis t•nct advantage · Minimum of 10 y ars' senior man· agement experience in p yments or related indu try uch as finan cial services, telecommunicat•ons andlCT · Good underst nding of 11 r~ous payment products and ris and compliance tssues related to pay· m nts, lncludtng fraud preven tion, an1i-money laundering (AML), scheme rules. tc
ment of mid to large-seal • complex, ·Proven track record of ach•evement nd cross-funct•onal related prOJects, nd contribut•on to the dev lopment and ab lrty to work effectJIIely m a hig~ of the payment tndustry, including svs· r 'd manding rwironmen pr terns, polici and procedures.
•Excellent knowledge and ppreciation of th payments bus10ess. ,,.. eluding emerging payment methods andsch m
·Strong working knowledge of rei ·Excellent I d rshtp nd xpen nee vant technologies. systems and mira in g neral man g mentlboard lev I ructure, oper811onal requirernen roles, with track record of achieveurity rand rd • procedures, IT men results regulatory policies, certifiCatiOnS nd trends with10 the payments pace ·W If-honed skills to persuade, influ· ence, n otl e. man g and su t n · Strategic. With a seNice orient uon ucc I rei tionships bolh tnt rn tty m lndset nd excell nt le r htp, and ext rnally. interpersonal, negotl lion, analytiC81 and commun•cations sluffs
•Strong commercial acumen and good appreciation of bu in str tegy i sues, cu tomer relation ship and bus10ess performance management.
rr
R porting to the CEO. the ucces · ful candidate wtll h ve overall responsibility for the dev loprnent and implementation of appropri te fin nci I man g m nt framewor to support the realilahon of overall corporate goals and obJectives of the Compeny H she will fegu rd the of rh Company nd maintain the integrity of the financial reports. In ddt!lon, he/ he will h ve oversight r pon tbthty for all the back· offtee functions in NIBSS. including Admm, HR. Legal nd Logi ics.
Clualifications
expel--
and attrilutes
•A good first degree from a repuUible i . !Aion. Post-gad ) in
finance, 8001 o •lies or 1:>\s
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•Pr ional qu lification( ) in counting uch as ACA
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·M•n•mum of 10 years' relevant ex peri nee •n a nior financial management position ·PreviOU expen nee a a CFO or Finance Controller Will be n added advantage ·Strong an lytical background, and demonstrable ability to establish goals and deltver results •Str tegic mind tiation kills
, and strong nego-
·Fam liarity with major applications
ounting
•Exc llent I der hip, interperson I, relation htp manag men negoti tion nd communiC8tiOns skills
To apply. pi quote ppropriate r terence number the subject of your e-mail nd send your current curriculum vr nd salledwithyourfull nam J to us t
[email protected] not t rth n31 Oecember2011.
(prepared as Microsoft Word documen
Please indud m vour apphcat1on, a statement of how you meet the adverused criteria, as well as names and oetntact details (includ•ng telephone and e-mail addr ) of three r who re knowled ble bout your pro ·on I achrevemen nd bilru All the posrtiOns are based in lagos, Ntgena The CEO poSitiOn •s ex.cluSive to 1get1 n Within and outs•de the country. Other posrt•ons are open to both and non-Nigeri n pplican All pphcatiom Will be tr ted in strict confidence. Only short-listed candid t will be contacted C 2011 KPMG Prof
The Economist December lOth 2011
tgenan
www.n g.kpmg.com
26
Executive Focus
IDRC
United Nations Development Programme
CRDI
The International Developm nt Rese.rch Centre llDRCl, Canildtan Crown corporc1uon, supports financially and through capacuy-bulld•ng, research 1n developtng regtons of the world to promo e growth and development. Th result Is lnnovauve,lasttng, local soluhons tha bring choiCe and chclnge to those who need 1 most.
SENIOR PROGRAM SPECIALIST Governance for Equity in Health Systems Ottawa, Canada The Governance for Equ1ty 1n Health Systems Program supports research 1n developing countnes to strengthen thetr health systems and Improve health ou tcomes. Our program Includes research on equ1tabl health ftnancing, pohc•es and tnnovattons for 1mproved health serv1ces dehvery, health formatiOn system$. and addresstng access and governance chclllenges across 1 number of regions As the Sen10r Program Spec1ahs a key member of our muh1dlsctphnary team you Will identtfy crulcal research Issues; ass st in developtng the research strategy; and ta the lead tn d loptng. m.tnagtng. monttonng and evaluating a portfolio of research proJects. In particular, you will be tnvolved with our portfolio on health pohcy and systems w1th a strong emphasis on governance and equ1ty to develop programs related to he lth InformatiOn systems ndprtmaryhe lthcarefocuu.ngonlaonAmerk:aandtheCar ben. For more Information about this opportuMy and how to apply, vtsll our websne a www.idrc.u/careers. Appliut on Deadline: January 9, 2012.
An tquol opporruntry tmploytr. JDRC tncourogts oppliamons from quohfitd womtn, Abortgmol ptoplel, prrsons WJih diSOb•~lles ond mtmbtrs ol ~~s bit mmOI'IIIes
The United Nat1ons Development Programme (UNDP) partners with people at all levels of society to help build nattons that can Withstand cnsts, and drtve and sustatn the kind of growth that 1mproves the quality of life for everyone. On the ground tn more than 177 countries and territones, we offer global perspective and Management local ins1ght to help for Development empower lives and build resilient nations. UNDP is recrUiting for the Assistant Administrator and Director (at the Assistant Socretary-Generallevel) of the Bureau of Management The Director is a member of UNDP's ExecutiVe Group and contnbutes to shaptng and moo•tonng overall corporate strategic directions. He/She directs and manages the corporate management function to address the organization's priorities and achteve outcomes. UNDP IS seektng cand•dates with a m1n1mum of 15 years of relevant experience; a strong record of progressively responsible, substantive experience and results achievement in the corporate management f1eld, includmg in large organ•zatlons. Sentor expenence at the internatiOnal level, including in operations/corporate functions, inter-agency and intemat1onal co-operation. negotiation of partnerships and management of resources are especially relevant. The candtdate will have held leadership roles and demonstrated his/her ab1lity to advocate for effective solut1ons. For more tnformatton dnd to wbm•t
dfl
appltcatton. go to
http://jobs.undp.org/cj view job.cfm?job id:26972
EDITORS Economist Intelligence Unit
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A ia, Middl
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Regional director to cover Asia and Australasia a~ th I dtng provider o country. industry and manag~mrnt analysis, ddfvenng informat on that helps organhations suy on top of market opportunf ies a!OIJI!d ~ wotld.
IUnaging nint regional o~nalysu. you II mainu.n and elop the quality and ~n cove,.g o our servic6. combining ou ~lldlng tdttori s~ndards and In Utctualleadtrsh•p with an ability to r pr !W!nt the cOmP'nY both frrt ~mlly and emalty.
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www.taylorbennett.com The
Economist December lOth 2011
27
The long life of Homo sovieticus MOSCOW
This week's elections and upheavals in Russia show how hard it is, 20 years after the system collapsed, for the country to put away its Soviet past WENTY years to the month since the T Soviet Union fell apart, crowds of angry young people have taken to the streets of Moscow, protesting against the ruling United Russia Party ("the party of crooks and thieves") and chanting "Russia without Putin!" Hundreds have been detained, and the army has been brought into the centre of Moscow "to provide security". Although the numbers are a far cry from the half-million who thronged the streets to bury the USSR, these were the biggest protests in recent years. The immediate trigger for this crisis was the rigging of the parliamentary elections on December 4th (see page 55). But the causes lie far deeper. The ruling regime started to lose its legitimacy just as Vladimir Putin, Russia's prime minister, declared a final victory for "stability", promised to return to the Kremlin as president and pledged to rebuild a Eurasian Union with former Soviet republics. The Soviet flavour of all this had been underscored at United Russia's party con-
gress at the end of November, where Mr Putin was nominated for the presidency. "We need a strong, brave and able leader ... And we have such a man: it is Vladimir Vladimirovich Putin," enthused a film director. A steelworker told the congress how Mr Putin had "lifted our factory from its knees" and supported it "with his wise advice". A single mother with 19 children thanked Mr Putin for a "bright future". Such parallels with the now idealised late Soviet era were supposed to be one of Mr Putin's selling points. No tiresome political debate, fairly broad personal freedoms, shops full of food: wasn't that what people wanted? Instead, unthinkably, Mr Putin has been booed: first by an audience at a martial-arts event on November 2oth, then at many polling stations, and now on the streets. The Soviet rhetoric conjured an anti-Soviet response. According to Lev Gudkov of the Levada Centre, an independent polling-research organisation, this reaction against the mo-
nopolistic, corrupt and authoritarian regime is itself part of a Soviet legacy. It is driven by the lack of alternatives rather than a common vision for change. For Russia is still a hybrid state. It is smaller, more consumerist and less collective than the Soviet Union. But while the ideology has gone, the mechanism for sustaining political power remains. Key institutions, including courts, police and security services, television and education, are used by bureaucrats to maintain their own power and wealth. The presidential administration, an unelected body, still occupies the building (and place) of the Central Committee of the Communist Party. More important, the Soviet mental software has proved much more durable than the ideology itself. When, in 1989, a group of sociologists led by Yuri Levada began to study what they called Soviet Man, an artificial construct of doublethink, paternalism, suspicion and isolationism, they thought he was vanishing. Over the next 20 years they realised that Homo sovieticus had mutated and reproduced, acquiring, along the way, new characteristics such as cynicism and aggression. This is not some genetic legacy, but the result of institutional restrictions and the skewed economic and moral stimuli propagated by the Kremlin. This mental software was not a generational feature, as the Levada group at first suspected. The elections were rigged in Moscow not only by middle-aged people with Soviet memories, but by thousands of pro-Kremlin younger folk gathered from across the country and dispatched to cast multiple ballots around the city. Symbolically, they made their camp in an empty pavilion of the Stalinist Exhibition of People's Achievements. Most of them had no memories of the Soviet Union; they were born after it had ceased to exist. Yet the election results also revealed the reluctance of a large part of Russian society to carry on with the present system. Thousands of indignant men and women, young and old, tried to stop the fraud and protect their rights. One election monitor, who was thrown out of the polling station, wrote in his blog that "I thought I would die of shame .. .I did not manage to save your votes ... forgive me." Such voices may still be a minority, but the clash between these two groups was essentially a clash of civilisations-and a sign that the process of dismantling the Soviet system, which started 20 years ago, is far from over. A moral vacuum When the Communist regime collapsed in 1991 there was an expectation, both in the West and in Russia, that the country would embrace Western values and join the civilised world. It took no account of a ruined economy, depleted and exhausted human capital and the mental and moral dent
~~
28 Briefing Russia
The Economist December
~ made
by 70 years of Soviet rule. Nobody knew what kind of country would succeed the Soviet Union, or what being Russian really meant. The removal of ideological and geographical constraints did not add moral clarity. In particular, the intelligentsia-the engine of Soviet collapse-was caught unprepared. When their "hopeless cause" became reality, it quickly transpired that the country lacked a responsible elite able and willing to create new institutions. The Soviet past and its institutions were never properly examined; instead, everything Soviet became a subject of ridicule. The very word "Soviet" was shortened to sovoh, which in Russian means "dustpan". In fact, says Mr Gudkov of Levada, this selfmockery was not a reasoned rejection of the Soviet system; it was playful and flippant. Sidelined by years of state paternalism and excluded from politics, most people did not want to take responsibility for the country's affairs. The flippancy ended when the government abolished price regulation, revealing the worthlessness of Soviet savings, and Boris Yeltsin, faced with an armed rebellion, fired on the Soviet parliament in 1993. Soon the hope of a miracle was replaced by disillusion and nostalgia. As Mr Levada's polling showed, it did not mean that most people wished to return to the Soviet past. But they longed for order and stability, which they associated with the army and security services rather than with politicians.
Enter the hero Mr Putin-young, sober, blue-eyed and calm-was a perfect match for people's expectations. Although picked by Yeltsin, he made a striking contrast with the ailing leader. Though he owed his career to the 1990s, he stressed that his own times were very different. Two factors made him popular: a growing economy, which allowed him to pay off salary and pension arrears, and the prosecution of a war in Chechnya. Both symbolised the return of the state. In the absence of any new vision or identity, the contrast with the 1990s could only be achieved by appealing to a period that preceded it-the late Soviet Union. Yet although Mr Putin exploited the nostalgia for an idealised Soviet past and restored the Soviet anthem, he had no intention of rebuilding the Soviet Union either economically or geographically. As he said repeatedly, "One who does not regret the passing of the Soviet Union has no heart; one who wants to bring it back has no brain." As a KGB man, Mr Putin knew perfectly well that the state-controlled Soviet economy did not work and that the ideology was hollow. But also as a KGB man, he believed that democracy and civil society were simply an ideological cover-up
It was better before Russia,% surveyed*
•
ves
No 0 10 20 30 40 50 60 70
Are you satisfied with the way things are going in Russia? Would you describe the current economic situation as good? Is it a great misfortune that the Soviet Union no longer exists? Have the changes since 1991 helped ordinary people? Have they improved the standard of living? Have they enhanced pride in our country? Have they had a good influence on public morality?
lOth 2011
brought television under his control, then oil and gas. Igor Malashenko, who helped to establish NTV, the first private television channel in Russia, says he thought that "there would be enough young journalists who would not want to go back to the stables. I was wrong." Russia was much freer in the 1990s than it became under Mr Putin. But the change was gradual rather than sudden, and was based on a relationship between money and power inherited from a previous era. The privatisations of the 1990s put property in the hands of the Soviet officialdom and a small group of Russian oligarchs. As Kirill Rogov, a historian and analyst, has observed, the real problem was not that the accumulation of capital was unfair-it usually is-but that clear rules of competition and a mechanism for transferring property from less to more efficient owners were never established. Under Yeltsin, the oligarchs were shielded from competition by their political clout. Mr Putin simply flipped the formula, turning owners into vassals who were allowed to keep their property at his discretion. From now on it was the power of the bureaucrat, not the wealth of the owner, that guaranteed the ownership of an asset. The nexus between political power and property was never broken-as it must be in a functioning democracy.
What should we rely on to solve Russia 's problems? 0 10 20 30 40 50 60 70
Democratic government Astrong leader
-
What is more important in society? 0 10 20 30 40 50 60 70
Freedom from state interference State ensuring no one in need Source: Pew Global Attitudes survey
*Survey conducted in spring 2011
adopted by the West. What mattered in the world-East or West-were money and power, and these were the things he set out to consolidate. The country was tired of ideology, and he did not force it. All he promised (and largely delivered) was to raise incomes; to restore Soviet-era stability and a sense of worth; to provide more consumer goods; and to let people travel. Since these things satisfied most of the demands for "Freedom" that had been heard from the late 1980s onwards, the people happily agreed to his request that they should stay out of politics. Though Mr Putin was an authoritarian, he seemed "democratic" to them. The ease with which Mr Putin eliminated all alternative sources of power was a testimony not to his strength but to Russia's institutional weakness. Yeltsin, who hated communism, had refused to censor the media or interfere in the court system. Mr Putin had no such qualms. First he
Monetising privilege Under communism, the lack of private property was compensated for by power and status. A party boss did not own a factory personally-he could not even buy a flat-but his position in the party gave him access to the collective property of the state, including elite housing and special food parcels. The word "special" was a favourite one in the Soviet system, as in "special meeting", "special departments" and "special regime". The Soviet system collapsed when top officials decided to "monetise" their privileges and turn them into property. The word "special" was also commercialised, to become ehshlusivny (exclusive) and e!itny (elite). It was used to market almost anything, from a house to a haircut. Under Mr Putin, "special" regained its Soviet meaning without losing its commercial value. A black Mercedes with a blue flashing light, ploughing its way through pedestrians, became the ultimate manifestation of power and money. It was also one of the symbols of injustice which helped to trigger the latest protests. Stories of bureaucrats, and especially the security services, putting pressure on businesses are now common. The most famous example is that of Mikhail Khodorkovsky and the dismembering of the Yukos oil company. But there are thousands of others. The statistics are staggering: one in six businessmen in Russia has been
~~
30 Briefing Russia ~ prosecuted
for an alleged economic crime over the past decade. Most of the cases have no plaintiff and the number of acquittals is close to zero, according to studies by Russia's Centre of Legal and Economic Research. This means that the vast number of Russian businessmen in jail are victims of corrupt prosecutors, police and courts, which can expropriate a business with impunity. As Yegor Gaidar, a prominent liberal economist, warned in 1994, "The carcass of a bureaucratic system can become the carcass of a mafia system, depending on its goals." By the time his book appeared in 2009 his warning had become reality. In the past few years this "monstrous hybrid" has started to extend its tentacles into every sphere of public life where money can be made. Examples of violence against businessmen abound. This adds up to a Soviet-style policy of negative selection, where the best and most active are suppressed or eliminated while parasitic bureaucrats and law enforcers are rewarded. What Stalin wrought by repression and extermination, today's Russia achieves by corruption and state violence. The bureaucracy's main resource is participation in the rent-distribution chain. While this allows it to channel money towards sensitive regions and factories, it also increases the country's addiction to oil and gas and fans paternalism. Mr Putin has worked hard to build up the image of the state as the sole benefactor, taking credit for rising incomes generated by high oil prices. As he stressed at the United Russia congress, only the state and its ruling party are capable of sorting out people's problems. "No one else is responsible for affairs in a village, town, city or region or the whole country. There is no such force." This idea was spread by local governors, who told their citizens before the elections that regional funding depended on voting for United Russia. "If we are responsible, we have no choice," the governor of impoverished Udmurtia told his people. "We must go and vote for the [United Russia) party candidates 99.99%. This is how it was in Soviet times, and if we had not broken this order, we would still be living in the Soviet Union ... much better than now." In practice, critics say, the state has failed to perform many of its functions, such as providing adequate health care, education, security and justice. But in Russia words and symbols often count for more than experience. A fortress mentality
Among Mr Putin's rediscovered Soviet symbols, none is more important than that of Russia as a great power surrounded by enemies. Having promoted a version of history in which Stalin represents Russia's greatness (his repressions just an unfortunate side-effect of a cold war forced upon
The Economist December him by America), Mr Putin has employed one of Stalinism's favourite formulas: Russia as an isolated and besieged fortress. Although Russia has no iron curtain and the internet is free, "it is as though an invisible wall still counterpoises everything that is 'ours' to everything 'foreign'," Mr Levada has written. Indeed his polling showed that, by 2004, the number of Russians who considered themselves no different from people in other countries had fallen, while the opinion that Russia is surrounded by enemies had grown stronger. The recent parliamentary elections were accompanied by a heavy-handed propaganda campaign that portrayed America's anti-missile system as an existential threat to Russia. Dmitry Medvedev, Russia's president, made belligerent statements and state television showed lengthy footage of Russian missiles, radars and other threatening stuff, accompanied by a tense soundtrack. It was as though Russia was about to be attacked. The target of this campaign was not the West, where the Russian elite spends much of its time and money, but the domestic audience. Anyone who criticises the government from within Russia gives aid to the enemy without. In his speech to the party congress Mr Putin particularly attacked NGOs which receive money from the West "to influence the course of the election campaign in our country". The "so-called grant receivers" were like Judas, he said, ending his speech with a quote from Stalinist times: "Truth is on our side. Victory will be ours!" He conspicuously left out the third bit: "The enemy will be destroyed!" But no sooner had he spoken than Russia's slavish television (which has shown none of the current protests) aired a propagandist film about Golos, a leading independent election monitor, trying to frame its staff as Western agents. Such tactics, in which enemies are everywhere and no one is allowed a noble motive, breed a general cynicism. In this, post-Soviet Russia feels very different from
lOth 2011
the Soviet Union. Leaders then had values, not just interests. The Communist Party might have been sclerotic and repressive, but it was not called" a party of thieves and crooks". Soviet leaders did not encourage cynicism: they took themselves and their words seriously. It would have been impossible, for example, for a chief Soviet ideologist to write an anonymous novel exposing the vices of the system he himself had created, as Vladislav Surkov, the chief Kremlin strategist, has just done. Many Kremlin politicians in fact perceive themselves as progressive Westernisers struggling with a backward, inert population which has neither the taste nor the skill for democracy. They assume people will swallow anything as long as their incomes keep rising. But when Mr Putin said that his job swap with Mr Medvedev had been planned long ago, people felt duped. These blatant machinations, where everything was imitation and nothing was real, leached away support for United Russia even before the elections. When the Kremlin decided to rig the ballot openly, fury boiled over. After a decade of "stability", Russia now looks as vulnerable to shock as the Soviet Union was at the end of its days. The big difference, however, is that the Soviet Union had a clear structure and, in Mikhail Gorbachev, a leader who was not prepared to defend himself with force. Today's circumstances are very different. Mr Putin is unlikely to follow the advice of Mr Gorbachev and cancel the results of the rigged election. He may instead resort to more active repression, thereby making the country look a lot more Soviet. This would only make the crisis worse. How Mr Putin's highly personalised power might be challenged, and what the consequences would be, remain unanswerable questions. But it is obvious that unless Russians create a system that promotes honesty, openness, tolerance and initiative, no change of leader will free their country from the Soviet grip. •
31 Also in this section 32 The economy and stimulus 32 Transport in Georgia 34 Technology and civil liberties 36 Detroit nears bankruptcy 36 Insider trading and Congress 38 Tort reform 40 Lexington: The wretched Middle East
For daily analysis and debate on America, visit Economist.comfunitedstates
The election
The president chooses his ground WASHINGTON, DC
Barack Obama offers America a new square deal VERY time a president seeks re-election, E it is something of a parlour game in Washington, c, to ask which of his predeD
cessors' campaigns he will take as a template. Will Barack Obama attempt to persuade voters, as Ronald Reagan did in 1984, that the darkness of recession was giving way to "morning in America"? The enduring listlessness of the economy makes that a tricky sell. Could he perhaps emulate Harry Truman's successful tirade of 1948 against the "do-nothing Congress"? Mr Obama is better at warming cockles than thumping tubs, and in any case control of Congress is divided, making Democrats as responsible for its ineffectiveness as Republicans are. This week Mr Obama put an end to the debate by publicly invoking a different role model: Teddy Roosevelt. On December 6th Mr Obama travelled to Osawatomie, a small town in Kansas where Roosevelt gave a celebrated speech in 1910, laying out the platform that he would eventually adopt as a third-party candidate for president two years later. Before a crowd of 30,000 he elaborated on his longstanding theme of a "square deal" for working Americans-a concept that had made him wildly popular during his nearly two terms in office. America's economy and political system were biased towards the rich, the former president complained; he promised to give the little guy a fair shake.
In a speech to a more modest crowd in the local high school, Mr Obama said much the same. Getting into the middle class and staying there has been growing ever harder in recent years, he lamented, and yet the rich have got ever richer. The solution, he maintained, is higher taxes on the wealthy to fund more investment in education and infrastructure while keeping America's debt in check. The alternative, he said, was a "you're on your own" economy, marked by falling wages, rising pollution and emasculated unions. Mr Obama was at pains to make clear that he had no wish to punish success or suggest that government had the solution to every problem. "This isn't about class warfare," he said at one point. "This is about the nation's welfare." The word "fair" cropped up again and again: the rich should pay their "fair share" of taxes; poorer Americans should get a "fair shot" at success; it was "the height of unfairness" that billionaires should pay a lower effective tax rate than middle-class folk. All this is quite clever. By invoking aRepublican president, Mr Obama can and did claim to be rising above partisan politics. He also shifts attention from his personal stewardship of the economy, which Americans consider inept, to the broader and more abstract question of inequality, where Democrats should be on firmer ground. In essence, he is attempting to di-
rect the widespread sense that America has lost its way-something that would normally count against him-into exasperation with the Republicans. But Mr Obama must walk a fine line. As Chuck Schumer, a Democratic senator, noted earlier this month, Americans are put off by anything that smacks of soaking the rich, but are attracted to the notion of fairness. (Roosevelt, it should be noted, lost the election following his Osawatomie speech, dividing his party and leaving it in the political wilderness.) The Democrats in the Senate have for months suggested paying for a series of worthy-sounding schemes-most recently an extension and expansion of a soon-to-expire reduction in payroll taxes-by raising tax rates for millionaires. These proposals, all so far stymied by Republican opposition, are intended to show that Republicans, when forced to choose between the interests of the middle class and those of the rich, will abandon the struggling mass of Americans without a second thought. Most polls suggest that voters agree with Mr Obama and the Democrats in principle. Our own Economist/YouGov poll finds that a majority of Americans would like to see the payroll-tax cut extended, for example, and two-thirds of those think a surtax on millionaires is the best way to pay for it. Yet Mr Obama has been harping on about raising taxes on the rich since his first election campaign. The Republicans do not seem to have paid an electoral price for dismissing the idea as class warfare and preventing its implementation in Congress. Indeed, Democrats in swing states have often voted with them when the idea has been put to the test, for fear of being labelled tax-and-spend liberals. Mr Obama seems to be hoping that his
~~
The Economist December lOth 2011
32 United States ~ Republican
opponents, many of whom have put forward proposals for regressive flat taxes, for example, will take their coddling of the rich too far for most voters' tastes. That case will be harder to make if Mitt Romney, the former governor of Massachusetts, wins the nomination. He has the least doctrinaire tax plan in the Republican field, complete with tax breaks exclusively for middle-income groups. In our latest poll, however, Mr Romney has seen his support among likely primary voters decline to 15%, less than half the level of Newt Gingrich, a former Speaker of the House of Representatives who appears to be benefiting from the "suspension" of the campaign of Herman Cain, a candidate dogged by multiple accusations of sexual impropriety. Mr Gingrich supports a flat tax and has denounced Mr Romney's plan as Obama-style class warfare. That presents Mr Obama with a bigger target. He told the crowd at Osawatomie that the debate about inequality "is the defining issue of our time", meaning that he would like it to be the defining issue of the presidential campaign. •
The economy and stimulus
Lool
The economy makes headway. So do efforts to renew stimulus HREE months ago Barack Obama was T firmly in the dock over news that no net jobs were created in August. Some gloomy people even saw a double-dip recession on the way. America, it turns out, was not on the verge of recession, and it still isn't. Subsequent revisions show that 104,000 jobs were in fact created in August. Later months have also been revised upwards, and in November payrolls grew by 12o,ooo, or 0.1%. On December 2nd the government also reported that the unemJobs revival Unemployment rate,%
Change in nonfarm payroll, '000
10.0
500
2010 Source: Burea u of Labour Statistics
2011
ployment rate had declined sharply to 8.6%, the lowest figure for two-and-a-half years, down from 9%. November, it seems, was a very good month. Retailers reported solid sales on and after "black Friday", the day after Thanksgiving on November 24th that marks the traditional start of the Christmas shopping season. Car sales were at their strongest since the days of the cash-forclunkers subsidy programme, back in August 2009. Mortgage applications also ticked sharply higher. The American economy is looking up in large part because it has been down for so long. The recent run of good economic data suggests that the economy is growing at around a 2.5% rate, roughly its long-term trend. That is fast enough to create jobs for a growing population, but not fast enough to reduce unemployment. Instead, the unemployment rate fell in November thanks to two unusual factors. First, the household survey, used to calculate the unemployment rate, has lately been recording stronger growth than the separate, betterknown payroll survey; why, is unclear. Second, and more gloomy, a lot of people have left the labour force, reducing the number who are counted as unemployed. The share of working-age people in the labour market has fallen since the recession ended, holding the unemployment rate down for the wrong reasons. A stronger recovery would probably have begun this year but for a run of bad luck: a rise in oil prices following the Arab spring, disruptions to global supply chains caused by Japan's earthquake, and the deepening debt crisis in Europe. But part of the problem was self-induced. Anxiety among investors rose in August when a stand-off between Mr Obama and the Republicans in Congress almost forced the government to stop paying some of its bills and prompted the first-ever downgrade of the nation's credit rating. In the aftermath, the president saw his approval ratings slump: but approval of Congress fell even more, at one point going into single figures. That seems to have scared both sides into avoiding further confrontation. Fears that the government might shut down on December 16th over funding disagreements are fading; Congress has passed three appropriations bills and is closing in on the remaining nine. More important, Republican leaders have indicated that they would like to extend both a 2% payroll-tax cut and the availability of up to 99 weeks of unemployment benefits. Both were part of a compromise agreement a year ago and are supposed to expire at the end of this year. The disagreement is over how to pay for the extensions, which JPMorgan reckons are worth $160 billion next year. Mr Obama and Senate Democrats would like to expand the payroll-tax cut and finance it
with a surtax on millionaires over the next ten years. The Republicans are using their filibuster power to block that but getting no further with their alternative, which would cut the ranks and pay of civil servants. Some Republican legislators oppose any extension because of the impact on the deficit. The posturing will inevitably continue for a few more days, but compromise seems likely. With the euro zone probably already in recession, America will struggle to maintain even its current modest pace of growth next year. With another self-induced wound, last August's forecasts of a seasonal recession would turn out to have been early rather than wrong. •
Transport in Georgia
Spare a penny? ATLANTA
Taxes for infrastructure ATLANTANS, it is estimated, have the /"\..longest average rush-hour commute in America: 127 minutes. The city's transport infrastructure has not kept pace with its rapid growth and sprawl. According to Georgia's government, the state spends less per head on transport than any other except Tennessee. But fixing the infrastructure means raising taxes-politically unpalatable even in fat years, and this is not one. So in June 2010 Georgia's legislature decided to let citizens vote on whether to raise their own taxes. The Transportation Investment Act (TIA) directed elected officials in each of Georgia's 12 regions to come up with a list of projects. The last of those lists was finalised in October. At the time of next year's state primary elections, citizens in each region will vote on whether to finance those
~~
The Economist December lOth 2011
34 United States ~ projects
by imposing a one-cent sales tax within that region. This is a variation on a taxation model called, rather pleasingly, a SPLOST: a special purpose local-option sales tax passed by a regional body and approved by referendum. On November 8th voters in metro Atlanta approved a total of $3.2 billion in SPLOST funds for the region's schools. Proponents sold that tax as a way to raise money for school construction without raising property taxes. Should the transport bill meet with similar approval, all money collected within each region will stay there. Should voters turn it down, the regional round-table can come up with another list and submit it for a vote in no less than 24 months. In all, TIA-backed projects would cost Georgia's voters over $12 billion in 2011 dollars, with nearly half of that coming from the ten-county Atlanta region. What is surprising is not the size of Atlanta's list-in addition to having some of America's worst traffic, the Atlanta metropolitan area also accounts for more than half the state's population and roughly 75% of its economic activity-but that it was agreed on at all. Animosity simmers between Atlanta and the rest of the state, especially among elected officials. Atlanta proper is heavily Democratic; the surrounding counties lean Republican, with a strong "tea-party" influence. And tea-party groups have come out strongly against the list, claiming it lacks oversight, is poorly planned, violates county sovereignty and invites terrorist attacks by creating a rail network. Fortunately, the plan has the support of Atlanta's mayor, Kasim Reed, its business community, the heads of all ten counties in the region and Nathan Deal, Georgia's Republican governor. The round-table approved it unanimously: no small feat, considering the disparate constituencies its members represent. The list covers a range of projects-building railway and tram lines, expanding highways, surfacing streets and improving bus servicesaround the region. But elected officials making deals is one thing; convincing a farmer in a rural part of Fayette County, on the very edge of metro Atlanta, to tax himself to pay for trams downtown is something else entirely. It will be sold as a contest between stagnation and keeping Georgia competitive, and it will not be an easy sell: according to Mr Reed, polling data show the best result for supporters would be a narrow victory. A poll in September found a slim 51% support the tax. Still, models run in August by the Atlanta Regional Commission show that the completed project will allow around 84o,ooo more people to commute to work in 45 minutes or less. And the improvements will also save $8oom in wasted fuel and time-a pretty penny indeed. •
Technology and civil liberties
Don't shoot ATLANTA
Police may not like being filmed, but they had better get used to it HAT is the most striking image to emerge from this autumn's Occupy W protests? Was it the campus police officer in Davis, California, casually pepperspraying a line of seated protesters? Or the white-shirted cop in New York, doing the same to a pair of unarmed, penned-in women? Perhaps it was a street in Oakland, deserted except for protesters and a line of black-helmeted riot police, the silence broken when one of the cops fires a rubber bullet at a protester filming him. Protesters have complained, as ever, about police infiltration, but as these videos make clear, protesters and other citizens are keeping their eyes on police, too. More than two-thirds of Americans own digital cameras. Around one-third of adults own a smartphone. Most of these devices can record and easily transmit audio and video. Recording police has never been easier, and thanks to social-media and activist networks such as Copwatch, which monitors police activity and posts videos to the web, neither has publicising these recordings. That does not always go over well. People peaceably filming police have been handcuffed, beaten, had their cameras seized, and been arrested for obstructing governmental administration, obstructing an investigation, interference, disturbing the peace, or for illegal wiretapping. In taking such action the police are on shaky legal ground. The right to photograph people, including police officers, in public places, is relatively clear.
Adding audio, however, raises a new set of legal issues. Most states have singleparty consent laws concerning audio recording, meaning that as long as one party consents to being recorded, the taping islegal. In most of the 12 states in which all parties must consent to be recorded, a violation occurs only if the subjects being recorded have a reasonable expectation of privacy. Arguing that police officers carrying out their duties in public have such a right is a challenge. The attorney-general in Maryland, an all-party-consent state, wrote in 2010 that few interactions with police could be considered private. And challenges are mounting in two of the states-Illinois and Massachusettswithout expectation-of-privacy clauses. In Massachusetts last August, a federal appeals court upheld a lower court's ruling that a citizen's right to film police in public is protected by the first and fourth amendments. During oral arguments, one of the judges hearing the challenges to the Illinois Eavesdropping Act worried that allowing recording might hinder the ability of the police to do their jobs. He gave the example of a policeman talking to a confidential informant. Police have also expressed concern about recording, and hence exposing, undercover officers. But of course police can still speak in private. Given the actions of some police officers when confronted with a camera, filming cops may not be prudent. But neither should it be illegal. •
The Economist December lOth 2011
36 United States Detroit nears bankruptcy
Nowhere to run
Insider trading and Congress
Capitol crimes Congress considers legislation to limit its own insider trading
DETROIT
The motor city flirts with fiscal disaster
N THE 1960s, the first hit song from Berry I(That's Gordy's Motown empire was "Money What I Want)". might well be an It
anthem for modern-day Detroit. On December 6th Michigan took the first legal steps towards a state takeover of Detroit. If it happens, it will be the largest American city to be taken over by a state. The problem has been building for decades; declining property values and the flight of better-off people to the suburbs have hit revenues, while the cost of servicing a still-sprawling city has not shrunk proportionately. The effects of the recession, particularly severe in Michigan, have provided the trigger for the crisis. Detroit's mayor, Dave Bing, now says the city will run out of cash in April2012. Failing to fix the problem, he adds, means losing "the ability to control our own destiny". This is a reference to legislation known as Public Act 4 (PA4), which allows the state to appoint an emergency manager for failing local governments and school districts. When an emergency manager is appointed, the authority of elected officials is suspended and the manager assumes control of public contracts, city assets, staff, pay and benefits. On December 1st the governor appointed an emergency manager to the city of Flint. In Detroit resentment is growing over the start, on December 6th, of a 30-day preliminary financial review which may lead to a takeover that the city says it does not need or want. Yet while Mr Bing has denounced the state's actions, they may help him swing the deal he needs to save his city. If the unions refuse, they know the alternative will be worse. As well as wage cuts and1,ooo lay-offs, the mayor needs big concessions from the unions, ranging from pensions and healthcare reform to changes in restrictive work rules. Sandy Baruah, head of the Detroit Regional Chamber of Commerce, reckons Mr Bing's proposals, while painful, are viable. The unions may realise that the game is up. One representative-among the 45 with whom the city must negotiate-says his members feel up against a wall. To add to the difficulties, the fight has become racially charged. One Detroit councilwoman invoked the fight against slavery. A local publication described the governor, Rick Snyder, as a slave-master using a legal "lash" against Michigan's blackmajority cities. John Conyers, a black congressman from Michigan, has written to
OR elected officials life in Washington, F DC, holds many advantages. One is having a network of friends and associates who keep you well informed. But allegations have surfaced that politicians sometimes make use of this privileged access for personal profit. Last month CBS television aired an episode of "6o Minutes" that accused several members of Congress of financia! opportunism usually associated more with Wall Street than Washington. The reason they can get away with it is that insider trading is perfectly legal for members of Congress, at least according to Peter Schweizer, the author of the book "Throw Them All Out", on which the CBs episode drew. This has set off a fuss on Capitol Hill, as congressmen try to decide what the law actually allows. Some authorities doubt that the Securities and Exchange Commission (sEc) could successfully charge a member of Congress with insider trading, because it is unclear to whom
the federal attorney-general asking for areview of PA4, expressing concern that it is being applied in a discriminatory fashion. Jurisdictions with high proportions of blacks, such as Benton Harbour, Ecorse, Flint, Inkster and Pontiac, have all been hit by it. Detroit can expect a lot more of this in 2012 if, during an election year, Michigan's white Republican governor appoints someone with the power to fire the elected, black, Democrats of Detroit. However, attempts are being made to challenge PA4 and if enough signatures are gathered the law can be held in abeyance until a referen-
congressmen owe a "fiduciary duty" and what qualifies as "material, non-public information" in a political context. These elements are clearer at companies, where insider-trading cases usually occur. It is remarkable, though, that congressmen's investments have been so laxly supervised. Members of Congress are not barred, for example, from owning shares in companies that are regulated by committees on which they sit. They are able to trade freely, even if they find out before anyone else about regulations or events that could affect specific industries or the stockmarket as a whole, such as a war, an executive order or a new law. Their unharnessed access to political intelligence may be part of the reason why a 2004 study that measured the performance of senators' stock investments in the mid-1990s found that they outperformed the market by 12% a year. A 2006 bill, the Stop Trading On Congressional Knowledge (STOCK) Act, aimed to hold politicians to the same standards as corporate insiders. It got little support. In the current political climate, members of Congress are under more pressure to distinguish themselves from greedy bankers. More than170 congressmen from both parties have rushed to sign the STOCK Act, or introduce their own version. "It is absolutely essential that we do restore the public's trust," says Spencer Bachus, the House Financial Service Committee chairman, who was among many accused by "6o Minutes" of benefiting from inside information. He denies wrongdoing, and has introduced his own bill, which would require members of Congress to put their assets into blind trusts. But even if a bill of some sort is passed, no one is expecting many showcase trials: after all, the SEC gets its funding from Congress. dum in November 2012. Were that to happen, complex legal battles would be certain. For business, that sort of extended crisis would be an unwelcome outcome, the uncertainty threatening to crush some of the green shoots that have sprouted in Detroit's downtown and midtown areas. The governor risks a great deal by wading into the fight to save Detroit; but the alternatives may be worse. A bankruptcy in Detroit, for example, might also affect other parts of the state. The wealthy county of Oakland would lose its triple-A rating simply because its neighbours are in trouble. •
BMW
Rolls-Royce
GROUP
Mo tor D rs llmited
MEET THE VISIONARY WHO IS HAPPY WITH NOTHING. 100% RECYCLING OF PRODUCTION WASTE. IT'S WHAT'S NEXT FOR US. Walking through the assembly shop, Lisa Pirwitz is pleased with little. Every empty bin of non-recyclable waste is a success for her. Together with her GreenTeam, she set a goal to recycle all assembly production waste at the BMW plant in Spartanburg by 2012. Lisa is convinced this project will be successful if every employee recognizes its value. She also knows that a small creative idea can make a big difference. To pique people's interest in her project, Lisa recently enlisted the help of two unusual spokespeople: a pair of hand puppets made of production waste. They were a big hit and helped raise awareness at the same time. The BMW Group is the world's most sustainable car company for the seventh consecutive year. Find out more about the Dow Jones Sustainability Index sector leader at
www.bmwgroup.com/whatsnext
The Economist December lOth 2011
38 United States
Tort reform
Closing the lottery NEW YORK
The debate over tort reform generates exaggerated claims, but also a few good ideas N HIS floundering campaign for presiItopic dent, Rick Perry has at least brought one into prominence: tort reform. In June the governor of Texas signed a "loser pays" tort law, intended to discourage slight or frivolous lawsuits by making losers pay the winners' legal costs. Conservatives are eager to support it. The right has maintained for decades that America's legal culture smothers small businesses, doctors and innovators. Too bad, then, that the Texas law is timid. "Loser pays" is the norm in many countries, including England, Canada and Germany. But there, "loser pays" is the rule in most torts. The Texas bill awards legal costs only for suits "that have no basis in law or in fact" and are dismissed before any evidence is gathered. Most competent lawyers can write a complaint that clears this bar. Even the Texas trial-lawyers' association eventually endorsed Mr Perry's law. Only one other state, Alaska, has loserpays, and only for a portion of fees. More intriguingly, Florida imposed "loser-pays" in 1980 for medical-malpractice cases. The number of claims dropped, but the average award rose, suggesting that more highmerit cases got their day in court while low-merit filings were deterred or settled for less. But many losing plaintiffs were too poor to pay the winners' costs, while in one case a losing defendant had to pay millions for the plaintiff's legal fees. Even doctors supported the law's repeal in 1985. Marie Gryphon of the Manhattan Institute, a centre-right think-tank, who is author of a loser-pays proposal, says that Texas got "much less than half a loaf", and that Florida was spooked too quickly. She
argues that loser-pays countries need legal insurance, which can be bought (for example) in England for just £1oo-2oo ($150-300) after an alleged loss, but before a suit is filed. Lawyers can advance the premiums and add them to their bills. In other countries, such as Germany, many households carry standing legal insurance with a small monthly premium. Ms Gryphon argues that in such a mature loser-pays market more small-value but high-merit cases would be brought, while both small "nuisance" suits and big "lottery" suits would be less attractive to lawyers. Loser-pays has yet to be properly tried in America. Another idea, however, is in place in many states: capping damages. In the popular imagination runaway juries routinely impose huge non-economic damages (to punish a defendant or make up for a plaintiff's suffering). In practice, headline-grabbing awards are often reduced by judges: the notorious $2.7m in Distorted diagnosis Texas direct-care physicians Total, '000
per 100,000 people
45
170 TORT REFORM I
40
160
I
35
150
30
140
25
130
20
120
1'
4'
1990
95
2000
05
10
Source: David Hyman, Charles Silver, Bernard Black
punitive damages for a woman who spilled scalding McDonald's coffee on her lap in 1994 ended up at $48o,ooo. Big damage awards are especially associated with medical lawsuits. But doctors' insurance policies rarely pay more than $rm, and often less. Patients must either accept the insurance company's quick and guaranteed payment, or fight on through debtor-protection laws to get at the doctor's personal assets. Most take the insurance money. This has not stopped states from capping damages. Some 30 have now done so. Texas politicians, including Mr Perry, credit the state's 2003 cap of $250,000 for most cases for bringing a flood of doctors to the state, though the extent of that is disputed. They often cite a sustained jump in medicallicences granted (which began in about 2006). Our chart, based on research by three university economists, took a different metric, using state health department's figures for doctors who work directly with patients. These were on a gradual upward trend well before 2003, and show no acceleration after that. Per-capita numbers begin, in fact, to flatten out around 2003. The caps did achieve their direct aim: medical-malpractice claims fell sharply in number, and awards dropped just as sharply in value. Insurance premiums for doctors have fallen, too. But these have failed to bring down overall Medicare costs, a key indicator of medical costs generally. Insurers are happier and so are doctors, but health care is no cheaper. So the two sides are locked in a standoff. Trial lawyers and their Democratic allies call for health reform along European lines to reduce costs, making torts less expensive. Republicans call for tort-reform first, saying it is the best way to keep costs down. But Massachusetts's universal health-care law has not (yet) bent the costcurve, and Texas-style damage caps have not in fact increased doctor numbers. In reality, incentives must change in American health care across the board, and tort reform is only part of that. Nonetheless, good ideas deserve serious debate. "Loser pays" should not shield wrongdoers. Keith Hylton of Boston University's law school estimates that the welfare-enhancing effect of making negligence more expensive would be the biggest economic benefit of loser-pays. And high-merit but low-stakes cases should be more economical to file. Herbert Kritzer, of the University of Minnesota, an opponent of loser-pays who is sceptical about the utility of caps on awards, suggests another reform: giving juries guidelines for damages in similar cases, which would trim expectations of big payouts. More widespread adoption of such sensible rules would not transform the tort system; but it could certainly improve it. •
•
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40 United States
The Economist December lOth 2011
Lexington The wretched Middle East I
A region that an American presidency turns away from at its peril tarian war. As for the Arab awakening, it is true that Mr Obama did a fair job in February of using America's influence over Egypt's army to prevent a bloodbath. But now that the army that defended the revolution looks tempted to steal it, and radical Islamists of all stripes have prospered at the polls, the trick of aligning America's interests with its values looks a bit harder to pull off. American energy independence? That is still an aspiration, not a reality. Oil is a globally traded commodity, which means that if the supply from the Gulf is pinched the price will rise in America, even though America buys most of its oil elsewhere.
Into Iran?
AT THE end of this month the last American troops will leave ./"\..Iraq, marking the conclusion of an eight-year misadventure in which some 4,500 American soldiers and many, many more Iraqis lost their lives. On December 1St Vice-President Joe Biden told American and Iraqi troops in Baghdad that even after its soldiers had left, America would be a loyal partner of the new Iraq and stay "deeply engaged" throughout the region. Back home, however, a subversive new idea has taken hold among the makers of foreign policy. Isn't it time for America to turn away from the scorpions' nest of the Middle East and pivot towards Asia? Since the wish is father to the deed, the supposed "pivot" has started already. Barack Obama declared last month that America had made "a deliberate and strategic decision" to be "all in" in the Asia-Pacific arena in the 21st century. Nobody in the administration thinks that the superpower can turn away from the wretched Middle East immediately, but a certain theory of the case is doing the rounds. Not right now, but soon, it is argued, America might at least be able to lower its profile there. The thinking runs something like this. First, the Arab awakening gives America a chance to align its interests with its values: instead of supporting the rulers against the street it can at last go with the grain of history. Second, Mr Obama has Iran well and truly "contained" by sanctions. Third, the dictatorship of Bashar Assad is about to collapse, and that will pull down the evil axis of Iran, Syria and Hizbullah. Fourth, as America's influence wanes, Turkey's is growing-and Turkey is a NATO member and American ally. Last, America no longer imports more than 10% of its oil from the Middle East, so it can afford to take a more relaxed view than it once did of the region's combustible dynamics. All these points have some merit. But to see in them a case for America to lean back as it turns to Asia you have first to plant a pair of rose-tinted spectacles on your nose. As Britain discovered after withdrawing from east of Suez nearly half a century ago, great powers that think they can leave the Middle East behind them are sooner or later sucked back in. Start with Iraq. Despite Mr Biden's breezy optimism, the politics of Iraq remain as volatile as gelignite. Many analysts fear that the departure of American troops makes it far likelier that an Iraq which has failed to resolve its internal rifts will fall back into sec-
Apart from oil, the other issue that anchors America in the region is its bipartisan commitment to the safety of Israel. And Israel right now believes that it is facing an extraordinary threat, in the shape of Iran's nuclear programme. Mr Obama has worked harder on Iran than he gets credits for. Tom Donilon, his national security adviser, noted last month that Mr Obama had persuaded allies to impose "unprecedented" sanctions that have left Iran boxed-in and isolated. If sanctions fail, Mr Donilon added, Iran should remember that America had taken no "options off the table". In other words, the president who sent SEALS and drones into Pakistan to kill Osama bin Laden and decimate al-Qaeda might in the end use force in Iran too. It is a good story. The trouble is that nothing America has done or may have done-not the sanctions, not the threats, not a mysterious campaign of assassination and sabotage-has yet stopped Iran from continuing defiantly to enrich uranium. And it is not only Iran that seems to doubt whether Mr Obama will ever take military action against it. Plenty of Americans, some glum, some relieved, have reached the same conclusion. In the Weekly Standard, the parish magazine of the Republican Party, Thomas Donnelly of the American Enterprise Institute argued recently that, contra Mr Donilon, Iran is probably pretty satisfied with the course of events. America was leaving Iraq and about to "bug out" of Afghanistan too. Iran has silenced its internal opposition and the Arab spring has plunged its Sunni foes into disarray. To judge by its public agitation, Israel too is losing faith in Mr Obama. Yes, the president has shown that he is not afraid of military action. But he also wants to be re-elected, and pushing Iran too hard could hoist the oil price and hurt the recovery on which his re-election depends. A meeting last weekend of the Saban Forum, an annual colloquium in Washington of high-ups from Israel and America, saw sulking, scolding and mixed messages from both sides. While exhorting Israel to "just get to the damn table" with the Palestinians, and mend relations with Turkey, Leon Panetta, America's defence secretary, said a military attack might delay an Iranian bomb for only a year or two, at the price of aregional war. That statement hardly makes it sound as if the military option is genuinely still on the president's table. Little wonder that Israel, unsure whether Mr Obama would in fact ever strike Iran, is debating whether a tight election year, one in which the Republicans are in full cry against Mr Obama's alleged "betrayal" of the Jewish state, might be the very time to do so itself. A pivot to Asia? Of course. That, says Martin Indyk of the Brookings Institution, a former ambassador to Israel, is where the great game has moved. Even so, this is decidedly not the moment for America to relax its vigilance in the Middle East. • Economist.comfblogsflexington
41 Also in this section 42 More floods in Colombia 42 Mining in Peru 44 Publishing in Latin America
For daily analysis and debate on the Americas, visit Economist.comfamericas
Canada and the United States
The border two-step OTTAWA
A deal that attempts to assuage American fears about security and Canadian worries about obstacles to trade VER since an unsuccessful attempt by the United States to conquer Canada in the war of 1812, Canadians have worried that Americans harbour ambitions to control, if not to own, their territory. This means that bilateral accords, of which there are some 698 on file, are jealously examined for their impact on Canadian sovereignty. The latest deal, called Beyond the Border and announced by Stephen Harper, Canada's prime minister, and President Barack Obama in Washington on December 7th, will attract particular scrutiny, because it involves not just trade but the sensitive issue of shared security. Mr Harper's aim in seeking the deal was to dismantle at least some of the restrictions that have piled up at the border in the name of security since the terrorist attacks of September nth 2001. The United States has agreed to do so if Canada meets its security concerns by providing more information on travellers, adopting us methods of baggage screening and exit controls, and harmonising a host of other security measures. A separate deal on regulations commits the two countries to work toward common standards on everything from food safety to locomotive emissions. "These agreements represent the most significant step forward in Canada-us co-operation since the North American FreeTrade Agreement (NAFTA)," says Mr Harper, whose goal was to protect Canada's access to the American market.
E
Doing so is of great concern to Canadian business. Although the government is trying hard to find other markets, concluding a host of free-trade agreements with Latin American countries and negotiating broader economic pacts with the European Union and India, the United States remains by far Canada's biggest trading partner, buying 73% of goods exported last year and supplying 63% of imports. Bilateral trade in goods and services totalled C$646 billion ($627 billion) in 2010. Yet this relationship has suffered recent blows, including the Buy American provisions in the jobs bill, a new fee for cross-border travel and the administration's stalling on approval for the Keystone oil pipeline from Alberta to Texas. But some aspects of Beyond the Border are controversial in Canada. That is especially true of passing on information about travellers. Even before the deal was announced, the New Democratic and Liberal parties pointed to concerns flagged by the privacy commissioner, an officer of Parliament, and accused the Conservative government of selling out to the Americans. The two governments say they will stay within the legal and privacy regimes of both countries and would develop joint privacy principles to guide their intelligence sharing. There is also opposition to harmonising product and safety rules. "The prevailing view in Canada is that regulatory co-oper-
ation will erode our standards, which are generally considered to be higher than those of the United States," the Conference Board, a business lobby, reported recently. None of this is likely to derail the agreement in Canada. Mr Harper enjoys a parliamentary majority. Several prominent Liberals are now among the business cheerleaders for the deal. And anti-American feeling north of the border has recently subsided. Canadians like Mr Obama a lot more than they did his Republican predecessor, George Bush. They pity rather than envy Americans because of the higher unemployment rate and more depressed housing market south of the border. The bigger question is whether Mr Obama can implement his end of the deal, given the other demands on his time and political capital during an election year. Although a large majority of Americans consider Canada to be a fair trader (a recent poll found 81% felt like this compared with 41% in relation to Mexico and 29% for China), they are generally unsympathetic to trade deals in today's economically depressed climate. The nativist wing of the Republican Party opposes Beyond the Border, just as it did an earlier failed attempt to deepen NAFTA, which involves Mexico too. Despite being America's largest trade partner and energy supplier, Canada has a low profile in Washington, except when it finds itself in the spotlight for the wrong reasons, such as being a source of so-called dirty oil from the Alberta tar sands. Mr Harper is doing his best to hedge his bets. He has begun to cultivate various Asian countries, especially China. Snubbed by the United States over the Keystone pipeline, he made a point of telling China's president that Canada is keen to supply more energy to Asia. But geography is still a big part of Canada's destiny. Beyond the Border is important. •
42 The Americas
The Economist December lOth 2011
Colombia's floods
That damned Nina BOGOTA
Endless rain exacts a heavy toll
N THE fictional Colombian town of MaIHundred condo, in Gabriel Garcia Marquez's "One Years of Solitude", it rains ceaselessly for four years, n months and two days. Sadly, in Colombia life has recently been imitating art. Torrential rains have battered the country for much of the past two years, destroying roads, unleashing mudslides, flooding houses and farmland and leaving millions homeless. The rains have been bolstered by what Juan Manuel Santos, Colombia's president called "that damned Niiia" (referring to a disruption in weather patterns associated with unusually low surface temperatures in the eastern Pacific). They have caused114 deaths in the three months to December 2nd, according to the Red Cross. Another 21 people are missing. Seven women died when a mudslide buried a house in To lima on December sth. Rather than guerrillas, violent crime or the economy, it is the floods that are "the worst problem" he has had to face since taking power in August 2010, Mr Santos has said. Many rivers have burst their banks. In Cordoba cattle are stranded on high ground, surrounded by pastures flooded by the San Jorge river. The Bogota river, which has reached its highest level ever recorded, has inundated the main road north from the capital with several feet of water. On November 21st a mountainous stretch of the highway to Buenaventura, the country's busiest port, collapsed at Alto de La Linea, causing a massive queue of lorries. The road was opened to some traffic a few days later, only to be blocked again by another mudslide. The road between Barranquilla and Cartagena has also been sliced in two. All told, some 4m people have been affected by flooding in the past two years, across 23 of Colombia's 32 departments. The rains this season have not been as heavy nor as constant as last year, when they were seven times heavier than average, according to meteorologists. But with many areas still waterlogged, flooding has been worse this time. Last year's flooding caused economic damage worth $5.1 billion (or 2% of GDP). Officials say the cost will be lower this year; analysts say the economy will still grow at around s%. The authorities were hardly caught off guard. After the 2010 floods the government set aside 1.65 trillion pesos ($8som) for 4,250 public-works projects to mitigate the effects of the next rainy season. But only 400 have been finished (another 68o
are near completion). Cecilia Alvarez, who manages the government's reconstruction fund, blames local officials for the delays. Local elections in October distracted many mayors. She says the fund will set to work repairing roads, schools and health centres "but to start, we need the rains to stop." Yet after a brief respite over Christmas, the meteorologists say the first three months of next year-normally the dry season-may well be wet. And then the next rainy season will start. • Mining in Peru
Doing the Conga LIMA
The president takes on the protesters
INCE he took office as president in July, Ollanta Humala has proffered few S words to Peruvians, giving only one press conference and few interviews. He was characteristically laconic on December 4th when he declared a state of emergency in the northern department of Cajamarca, dispatching the army to quash weeks of protests against Minas Conga, a giant mining project. His television address announcing the measure lasted less than three minutes. But it could come to define his five-year presidential term. As a leftist candidate in the past two presidential elections, Mr Humala railed against foreign mining companies and courted the social movements that oppose them. But he knows that as president his standing will depend mainly on whether he can maintain Peru's recent rapid economic growth. Growth is now slowing, as in the rest of the world, although it will still be over 6% this year. Matching or beating that rate in future will turn on how much of the $so billion in mining and hydrocarbons investment planned for the next five years actually goes ahead.
Minas Conga, a $4.8 billion copper and gold project, would be the largest single mining investment in Peru's history. It is an expansion of Minera Yanacocha, Latin America's biggest gold producer, which is mainly owned by America's Newmont and Peru's Buenaventura. Conga would open by 2015 and pay $3 billion in taxes over the next 19 years, half of which would stay in Cajamarca. But the project would turn several small Andean lakes into reservoirs or tailing ponds. Some locals support Conga. Others worry that it could threaten water supplies for farming. Yanacocha's own environmental record has not been spotless. Nevertheless, Cajamarca's regional president, Gregorio Santos, waited a year after the project's approval before calling for a new environmental-impact study. He then went further: in alliance with extreme-left groups last month he called an indefinite "strike" to stop Conga. The demonstrators blocked roads and shut the airport; public offices and private businesses closed and losses mounted to $1om a day, according to the local chamber of commerce. As the protests grew violent, Newmont agreed to a government request to suspend the project, pending a review. But the government has refused to bow to the protesters' demands to scrap it. Most Peruvians will support the state of emergency. The conservative opposition had earlier berated Mr Humala for weakness in his handling of the dispute. Several big mining and electricity projects have been cancelled this year because of local protests. The task for Mr Humala is to put in place procedures for evaluating mining and other big projects that most Peruvians see as fair. But one thing now seems clear: those pundits who predicted that an economic slowdown would prompt Mr Humala to move further to the left were wrong. The president is a man of as few principles as words. •
Hands off our lake
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The Economist December lOth 2011
44 The Americas
Publishing in Latin America
A literary deficit GUADALAJARA
Brazil apart, publishers are struggling to persuade the growing middle class to read more books INY fingers wiggle through the holes in T the pages of "A Moverse" ("Let's Get Moving"), a children's picture-book that lets readers pretend their digit is a eat's tail or penguin's beak. While managers in suits talk print-runs and profits in one hall of the Guadalajara International Book Fair, the world's biggest Spanish-language literary get-together, shrieks of excitement can be heard from young customers in the children's area next door. Illiteracy and poverty once denied the pleasure of reading to many Latin Americans. That should no longer be the case: a quarter of Mexicans born before 1950 are officially classed illiterate but only 2% of those under 30. And less than a third of Latin Americans now live below the poverty line, compared with half in 1990. The newspaper business has taken note. Paid-for daily newspaper circulation in Latin America rose by 5% (21% in Brazil and 16% in Mexico) between 2005 and 2009, according to Larry Kilman of the World Association of Newspapers and News Publishers. Newspapers have won over young readers, says Mr Kilman. Argentina's Clarin group, for instance, markets different titles to different age groups. Regional titles in Mexico's drug-war hotspots have seen spikes in circulation, he adds (though they have also suffered violence from the mobs they expose). In books, the picture is more mixed. Publishers are churning out more new titles than ever. Sales in (Portuguese-speak-
ing) Brazil, the biggest market, are rising. On December sth Britain's Pearson (which owns so% of The Economist) announced the purchase by its Penguin subsidiary of 45% of Companhia das Letras, Brazil's most innovative literary publisher. Things are less bright in the Spanishspeaking world. In Mexico and Argentina, Latin America's second and third markets, book sales have been falling. Thanks to the "Twilight" vampire saga and a self-help series, Spain's Grupo Santillana, the region's biggest publisher, reports that its sales of titles aimed at teenagers have held up. But Mexico's publishers' association says that total sales last year were 139m copies, down by 12% from 2005. Many of these are textbooks, for which demand is pretty steady. But in the four years to 2009 sales of novels fell by 39% (to 8m) and of children's books by 42%, to 13m. That was the year that recession whacked Mexico. With economic recovery, many publishers at this year's Guadalajara fair, which closed on December 4th, report better sales. The stagnation has deeper roots. Headline statistics flatter the reading prowess of Latin Americans. International tests show that almost half the region's secondaryschool pupils fail to reach the "minimum acceptable level" of literacy, according to the OECD, a mainly rich-country thinktank. Some middle-class adults set a poor example: book lovers cringed when Enrique Peil.a Nieto, who leads the opinion polls for Mexico's presidential election,
seemed stumped when asked at Guadalajara to name three books that had made a mark on him (he eventually came up with the Bible, the novels of Jeffrey Archer and "The Eagle's Throne" by Carlos Fuentes, whose authorship he misattributed). One answer is to make books more widely available. Mexico has 7,000 public libraries and 4,100 "reading rooms" in which volunteers are given a set of 100 books to lend at churches or workplaces. The government has installed mini-libraries in bus stops and even has a fleet of emergency "book bikes" which dispatch novels to places where Mexicans are at risk of boredom, including in long queues to cross the United States border. "We have to tell people that putting a book on the table is as important as putting bread on the table," says Soccoro Venegas of Conaculta, the state cultural agency. Colombia, too, has a large network of public libraries. The small size of the market means that books have traditionally been sold like luxury goods in Latin America. Spain has one bookshop for every 10,000 people. By contrast, Argentina has one for every 20,000, Brazil one for every so,ooo, and Mexico one for every 70,000. Modern book superstores, with cafes and comfortable chairs, are marching across the region's bigger cities, especially in Brazil. But they co-exist with old-fashioned shops, where books must be requested by name from counter staff or are wrapped in browser-proof cellophane to prevent damage. Other places are book deserts. That helps to explain the popularity of fairs, such as Guadalajara's. A fifth of Mexicans (but only a tenth of Brazilians) say these are where they get most of their books. Publishers explain the high price of books as a consequence of short printruns and the high cost of imported paper. Absurdly, in Mexico the English version of "The Girl With the Dragon Tattoo", a popular thriller, can be bought more cheaply than its Spanish translation. Shopkeepers complain of piracy, which stalks the book market as it does that for nvns. The shift from paying in cash to credit cards has squeezed margins further, according to Hector Chavez, head of Educal, a state-run bookshop chain in Mexico. Technology has been slow to disrupt this low-volume, high-margin business. Internet bookselling has been hampered by relatively low levels of broadband penetration and poor postal services. Amazon (and its Kindle e-reader) set up shop in Spain only this year; it has plans to enter Chile, Argentina and Brazil. Some 4,000 ebook titles are already available in Portuguese in Brazil, according to O'Reilly Media, a consultancy. Roberto Feith of Edit ora Objetiva, a publisher, has forecast that ebooks will make up 7% of the Brazilian book market by 2015. Time for Spanish-language publishers to wake up. •
45 Also in this section 46 Chinese politics and the WTO 47 Japan's energy crisis 47 Retail reform in India 48 Banyan: Hornets' nest in Pakistan
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China's economy and the WTO
All change HONG KONG
In two articles, we examine how China has been altered by its entry into the WTO ten years ago. First, the economy. Over the page, the political impact HE World Trade Organisation (wTo), T like many clubs, denies patrons the right of automatic readmission. Having quit the organisation's predecessor shortly after the Communist revolution of 1949, China had to wait 15long years to gain entry after reapplying in the 1980s. The doors finally opened on December nth 2001, ten years ago this week. The price of re-entry was as steep as the wait was long. China had to relax over 7,000 tariffs, quotas and other trade barriers. Some feared that foreign competition would uproot farmers and upend rusty state-owned enterprises (soEs), as to some extent it did. But China, overall, has enjoyed one of the best decades in global economic history. Its dollar GDP has quadrupled, its exports almost quintupled. Many foreigners also prospered. American foreign direct investment reaps returns of 13.5% in China, compared with 9.7% worldwide, according to K.C. Fung of the University of California, Santa Cruz. China imposes lower tariffs on average than Brazil or India. The gap between what it can charge, under WTO rules, and what it does charge is also unusually small. So unlike its peers, China could not raise tariffs much even if it wanted to (see chart). Yet in America, China's single biggest trading partner, sentiment towards the country has turned starkly negative. In a recent poll, 61% of Americans said that China's recent economic expansion had been
bad for America; just 15% thought it had been good. This partly reflects China's controversial currency regime. By keeping the exchange rate down, China's critics allege, it has gained a substitute for the mercantilist measures it gave up to join the WTO. Foreign frustration is partly a sign of China's success. As its economy has grown and matured, the stakes have risen. Foreign firms lament losing trade battles they might not bother to wage in a less lucrative market. They also face competition from local upstarts in markets where no such rivals previously existed.
I
No headroom Average tariffs and tariff ceilings, 2010, % Maximum permissible tariff of which: actual tariff 0
10
Colombia Indonesia Egypt Mexico Brazil Peru Thailand Malaysia India South Korea China Source: WTO
...
20
30
40
50
Electronic payments are one example. China's first ever payment card was issued in 1986 by MasterCard. Foreign brands remained dominant at the time of China's WTO entry. But shortly afterwards, China's central bank established a domestic competitor, China UnionPay, and gave it a de facto monopoly over the handling of local-currency payments between merchants and banks. This setback might have been easier to take for foreign companies had the market not since grown tenfold, to $L6 trillion, according to The Nilson Report, an industry newsletter. China's economy has evolved faster than anyone hoped. But its economic philosophy has not. Long Yongtu, who helped China win admission to the WTO, recently said that China is now moving further away from the organisation's principles. To modernise its economy, it has remained wedded to industrial policies, state-owned enterprises, and a "techno-nationalism" that protects and promotes home-grown technologies. Many foreign companies feel they must compete not with Chinese firms but with the Chinese state. Between them, China's central and local governments own over 100,000 companies and implicitly favour many more. Thanks to the WTO, foreign firms are no longer required to hand over technology in exchange for entry to China's market. But many still feel an informal pressure to do so. China is also keen to promote its own firms by enforcing its own technological standards, such as for 3G mobile phones. Many of these interventions violate the spirit, if not always the letter of WTO rules. In response, America often pushes back bilaterally rather than in Geneva, according to a former American trade negotiator. This is partly because companies worry they will face retribution from China's gov- ~~
The Economist December lOth 2011
46 Asia ~
ernment if they provide evidence against it in a trade case. It is also because much of what China does falls into a grey area that is not easy for the WTO to police. China, on the other hand, is growing more comfortable with the WTO machinery. In its early years as a member, it shied away from confrontation, points out Henry Gao of Singapore Management University. In 2006, for example, America threatened to file a complaint over China's duties on kraft linerboard. China lifted the duties the next working day. But now the Chinese have learned the ropes, they have also become more proactive. "Now they defend themselves," says Nicholas Lardy of the Peterson Institute, a Washington think-tank. "They initiate cases. And when they lose, they comply." In some cases the discrimination is no
worse than before, it is simply more visible. As part of its WTO agreement, China now circulates draft laws and regulations for 30 days to collect comments. That has made it easier for foreigners to spot foul play. America recently complained that China had failed to notify the WTO of nearly 200 subsidy programmes, such as those supporting green-energy technology.lt knew this in part because China, following its newly transparent practice, had disclosed many such programmes online, the former negotiator said: "Similar policy announcements were neibu (for limited distribution) in the past." China's trade policies may look a little uglier than WTO members had hoped when they opened the club's doors ten years ago. But that is partly because the lights have been turned on. •
Chinese politics and the WTO
No change BEIJING
Hopes of sparking political change have come to nothing so far HEN trying to persuade Congress in that China should be let into W the World Trade Organisation (WTO), 2000
America's then president, Bill Clinton, knew how to win over the sceptics. China's admission, he said, was likely to have "a profound impact on human rights and political liberty". A decade on, China's disappointed liberals no longer suggest that freer trade will speed political reform. China's media have been trumpeting the tenth anniversary on December nth of the country's WTO accession. In China as much as in America, the event was seen as of far greater importance than a mere pledge by China to reduce barriers to its markets (moves towards which had long been under way). For both countries it was a crucial part of restoring calm to a relationship that had been marred by annual
fights in Congress over whether to keep granting China most-favoured-nation trading status (as enjoyed by most of America's other trading partners). Mr Clinton's remarks preceded bitterly contested votes in Congress in 2000 that ended the annual renewal process and ensured America would share any benefits from the marketopening measures pledged by China on entering the WTO. Chinese officials did not share Mr Clinton's belief in what he called the "quite extraordinary" change that the WTO would bring about in China, politically as well as economically. Such views were bolstered in the West by supportive comments from some Chinese dissidents. ("Before, the sky was black; now it is light. This can be a new beginning," Mr Clinton quoted one of them, Ren Wan ding, as saying.)
But even the man seen by many in the West as China's arch (economic) reformer, the then prime minister Zhu Rongji, had no truck with such views. A recent four-volume set of Mr Zhu's speeches, including many not previously published, shows him to have shared hardliners' concerns about perceived Western efforts to undermine Communist Party rule in China. "Western hostile forces are continuing to promote their strategy of Westernising and breaking up our country," he told provincial officials in one now-declassified speech, four months after China had joined the WTO. He accused such people of conducting "infiltration and sabotage" in an effort to foment instability, pointing to large-scale protests early in 2002 by workers in state-owned enterprises (independent observers detected little if any sign of foreign involvement). Mr Zhu's reformist zeal in the economic realm helped to foster the impression of a country willing to take considerable political risks in order to create a more marketdriven economy. The then party chief, Jiang Zemin, was also pushing through a controversial revision to the party's constitution to allow owners of private businesses to become members. But high hopes among some Chinese liberals faded as the decade wore on. Cao Siyuan, who heads an independent think-tank in Beijing, says he and likeminded intellectuals were "over-optimistic" about the ability of the WTO to promote further change, such as the development of a robust and independent legal system. The last decade has seen huge social changes, but these have been a legacy mainly of pre-wTo membership reforms, such as the privatisation of housing and the loosening of controls on internal migration. And with the Communist Party again facing a big leadership shuffle next year, few believe that long-neglected political reforms will be revived any time soon. Mr Cao has recently published a call for a "division of powers" within the party as a step towards making China more democratic. He claims many in the party support such a notion, but do not dare say so openly. Mr Cao says police stopped him from leaving his home during the visit to Beijing in August by America's vice-president, JosephBiden. In his speech in 2000, Mr Clinton said that WTO membership would accelerate the shrinkage of the state-owned sector which had been "a big source of the Communist Party's power". This, he said, would lead to "profound change". Many liberals complain, however, that remaining state firms not only still control the commanding heights of the economy but are in some cases stepping up their resistance to encroachment by the private sector. In recent years officials have increased ~~
The Economist December 10th 2011 ~
their efforts to ensure that party cells are set up in private firms. Several local governments have started requiring private companies to contribute about 0.5% of their payrolls to sponsor party activities on their premises. Such was the seeming status symbol of WTO membership a decade ago that few in China openly criticised the decision. A Beijing academic, Han Deqiang, was a rare exception. His book, "Collision: the Globalisation Trap and China's Real Choice", gave warning of an American plot to use the WTO to "Westernise" China. He remains a fierce critic. Karl Marx, he says, would have agreed with the view that economic liberalisation leads to political change. "It's a matter of time," he says. Perhaps Mr Clinton can draw comfort. • Japan' s energy crisis
Nuclear winter TOKYO
Times are getting tougher for some of Japan's regional power monopolies T.(YUSHU and Kansai, Japan's two most
.I nuclear-dependent regions, are bracing for a bitter winter. Citizens of both areas, many of them elderly, have been advised that they may have to turn down the heating because of shortages of nuclear power. It will be another hardship in analready trying year; after the March nth nuclear disaster they had to swelter through the summer with restrictions on air conditioning. But this time it is not just TEPCO, operator of the stricken nuclear power plant in Fukushima, that is getting the blame. People are putting their local power suppliers in the dock too. Take Kyushu Electric. The monopoly that covers the south-western part of Japan will on December 25th suspend the last of its six nuclear reactors for routine maintenance, as it has its other five. In less than a year nuclear power will have dropped from providing 40% of the region's electricity to zero. This is a generic problem. Normally reactors restart once maintenance is complete, but across Japan public safety concerns mean that no suspended reactor has been authorised to resume operations since March nth. Only eight out of 54 are still in service. In Kyushu Electric's case, however, some problems are self-inflicted. In June the power company sought to influence a publicly broadcast hearing by asking employees covertly to send in e-mails supporting the restart of a nuclear reactor. When the scandal broke, the company recruited an independent panel headed by a former Tokyo prosecutor, Nobuo Gohara,
Asia 47 to investigate. It concluded that the attempted manipulation had indeed taken place. It also said that an internal Kyushu Electric memo indicated that Yasushi Furukawa, governor of one of the local prefectures of Saga, encouraged the sending of supportive e-mails. But when Kyushu Electric sent a separate report on the matter to the Economy and Trade Ministry (METI) in October, it played down the independent committee's findings and denied Mr Furukawa's involvement-as did the governor himself. Although Kyushu Electric's boss has tendered his resignation, the company's 13man board has rejected it, so he remains in his job. Even METI was unimpressed. Its head said last month that he would notallow Kyushu Electric to restart reactors in Kyushu because of the poor governance, indicating that he wanted heads to roll. Mr Gohara, the prosecutor, believes the more Kyushu Electric sticks to its guns, the harder it will be to rebuild trust. "All they are doing is giving more ammunition to the anti-nuclear people," he says. Kansai Electric (KEPco) is in a different pickle. The utility that covers the cities of Osaka and Kyoto will have only one of its n reactors working by the end of December. To restart them, prefectures like Kyoto (with a population of 2.6m), whose nuclear-power plants lie in an adjoining prefecture, have demanded for the first time to have a say over whether the plants are safe. What is more, Osaka's anti-nuclear mayor, Toru Hashimoto, has threatened to end KEPCO's monopoly on power generation and distribution. His is not just the loudest voice in regional politics. His city, Osaka, is KEPco's biggest shareholder. There will be plenty for concerned citizens to mutter about this winter as they huddle together to keep warm. •
No fission
Market reform in India
Off their trolleys MUMBAI
India shelves a key retail reform HE announcement on December 7th T by India's diminutive finance minister, Pranab Mukherjee, had been expected. A decision two weeks earlier to allow foreign supermarkets into India was to be "suspended", he said. The suspension could be indefinite, although the rules for "single brand" shops may yet be relaxed. The embarrassing result may be an influx of smart handbag stores from Paris and Milan, while foreign supermarkets remain banned from trying to sell food more cheaply and efficiently than their Indian rivals. The ruling Congress party faced a mutiny in its own ranks, anger from smaller coalition partners and ferocious resistance from the opposition party, the BJP. Parliament had been shouted to a standstill for days. As he announced his u-turn, Mr Mukherjee expressed the hope that MPS would start passing laws again. "Only ten days are left," he said of the present winter session during which, so far, nothing has been achieved. Other bills awaiting attention concern more controversial issues, such as land reform, corruption and mining. The likelier outcome, though, is more sound and fury and little action. The humiliating defeat may come to define the present government's weakness and India's fear of reform even as its economic outlook dims. The debacle also highlights the isolation within Congress of reformers such as Mr Mukherjee and the prime minister, Manmohan Singh. Then there is the electoral cycle. There could now be two years of partisan and populist politics, with a flurry of state elections in 2012leading up to a general election by 2014. The time to pass hard reforms may have passed. Unless, that is, the economy tanks. Already growth has slowed from over 9% to 6.9%. Part of that reflects the malaise in the global economy. But it is also down to an investment slump as Indian firms lose confidence that bottlenecks in their own economy will be addressed. If investment does not perk up, and especially if it declines, growth could slow to just 5·6% next year, reckon economists at Citigroup, a bank. Nobody expects that yet. An unspoken rule has it that India's political class passes difficult reforms only when the economy slows down enough to give it a fright. That rule probably still holds true. But the events of the past few weeks raise a scary question: just how low does growth have to go?
The Economist December lOth 2011
48 Asia
Banyan
I
Hornets' nest
Why Pakistan may be America's most dangerous ally
different ways, both Pakistan's sober-suited diplomats ItheNandTHEIR its turbaned, bearded terrorists have this week reminded world that their country remains indispensable to a settlement in Afghanistan. In protest at the killing in November of 24 Pakistani soldiers by NATO and Afghan forces, the diplomats boycotted a conference in Bonn at which 90 countries gathered to discuss Afghanistan's future. The next day, on the festival of Ashura, especially holy for Shia Muslims, some 6o died in apparently co-ordinated terrorist attacks in three Afghan cities. A Pakistanbased extremist organisation claimed responsibility. Pakistan's absence meant that the Bonn conference offered little reassurance about Afghanistan's stability after 2014, the year when America and its NATO allies intend to complete handing over security to Afghan forces. The Ashura attacks raised the nightmarish prospect that the country might fall prey to one of the few curses it has been largely spared in the past decade: sectarian bloodletting between the Sunni majority and the Shias. Many in Afghanistan and in NATO will see the two events as related: terrorist attacks as both payback for the Pakistani soldiers' deaths and a reinforcement of the diplomatic message. Senior American officials have been ever more vocal in denouncing the links between Pakistan's spies, the Inter-Services Intelligence agency (ISI) and the terrorists. In September the previous chairman of the Joint Chiefs of Staff, Admiral Mike Mullen, called one group, the Haqqani network, a "veritable arm" of the IS I. Pakistan of course denies any such links. American diplomats, although convinced that the ISI dabbles in terrorism, think Admiral Mullen overstated the case. The latest attacks have not been claimed by either the Haqqani network or the Afghan Taliban, whose leadership is believed to be based in the Pakistani city of Quetta. Indeed, the Afghan Taliban, mostly Sunnis from Afghanistan's largest ethnic group, the Pushtuns, have condemned them-understandably, since not to do so would alienate minorities and undermine their political ambitions. Instead, the attacks have been claimed by an offshoot of Lashkar-e-Jhangvi (LeJ), a banned group with links to al-Qaeda and, of late, a tactical ally of the "Pakistani Taliban", who unlike their Afghan namesakes are at war with the Pakistani state. LeJ was implicated in an attack on army headquarters in Rawalpindi
in 2009. It may be many bad things, but it is not an arm of the IS I. So, if elements of the ISI had a hand in this week's atrocities, the Pakistani government can plausibly deny it. But its message of Pakistan's centrality to an Afghan settlement is strengthened, whether or not a gruesome act of revenge was intended. Andrevenge is a popular demand in Pakistan after the killing of those 24 soldiers. NATO's presence in Afghanistan was already deeply resented in Pakistan as an American war that costs Pakistani lives. Pakistan's support for it now has even fewer advocates at home. Commentators have seen the deaths as just the latest and most serious in a series of American stabs in the back. One came in January when a CIA contractor killed two people in murky circumstances in a Lahore street. Next there was the secret raid in May by American navy SEALS to kill Osama bin Laden on Pakistani soil. America was outraged that bin Laden was there. Pakistan was outraged its authorities were not warned of the raid, let alone asked for permission. Now its soldiers, politicians and pundits alike are saying: enough is enough. Pakistan has also tried to demonstrate how important it is to America in more practical ways than just its diplomatic sulk. It has closed two border posts through which large quantities of NATO supplies have passed. It has cut off intelligence co-operation, which, for all its shortcomings, had led to a steady stream of arrests and killings of American targets. And it has ordered America to quit a base from which it is believed to have launched drone raids on terrorists in Pakistan-another cause of deep local resentment. The government is clearly exasperated that its anger seems almost to have gone unnoticed in Washington. It took Barack Obama a week to call his Pakistani counterpart, Asif Ali Zardari, to offer "condolences" for the soldiers' killing. Pakistanis catching the talk shows on American news channels might think Americans believe it is their soldiers who were killed by Pakistanis, so sour is the attitude toward Pakistan. This week two senior Republican senators, John McCain and Lindsey Graham, issued a statement calling for a review of American aid to Pakistan, arguing that "the United States has been incredibly patient with Pakistan. And we have been so despite certain undeniable and deeply disturbing facts." Allies like these It must still be likely that, after a decent interval, the allies will
patch it up. After all, both have an interest in a stable Afghanistan, and Pakistan needs American aid. But in both countries long election seasons have already begun, making it harder for politicians to offer concessions to an unpopular partner. Pakistan's government is beset by legal threats and beholden to its overweening army. When it was reported this week that Mr Zardari was in Dubai for medical treatment for a heart complaint, many speculated that this was a prelude to his resignation. His government may be unable to accept a renewal of ties unless America guarantees that its strategic concerns will be met in an Afghan settlement. Those concerns demand the installation in Afghanistan of a government with which it feels comfortable, and strict limits on Indian influence there. But, to pursue these goals, Pakistan, not for the first time, is finding itself playing a very dangerous game. If it is no longer offering the border crossings, drone base and intelligence help, Pakistan's role in America's war effort becomes more that of a spoiler. And if you're not with us, as the previous American president put it succinctly ... •
49
Also in this section 50 Israel and the Isla mists ... 51 ... and its own religious right 52 Uncertainty in Iran 54 Congo's dangerous election 54 South Africa's courts under pressure
For daily analysis and debate on the Middle East and Africa, visit Economist.comfworldfmiddle-east-africa
Political Islam
Everywhere on the rise FAYOUM
The success of Egypt's Islamists marks a trend throughout the region EVOLUTION sweeps away a hated tyrant, unleashing a joyous jumble of hopes. Amid the cacophony a faint but steady drumbeat grows louder. Soon the whole country marches to this rhythm. Those who fall out of step find themselves shunted aside or trampled underfoot, sacrificed to the triumph of an idea that many exalt as noble but no one can define. It happened in Iran when Ayatollah Ruhollah Khomeini steered a broad uprising against the shah into a grimly Islamist cuide-sac. Might the same fate await Egypt, where elections seem set to produce a solid majority oflslamists in parliament? And might the example of Egypt, the most populous and culturally radiant of Arab countries, spread across a region primed for revolutionary change? The bold early advance of Egypt's Islamists, in an electoral process that still has several rounds to run, has come as a shock to many, including the country's own largely secular elite. It had been widely assumed that the Muslim Brotherhood would capture a plurality rather than an outright majority of votes, much as its cousins, Nahda in Tunisia and the Justice and Development Party in Morocco, have recently done. Founded in1928 and hounded by all governments despite-especially recently-professing a fairly moderate ver-
R
sion of Islam, the Brotherhood is known for its political savvy as well as its resilience and discipline. The dozens of other parties competing in Egypt's elections are inexperienced, narrowly based or tainted by association with the fallen regime. In the first round of voting for the lower house of parliament, covering a third of Egypt's 27 governorates, the Brotherhood's Freedom and Justice Party won a startling 46% of seats with 37% of the party-list vote. More striking still was the performance of Nour, the Party of Light, a rival representing the puritanical Salafist strain of Islam. Partly inspired by Saudi Arabia's strict Wahhabism, Egypt's Salafists seek to purge the faith of modern accretions and impose literal interpretations of dogma. Though only a few months old, and despite doubts that it could unite an array of often squabbling Salafist factions, Nour won 24% of the party-list vote and 21% of the seats. The biggest secular party trailed with 10% of the seats. In some districts the neophyte Salafists beat the Brotherhood's slick political machine by wide margins. Add in smaller parties that are offshoots of the Brotherhood, and the Islamists appear to have secured two-thirds of the firstround seats. Much of the voting to come is in rural districts that are Islamist strongholds, so this tally is unlikely to diminish
before the next two rounds of elections conclude in mid-January. Why did the scale of the Islamists' triumph so surprise Egypt's mainly secular pundits? Mostly this reflects the success of Egyptian governments, beginning long before Hosni Mubarak came to power, in denying that the bulk of Egyptian society has always been deeply conservative and fervidly religious. Whatever inroads secularism made in the 2oth century, a generationlong, worldwide Islamist revival has washed much of it away. The reality is that most Egyptians remain grindingly poor, ill educated and alienated from a ruling class seen as more attuned to Western fashions than local custom. In a survey of attitudes in seven Muslim-majority countries in December 2010 by Pew, an American research organisation, Egyptians proved the most likely to prefer "fundamentalists" over "modernisers" as champions of Islam. More than half of Egyptians favoured separating the sexes at work, compared with just 13% among Turks. Only Pakistan matched Egypt's enthusiasm for such traditionally Islamic penalties as stoning for adultery, amputation for theft and death for apostasy, despite the fact that Egyptian courts have shunned such punishments for a century. Youssef Ziedan, an Alexandrian novelist, explained in a recent column that he came to understand the Salafists' attraction after taking a wrong turn and getting lost in a maze-like ghetto whose existence he had been completely unaware of. This was just one of hundreds of such places across the country, with untold thousands jammed into dark streets under no guidance or rule: "People there have no recourse except to Islamists; there is no one
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50 Middle East and Africa ~ else
to impose any sort of order. The Mubarak regime created such realities by neglecting Egyptians whose only sin was that God created them in the age of Mubarak." Villagers in the rural province of Fayoum, south-west of Cairo, who were for decades corralled to vote for Mr Mubarak's party in fraudulent polls, got little in return except for brutal police, venal officials and rutted roads. But for many years Muslim Brothers have paid small stipends to widows and supplied water buffaloes on easy repayment plans to landless peasants. Salafists, whose fiery sermons thrill mosquegoers and have propelled a fashion for fullface veils, now also do their bit, distributing cut-price food for religious feasts and offering classes in Koran recitation. Perhaps more importantly, they have gained a bully pulpit on numerous Saudi-funded satellite television channels that beam round-the-clock religious fare. The recent elections brought out colourful banners and blaring tannoys in Fayoum's remotest hamlets but almost none advertised secular parties. Rallies graced by telegenic Salafist preachers attracted tens of thousands, while a curious few listened politely to youthful leftists talking up revolution. Small wonder that the province gave 14 of its 16 seats to Islamists. Four went to the Salafists, whose numbers were, ironically, boosted by voters once beholden to Mr Mubarak's now-disbanded party, who are still instinctively mistrustful of the Brotherhood. What do they want to do? Surrounded by well-wishers at his home on a narrow dirt street in the village of Nazla, Wagih al-Shimi insists his Nour party would have done even better if the Brothers had not cheated. Blind from birth and lushly bearded, Fayoum's new MP is a doctor of Islamic jurisprudence, preaches in local mosques, and has a reputation for resolving disputes according to Islamic law. "We owe our success to the people's trust, to their love for us because we work for the common good, not personal gain," says Mr Shimi. As for a party programme, he says his lot will improve schools, provide jobs and reform local government, introducing elections at every level to replace Mubarak-era centrally appointed officials. As for the wider world Mr Shimi is vague, except to say that Egypt should keep peace with any neighbour that refrains from attacking it. The Brotherhood echoes this parochialism: its party's So-page manifesto mentions neither Israel nor Palestine. The two groups have more in common. The Brothers profess to share the Salafists' end goal; namely, to regain the pre-eminent role for Islam in every aspect of life that they believe it once held. Some leading Brothers even describe themselves as Salafist in ideology. Many secular Egyptians, too, espe-
Allah be praised
cially Coptic Christians, who make up an increasingly beleaguered1o% minority, see little difference between rival Islamists. Yet within the broad spectrum of political Islam, the distinctions between two are telling. Muslim Brothers tend to be upwardly mobile professionals, whereas the Salafists derive their strength from the poor. The Brothers speak of pragmatic plans and wear suits and ties. The Salafists prefer traditional robes and clothe their language in scripture. The Brothers see themselves as part of a wide, diverse Islamist trend. The Salafists fiercely shun Shia Muslims. Asked what he thinks of Turkey's mild Islamist rule, a Nour spokesman snaps that his party had nothing to take from Turkey bar its economic model. Nour says it rejects Iranian-style theocracy, but equally rejects "naked" Westernstyle democracy. Instead, in what some Salafists see as a daring departure from previous condemnation of anything that might dilute God-given laws, it wants a "restricted" democracy confined by Islamic bounds. Yasir Burhami, a top Salafist preacher, says that his mission is to "uphold the call to Islam, not to impose it on people." Still, he believes the party can convince Egyptians to accept such things as banning alcohol, adopting the veil and segregating the sexes in public because "we want them to go to heaven". Brotherhood leaders say instead that they must respect the people's choice. Their party includes a few Christians. It worked hard to build a coalition with secularists, too, though most of its partners soon withdrew. Whereas Nour party leaders openly call for an alliance with the Brothers to pursue a determined Islamist agenda, the older group, with its long experience of persecution, is wary. It says fixing Egypt's ailing economy should take priori-
ty over promoting Islamic mores. The Brotherhood would probably prefer a centrist alliance that would not frighten foreign powers or alienate Egypt's army, which remains an arbiter of last resort. In any case, a Brotherhood-led government is not in the immediate offing. Egypt's generals, discomfited as anyone by the Islamists' advance, seem determined to find ways to delay it. They insist on retaining the right to appoint a cabinet and are seeking to dilute the new parliament's role in writing a constitution. Egypt's fractious liberals are deeply sceptical of the military, but may revert to accepting a further dose of military dictatorship to stave off the Islamist tide, at least for a while. Just possibly, they may also embrace the Brothers as the best guarantee of getting the soldiers back to the barracks. Whatever the outcome, Egypt looks set to join a broader regional trend that has seen a more pragmatic, tolerant form of Islamism rise to dominate the political scene, by way of the ballot box rather than the gun barrel. As Islamist parties come to the fore, from Iraq to Morocco, it is worth bearing in mind the words of Safwat Abdel-Ghani, the leader of an Egyptian Salafist group that once preached terrorism in the name of jihad, on the death of Osama bin Laden: "Al-Qaeda has not been destroyed by the 'war on terror' but by popular revolutions that made it unnecessary." • Israel and the Isla mists
Oh no! But let's tall{, maybe JERUSALEM
Israel is appalled by the surge of Islamists but may want to talk to them HE election results in Egypt are an IsT lamist "hurricane", "deluge" or "tsunami", according to Israeli newspaper headlines. The defence minister, Ehud Barak, called them "very worrisome". Officials, sounding cool, noted that there were precious few relations left to break, since Egypt had long been severing ties to punish Israel for refusing to yield to the Palestinians in the peace process. Egyptian-Israeli agricultural schemes long ago ground to a halt. Factories with Israeli links that had profited from tariff-free exports to the United States have shut. Since Egypt's revolution began in January, Israeli tourists have virtually stopped coming. This year Egyptian militants have blown up a pipeline pumping Egyptian gas to Israel nine times. And Israel's embassy in Cairo remains closed. It could get worse. Before the Camp David peace accords were signed 33 years ago, Israel's front with Egypt was its most men-
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acing-and it could become so again. The Muslim Brotherhood's Palestinian branch, Hamas, which, to Israel's chagrin, still rules the Gaza Strip between Israel and Egypt, hopes that better relations with a new lslamist-oriented Egyptian government will bolster it. Farther south, Egypt's Sinai peninsula is becoming a lawless no-man's-land, with Bedouin and Islamist militants at large. Yet Israel is loth to attack them, lest it ignite a broader war. When Israeli troops shot back at militants dressed in Egyptian army uniforms who killed eight Israelis near a Red Sea resort on the Israeli side of the border in August, Egyptian protesters stormed the Israeli embassy in Cairo. Another such attack might rupture Egyptian-Israeli diplomatic relations altogether. Even if Egypt's Islamists refrain from scrapping the peace treaty, Israel fears they will seek to amend the clauses that provide for Sinai's demilitarisation. They might even put the treaty to a referendum. The Salafists, though declaring themselves non-violent at present, could yet-Israelis fear-turn jihadist. Israel's generals are already battening down the hatches. They have speeded the construction of a vast concrete wall along Israel's 240-km (lso-mile) border with Egypt and deployed another brigade to patrol it. Drones peer over the border at Sinai. Some Israeli generals hope that old ties with their Egyptian counterparts will survive. They may be too optimistic. If the Islamists end up ruling Egypt, might they seek to engage with Israel? Precedent is not encouraging. When Hamas won the Palestinian elections in 2006 and then asserted sole control over Gaza the following year, Israel opted for boycott and siege unless Hamas recognised Israel, among other things. After President Hosni Mubarak's fall in February, Israeli diplomats in Cairo suggested making overtures to the Muslim Brotherhood, only to be told from on high to desist. Israelis often reckon that order, even if imposed by a hostile entity, is better than chaos. (This may apply to Syria under the Assad family too.) Moreover, thanks to Israel's indirect and informal contacts with Hamas, a modicum of peace has returned to Gaza. "With Hamas, we can do whatever we wish," says an Israeli who talks to it. Calming pragmatic statements by Muslim Brotherhood leaders in Cairo hint at an accommodation. Muhammad Salem Awa, a leading Brother, condemned the attack on Israel's embassy. The Brothers' election manifesto says that Egypt's international agreements must be upheld, presumably including those with Israel. The Brothers' desire for good relations with the West and for tourism to revive will make a confrontation less likely. In a sign of things to come, Rachid Ghannouchi, head of Nahda, the Tunisian
Middle East and Africa 51
Islamists who are close to the Brotherhood, recently met Israelis discreetly in Washington. He said that Tunisia's constitution would not ban further contact. "The new political Islam is more realistic," says Israel's outgoing ambassador to Egypt, Yitzhak Levan on, who wants to engage. For decades Israel's security people ran policy with Egypt. But as generals lose power across the region, Israel's politi-
cians, including religious ones, may try their hand. "Men of religion understand each other better," says the religious-affairs minister, Yaakov Margov of Shas, one of two Orthodox parties in Israel's ruling coalition. "I am ready to meet the Brotherhood any time, any place," he says. His party leader, Eli Yishai, once even offered to meet Hamas, until others in Israel's then government reined him in. •
The religious right in Israel
It's on the rise too JERUSALEM
As if to match the Islamist surge, religious jews are gaining in politics too HEN revolutionary Zionist pioneers first pitched up in Palestine, they tended to look askance at the existing Orthodox Jews as dusty museum pieces. A century or so on, Orthodox Jews often have a similar attitude to secular Jews. Once a small minority in Israel's state-building project, Orthodox Jews are now at its forefront. They comprise 40% of the ruling coalition's members, and over 40% of new army officers and combat soldiers. As their birth rate is more than double that of secular Jews, their power is set to mount. The spectrum of political Judaism is as wide as political Islam's. A bit like the split between Muslim Brothers and Salafists, religious Jews loosely divide into religious Zionists, who want]ews to control biblical land, and the ultra-Orthodox, who seek to enforce literal rabbinical dictates. The former pride themselves on leading Israelis into battle. The latter staunchly defend their exemption from the military draft. Though intense ideological rivals, they have forged working relations under Binyamin Netanyahu's coalition. Both defend their assets, be it settlements in the West Bank, where they form at least 70%of the Jewish population, or the separate Torah education systems they have created, both with state backing. Both argue that Israel's Jewish character is more vital than its democratic one. Secular Jews, who founded the state and are still a narrow majority, used to fret that the religious were carving out no-go areas for the authorities with their own legal and morality police and using their power as parliamentary kingmakers. Now they fear religious Jews are the state. Secular Jews continue to leave Jerusalem for the coastal cities, ceding it to a volatile cocktail of religious Jews and resentful Arabs in the east of the city. Under pressure from rabbinical authorities and their disciples, the hotterheaded religious soldiers boycott military pageants at which women perform.
W
A different sort of beard
Municipalities cancel concerts with female artists or insist that they fully cover their bodies, and remove advertising of even modestly-clad women from streets and buses. In ultra-Orthodox suburbs of Tel Aviv, women, like their Saudi counterparts, do not drive. The American secretary of state, Hillary Clinton, recently said she was worried that women's rights in Israel were being eroded. In the ultra-Orthodox press her photograph was airbrushed out. Religious Jews tend to be more dismissive of Arabs than their secular compatriots are. Politicians aligned with them promote laws allowing Jews to ban Arabs from living among them. Polls suggest that a high percentage of religious Jews would deny non-Jews the vote. The leaders of Israel's largest opposition parties are secular women, who warn against rising Jewish chauvinism, as does the head of the Supreme Court, a last secularist bastion. But a secular comeback may depend on Mr Netanyahu. Secular himself, he has ridden a religious tide to two election victories. Some say he regrets the religious right's rise. But can he resist the temptation to use this winning formula for a third time?
52 Middle East and Africa
The Economist December lOth 2011
Uncertainty in Iran
Did they really mean to do it?
The trashing of the British embassy may have made things worse for the regime
T FELT at first like a throwback to 1979, IAmerican when Iranian revolutionaries seized the embassy in Tehran fons months and a bilateral friendship soured. In truth, relations between Iran and Britain had curdled long before November 29th, when two British diplomatic compounds in the Iranian capital were overrun in similar fashion, this time for only a few hours. As in 1979, the assault may have strengthened the hand of hardliners at home, but today's Islamic Republic can ill afford such shows of defiance. Within a week of the assault, which led to the closure of the embassy and the expulsion of the entire Iranian mission in London, the Iranian action began to look like a costly mistake. At the beginning of the diplomatic crisis, the speaker of the parliament in Tehran railed against Britain's "hegemonic" policies. Iranian diplomats returning from London were greeted with bouquets. But Iranian braggadocio soon turned to queasy contrition. By December 4th a senior ayatollah was describing the seizures as "illegal"; the Iranian courts, it seems, may even try some of the intruders. The country's supreme leader, Ayatollah Ali Khamenei, who seems to have ordered the belated expulsion of the baseej, the regime's thuggish militia who carried out the assault, has maintained a telling silence. Iran's loyalist media were soon trying to fix people's attention upon ceremonies to mark the Shia mourning month of Muharram. The impression was of a regime which, having engineered a crisis, then
Welcome back from London
wanted it to go quickly away. This will be hard to arrange. The embassy assault has hardened hearts that were, in any case, turning against Iran. William Hague, the affronted British foreign secretary, may be more hawkish than his predecessor in Britain's previous (Labour) government. He is pressing, with his French counterpart, AlainJuppe, for the European Union to impose an embargo on Iranian oil. Greece, Italy and Spain, the EU's biggest purchasers of the stuff, want time to line up new suppliers. The United States is deciding on new financial restrictions of its own. And some American forces now being withdrawn from Iraq are likely to be redeployed in Kuwait, just across the Persian Gulf from Iran. The pressure on Iran is continuing to mount. The embassy attack may even have increased it. The main reason is, as ever, Iran's contentious nuclear plans. Most experts think the country is still several years away from being able to build a bomb, but the dispute is now being driven by a deep mutual distrust, recently increased by an ominous report by the International Atomic Energy Agency, the uN's nuclear watchdog. With this report the agency came closer than before to accusing Iran of trying to build a nuclear weapon. Iranian officials insist they still want only to generate electricity. On December sth an American diplomat, Robert Einhorn, said Iran was "becoming a pariah state". The country is certainly distrusted by the Gulf sheikhdoms and loathed by Saudi Arabia, whose am-
bassador to Washington Iran has been accused of plotting to kill. Though Mr Khamenei claims the Arab spring was inspired by Iran's revolution, the only Arab government Iran is close to is Syria's, which has been ostracised by the Arab League. Mr Assad's opponents say that Iran's support for Bashar Assad will not be forgotten. Ordinary Iranians fret that the events of November 29th have indeed brought pariah status closer-with the possibility of worse to come. Though Iranians resent Britain's record of interference in their affairs, which began in the 19th century and continued until the revolution of 1979, the presence of British diplomats in Tehran has been widely seen as a guarantee that the ultimate sanction against Iran, an Israeli or American attack, was some way off. As a European diplomat puts it, "the Iranians had their hostages in the event of military action right there, in the British embassy. No longer." The sight of a darkened and shuttered embassy jangles the nerves of people already worrying about their future. A recent blast at a missile factory near Tehran, which killed 20 and rocked the capital, was one of several explosions at military and economic installations over the past two years. Locals assumed they were under attack. American surveillance drones drift over the border from Afghanistan; the Iranians were pleased when one recently fell into their hands. The assassination of nuclear scientists (two to date) and moralesapping insurgencies among minorities along Iran's borders contribute to the sense of a country under siege. But this is not 1979. Iran is riven, not simply between supporters of the Islamic Republic and of the pro-democracy Green movement, who took to the streets after a disputed presidential election in 2009 and were eventually crushed, but also between the two men at the top. Mr Khamenei saved President Mahmoud Ahmadinejad after the latter's re-election in 2009, but today the two barely conceal their personal and ideological rivalry. Meanwhile, allegations of corruption erode popular faith in the regime as a whole. Mr Ahmadinejad is due to stand down in less than two years, but he shows every sign of wanting to prolong his influence. In fact, he may turn out to be the Islamic Republic's last president, for the supreme leader has let it be known that he favours a constitutional change to replace an elected president with a prime minister appointed by parliament. In theory, this would put Mr Khamenei, who exercises much control over the members of parliament, in an unassailable position. But Mr Ahmadinejad's supporters show every sign of vigorously contesting parliamentary elections in March. Since both men control institutions that supervise the electoral process, it promises to be a lively poll. •
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54 Middle East and Africa Congo's election
It could get worse KINSHASA
Joseph Kabila is re-elected, but his opponents cry foul HE warehouse where poll workers are T adding up the votes is in chaos. Ballot papers are strewn across the building and in the mud outside. Bags with sensitive material spill onto the floor. The people doing the counting ask visitors for food and drink because they have barely had either since they began totting up the results a week ago. The scene is a symbol of Congo. The decision to hold an election without delay was bound to create a mess. The consequences may prove disastrous. Only nine years ago Congo was still at war. In 2006, with massive support from outsiders, especially the UN, the country held its first election since before the dictatorship of Mobutu Sese Seko, who ran Congo from 1965 to 1997. The current president, Joseph Kabila, has spent five years struggling to hold together the country's 11 provinces and several hundred ethnic groups while fending off rebellions in the east and trying to pass a budget financed mainly by unpredictable mining revenues. Yet the 40-year-old former rebel insisted that the poll should go ahead on November 28th, with scant foreign help. International bodies, tired of holding Congo's hand for more than a decade and uninspired by any candidate, were relieved. But a little bit of democracy done badly can be a dangerous thing. At least18 people were killed in violence over the weekend before election day. Voter rolls were not audited because the electoral commission ran out of time. On the day itself, ballots in some places never arrived. In others voters' names were not on the lists. Some polling stations were burned down and poll workers attacked. In more than one town in North Kivu province, soldiers in uniform or plain clothes bullied voters into voting for Mr Kabila or filled out the ballots themselves, sometimes voting dozens of times. In Equateur province, in the west, a local election official went into hiding after the governor pressed him to change the results, which put the main opposition candidate, Etienne Tshisekedi, in the lead. Mr Tshisekedi and the rest of the opposition have cried fraud. Daniel Ngoy Mulunda, head of the electoral commission, a pastor who is a friend of Mr Kabila's, announced partial results that put the in cumbent well in the lead with almost no detail about where his numbers came from. The African Union and South Africa's president, Jacob Zuma, said there was almost nothing wrong. If, as is likely, Mr Mu-
Kabila counts the votes lunda declares Mr Kabila the winner, uprisings may break out in parts of Congo. "If Kabila returns to power he'll have to walk over our dead bodies," said Palmer Kabeya, one of Mr Tshisekedi's backers outside the 78-year-old candidate's party headquarters in Kinshasa. The dozens of young men around him agreed. Most were unemployed: less than 10% of Congo's working-age people in a population of 66m (the UN guesses) have formal jobs. All said they were ready to die if they felt their votes were not allowed to count. In vain. Without clear evidence of systematic fraud, the outside world is loth to play arbiter. "It didn't have to be like this," an international monitor says ruefully. "These were technical mistakes and they could have been largely avoided." Alas. • South Africa's courts
President v judges JOHANNESBURG
The ruling party would prefer more malleable judges OR the third time this year South AfriF ca's courts have overruled government decisions over the justice system. First the Constitutional Court ruled that the abolition of the Scorpions, an elite corruptionbusting team, was unconstitutional. Then it said President Jacob Zuma could not extend the chief justice's term of office, as he planned. Now the appeal court has declared invalid Mr Zuma's contested appointment of Menzi Simelane to head the National Prosecuting Authority (NP A). The president and his African National Congress (ANC) are not amused. Mr Zuma had already warned the judges against
"encroaching" on the territory of the other two branches of the state. Unelected judges, he said, had no right to interfere in government policy. Yet there were clearly some "who wish to co-govern the country through the courts." The Constitutional Court's rulings are now to be "assessed" by an independent research institute to ensure that the court "conforms to the transformation mandate". In South Africa transformation is shorthand for promoting the rights of racial groups oppressed under apartheid. Whenever the courts hand down a ruling not to the ANC's liking, one of its leaders tends to complain of "untransformed" or "counterrevolutionary" judges. When the ANC came to power in 1994, nearly all judges were white. But now most are not, including those on the Constitutional Court. The challenge to Mr Simelane's appointment was first brought by the Democratic Alliance (DA), the main opposition party, on the ground that he was not, as the constitution requires, a "fit and proper person" to head the NP A. As director-general of the justice ministry in 2008, he had given "misleading and untruthful evidence" to a commission of inquiry, headed by Parliament's speaker, Frene Ginwala, the DA said. The commission had found his conduct as a witness "highly irregular". The Public Service Commission recommended disciplinary action against Mr Simelane, but the charges were quietly dropped on his appointment as the NP A's boss in November 2009. When recommending him, Jeff Radebe, the justice minister, argued that the Ginwala report's criticism was irrelevant. But the Supreme Court of Appeal disagreed. In making the appointment, Mr Zuma had not "applied his mind properly", as the constitution demanded, it ruled. It was therefore invalid. It was Mr Simelane who, as directorgeneral of the justice ministry, drafted a letter ordering Vusi Pikoli, the then NP A boss, to drop his prosecution ofJackie Selebi, the police chief, on corruption charges. Mr Pikoli refused and was suspended. The prosecution nevertheless continued: Mr Selebi was found guilty last year. The former Interpol boss began his 15-year jail term on December sth after losing his appeal. Helen Zille, the DA's leader, says Mr Zuma appointed Mr Simelane because he wanted somebody more "pliant" to head the prosecuting authority. She calls it part of a "Zumafication" of state institutions "designed to shield the president and his network from being held accountable". She is far from alone in her view. Business Day, the country's leading daily, claims that the possible resuscitation of charges against Mr Zuma over a multi-billion-dollar government arms deal "is at the centre of everything he does". Hence his need to surround himself with "an iron ring of men he relies on to keep him safe." •
SPECIAL REPORT VIDEO GAMES
All the world's a game Video games will be the fastest-growing and most exciting form of mass media over the coming decade, says Tim Cross
ACKNOWLEDGMENTS Besides t hose qu oted in the text, many others contributed ideas, insights, contacts and suggestions to thi s special report, including Justin Brown, Jonnie Bryant, Edward Castranova , Sara de Freitas, Kati e Goldberg , Vikas Gupta , Aubrey Hesselgren , Tim Luft, Peter Moore, Mike Morhaime, Robert Pike, Nicholas Plott, J .P. Rangaswami , Daniel Stemkoski, John Walker and Nick Yee. Others spoke on condition of anonymity. The author would like to thank them all.
A li st of sources is at Economist.comjspecialreports An audio intervi ew with the author is at Economist.comfaudiovideof specialreports
The Economist December lOth 2011
IN NOVEMBER 2010 "Call of Duty: Black Ops" was released. Fans in many countries queued round the block to get their hands on a coveted early copy. A lucky few had won tickets to invitation-only release parties which were broadcast live to viewers across the internet. The event had been advertised on billboards, buses and television for weeks. Chrysler even produced a commemorative version of its Jeep. In the event the reviews were mixed, but no matter: the publishers, Activision, notched up worldwide sales of $6som in the first five days. That made it the most successful launch of an entertainment product ever, and people kept buying. A month later the total stood at over $1 billion. "Black Ops" is not a film or a book: it is a video game. For comparison, "Harry Potter and the Deathly Hallows Part 2", the current record-holder for the fastest-selling film at the box office, clocked up just $169m of ticket sales on its first weekend. "Black Ops" stole the crown from its predecessor in 2009, "Call of Duty: Modern Warfare 2". The latest instalment, "Modern Warfare 3", released on November 8th, set a record of its own with $750m in its first five days. Over the past two decades the videogames business has gone from a cottage industry selling to a few niche customers to a fully grown branch of the entertainment industry. According to PricewaterhouseCoopers (Pwc), a consulting firm, the global video-game market was worth around $56 billion last year. That is more than twice the size of the recorded-music industry, nearly a quarter more than the magazine business and about three-fifths the size of the film industry, counting DVD sales as well as box-office receipts (see chart below). PWC predicts that video games will be the fastest-growing form of media over the next few years, with sales rising to $82 billion by 2015. So who plays? The stereotypical image of the gamer-teenaged, male and probably rather nerdy- has hardly changed in 20 years. But it is no longer accurate, if it ever was. Today the average age of players in America, the biggest market, is 37, and 42% of them are female, according to the Entertainment Software Association (ESA), an American trade group. Some 72% of households in America play games of some sort, says the ESA. Even among the over-sos the share is one in three. One explanation for this coming of age is demography. The first video-gaming generation, which grew up with games arcades and home consoles, is now entering middle age. It seemed likely that some of those who whiled away their youth playing "Space Invaders" and "Galaxian" would stick to their hobby into adulthood. But games companies, readier than other media to chase the "next big thing", have also started looking for new audiences. In recent years they have drawn in ~~
CONTENTS
5 As you like it There is a video game for every taste 5 Thinking out of the box Consoles are no longer the only game in town 7 Paying for pixels Virtual goods are worth real money-and cause real dilemmas 8 Gentlemen, start your computers Sport by other means 9 No killer app The moral panic about video games is subsiding 10 The play's the thing What video-game technology can do in the real world 12 Homo ludens Why video games will be an enduring success
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groups such as women, the elderly and middle-aged commuters who would never describe themselves as garners but are more than happy to play "FarmVille" on Face book or" Angry Birds" on their smartphones. The biggest market is America, whose consumers this year are expected to spend $14.1 billion on games, mostly on the console variety written for Microsoft's Xbox 360, Sony's PlayStation 3 or Nintendo's Wii. Consoles also dominate in Britain, the fifthlargest gaming market. In other parts of Europe, and particularly Germany, PC games are more popular, says Peter Moore, chief operating officer of Electronic Arts, a big games publisher. "German parents tend to see console games as childish, but they think PCs have some education value," he notes. China is already the second-biggest market and one of the fastest-growing, with sales rising by 20% last year. The high price of consoles and rampant piracy have encouraged the development of online games, mostly played on PCS, which are easier to protect from pirates. Japan is a law unto itself. It was the second-biggest market until China overtook it earlier this year, but the Japanese idea of fun is different from other people's. Western games that sell well elsewhere tend to struggle there, says Mr Moore, and the same is true of Japanese games in the West. Nobody really knows why. In high-tech South Korea, the fourth-largest market, Pcs and online games are also popular, not least because of lingering resentment of Japanese products.
The PlayStation generation If you had to pinpoint the moment when gaming started to move from niche to mainstream, December 3rd 1994 would be a good date to pick. That was when Sony, a Japanese consumerelectronics giant, launched its PlayStation console. Until then games-console companies, led by Sega and Nintendo, had con4
centrated largely on children and teenagers. Their best-known products featured the adventures of pixellated Italian plumbers and cute cartoon hedgehogs. But the PlayStation's neat design, slick marketing and line-up of big-budget games appealed to young men in their 20s and 30s, says Piers Harding-Rolls of Screen Digest, a firm of media analysts. Another big event was the launch of Nintendo's Wii console in 2006. This was specifically aimed at women, families and those who had never played video games before. Its user-friendly, simple design, intuitive motion-sensitive controller and lighthearted games based on fitness, sports and the sorts of puzzles found on the back pages of newspapers helped it sell89m units, half as many again as PlayStation 3 or Xbox 360. Now the ever-increasing computing power of mobile phones has put the means of playing games into the pockets of people who would never think of spending hundreds of dollars on a dedicated console or a PC. The simple games that came preloaded onto the mobile handsets of a decade ago have evolved into a subset of the industry in its own right, appealing to a more casual crowd who play them on trains, in airport departure lounges or while waiting for the washing to finish. Today's smartphones pack far more computing power than the original PlayStation, and games are a big part of their appeal: the two most popular kinds of software on Apple's App Store are games and entertainment. The internet has played a crucial part in the rise of video games, enabling developers to get their products into their customers' hands without the need for traditional shops or publishers. That has allowed small, independent developers to compete with the big firms who might spend tens of millions of dollars on developing a single title and as much again on marketing it. As a result the industry is becoming increasingly fragmented as its markets become more differentiated. The Economist December 10th 2011
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The internet has also become a games platform in its own right, making the hobby truly sociable by electronically linking garners the world over. Millions of people spend many hours each week playing and working (sometimes the distinction is not clear) in virtual places such as "World of Warcraft" and "EVE Online". Hundreds of millions more play free, simple, sociable games on Face book, such as "Lexulous", which is a bit like Scrabble, and "FarmVille", a game with an agricultural setting. Increasingly the games themselves are free, but the virtual goods available in these online worlds-a stable for one's electronic horses, say, or a particularly pretty shirt for one's digital alter ego to wear-cost real money. The video-games industry has long been dogged by accusations that violent games breed violent behaviour and that its products can cause addiction. The evidence was never strong in the first place, but the shady reputation has proved hard to shake off. In fact many games do not feature any violence. With the new emphasis on more casual games, some of the most popular titles involve inoffensive pastimes such as constructing electronic cities, completing abstract logic puzzles or managing a virtual football team. Like all media businesses, the games industry is changing fast. What makes it different from the rest is that it has welcomed change and innovation and thrived on it. It is now growing in all sorts of unexpected ways. For example, the best players can earn money (sometimes a lot of it) from "e-sports"-that is, video games played professionally, in front of a crowd. And after years of talk about an imminent "virtual reality" revolution, it is the games industry that has perfected cheap, convincing simulations of the real world. Technology pioneered by games is now being put to use in fields from military training programmes to molecular biology and virtual showrooms for cars. The industry has even spawned a management technique, "gamification", that applies the psychological principles of game design to motivating workers and engaging customers. Yet video games are still widely regarded as trivial. This special report will argue that as the newest and fastest-growing form of mass media they deserve to be taken seriously. •
As you like it VIDEO GAMES COME in many guises. There are strategy, adventure, puzzle, sports and business games, first-person and thirdperson shooters, fantasy and sciencefiction role-playing games, fighting games (think of a virtual boxing match), flight simulators and many, many more. The same people will probably play lots of different kinds of games. The archetypal players-young males with plenty offree time and disposable income-are known as hardcore garners. They tend to use dedicated consoles or powerful PCs, and their games are likely to involve violent action, complicated role-playing or strategy. In recent years they have been joined by so-called casual players who spend less time, money and attention on simpler games, often played on mobile phones or
The Economist December lOth 2011
The business of gaming
Thinking out of the box Consoles are no longer the only game in town THE IDEA BEHIND video games used to be simple. Nintendo, Microsoft, Sony, Sega and others sold consoles at a loss and made their money from the boxed games they produced for them. The punters, mostly young technophile men, bought the games from a shop, played them for a few weeks and then put them away. Those customers are still around, but they have been joined by a plethora of others. New, more casual sorts of games are being picked up by a mass audience that would previously not have played at all. "In the past few years two things have changed," says Mr Moore of Electronic Arts. "The first is the proliferation of platforms [on which to play games], and the second is that it's become so much easier to call yourself a gamer." So the industry has branched out into a bewildering variety of sub-sectors and niches. At one extreme, companies in the traditional sector are still charging $so or $6o for high-end console games with ultra-realistic graphics and cinematic game play. At the other, a shoal of smaller firms is developing simpler, more casual games aimed at a much larger and more diverse group of customers. In between, a mix of established firms and start-ups are testing new ways to develop games and new business models for selling them. One of the biggest changes has been the rise of the mobile phone as a gaming device. Games specifically designed to be played on mobile phones already account for $8 billion of the $56 billion global games market, even though they typically sell at less than a tenth the price of a traditional console game. Such mobile games are simpler to play and require less time and dedication than the console titles. Their relatively low development costs and the fact that they can be downloaded over mobile networks brings them into impulsebuy territory, says Mr Harding-Rolls at Screen Digest.
online. Action and strategy titles are available for such users too, buttheytend to be less complex. The classical casual genre is puzzle games-abstract brain-teasers such as the venerable ''Tetris" or modern titles like "Dr Kawashima's Brain Training". The internet offers more possibilities. "Massively multi player" games are played by hundreds or thousands of people simultaneously, all inhabiting the same virtual world, hosted on a remote server. The iconic example is the fantasy-themed "World of Warcraft". Life in such worlds goes on regardless of whether an individual gamer is playing or not. On a different note, social games mix the community feel of socialnetworking sites with game-play mechanics, encouraging friends and acquaintances to play together.
Playing on the move The potential market is huge. The number of mobile-phone subscriptions worldwide is over 5 billion. Last year 1.6 billion handsets were sold, a 31% rise on 2009. That is attracting attention from big, established firms such as THQ, an American publisher and developer of video games, and Square Enix, a Japanese publisher and developer that has a dedicated mobile division. But many games for mobile phones are made by small start-ups, attracted by low entry costs. The best-known example is "Angry Birds", released in 2009 by RovioMobile,aFinnishfirm with just 55 employees. It is a light-hearted affair in which vengeful player-controlled birds hurl themselves at fortifications built by a group of egg-snatching green pigs. In
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terms of sales, it is among the most popuIJ Win some, lose some lar games ever made, with total downloads of more than soom (the game is Estimated development cost, $m Unit sales since launch, m available in a free but limited edition as 12 120 well as in a standard, paid-for version). By 100 ·-·-·-·-·-·-·-··-··-·-·-··-··-··-· -·-··-·-··-·-·-·-··-··-· ·-·--·-·-·-·- ··· contrast, a console game is reckoned to 80 have done well if it sells a couple of mil60 lion copies. 40 4 20 Games are proving a popular application for mobile phones, and especially a ~--~----~~----~ Final Call of Shenmue Grand Red Crackdown Lost Assassin 's Strangle- Halo 3 for the latest generation of smartphones Fantasy Duty: Theft Auto Steel Planet Creed hold such as Apple's iPhone. PWC expects the MW2 IV IX Source: Digi-Capital market for such apps to grow from around $7 billion last year to $35 billion in 2015, In "CityVille", for instance, there are incentives for players to and much of that growth is likely to be driven by games. They accounted for more than half of the 100 most popular apps for the help with the running of other cities managed by their friends. iPhone in 2010 and make up a large chunk of the software market Unlike traditional console games and even many mobile ones, for other brands of smartphone too (see chart1). these games do not demand the players' full attention but are designed to be dipped into in short bursts. And they are free to play, Online orcs at least for users who are prepared to do without frills and extras, Thanks to the spread of high-speed internet connections, which are often bought for real money (see box, next page). the web has emerged as a games platform in its own right. BlizMoreover, the designers are able to collect lots of informazard Entertainment's "World of Warcraft", an intricate online tion on exactly how users are playing the games online and can tweak them to suit the players' latest whims. "You spend singlefantasy world filled with orcs and dragons, attracts around 9m regular users, each of whom pays a monthly subscription fee of digit millions, work for six months, put your game out there, around $10 to play. study the telemetry to learn very quickly what people like and As with mobile games, much of the interest in online gamwhat they don't, and refine the product from there," says Frank ing revolves around attracting a new, more casual kind of player. Gibeau, a senior manager at Electronic Arts. By contrast, a typical Again, the potential market is vast. Companies such as Pop Cap, a console game may cost $2om-3om to make and take several hunSeattle-based games studio, specialise in easy-going games that dred people and two years or more to develop (see chart 2). For all the promise of the new, more casual games, the conrun in ordinary web browsers. PopCap's most successful game sole-based ones still account for $28 billion of the industry's gloto date is "Bejeweled", an abstract puzzle game in which users bal sales of $58 billion. But the balance is changing. Sales of conhave to create patterns in a grid of coloured gems.lt is easy to pick up but difficult to master, and can be played for a few minutes at sole games will be flat at best for the foreseeable future, reckons Tim Merel of Digi-bank, an investment bank that specialises in a time. In 2010 sales of the full version, which sells for about $20, the games business, whereas mobile and online games will conpassedsom. tinue to grow rapidly, keeping the industry's overall growth rate Even more dramatic has been the rise of social-networking above 8% a year. By 2014, reckons Mr Merel, mobile and online sites as venues for video gaming. As with mobile phones, one attraction for developers is the potential size of the audience. Facegaming will account for half the industry's revenue. book, the biggest, claims Boom users each month, most of Unpacked whom are fairly new to gaming. A new generation of consoles, offering better graphics and Games make up half of the 40 most popular applications on Face book. Some are simply electronic takes on existing realmore internet connectivity, will go on sale from next year, when Nintendo releases the Wii u, the successor to its popular Wii world pastimes, such as "Texas Hold'em", a poker game with machine. Microsoft and Sony are expected to follow suit in 2013 30m users a month, or "Slotomania", a digital version of slot machines (that can be played with or 2014 with sequels to their machines. But some analysts now wonder whether dedicated games consoles have much of a or without real money) with sm II devotees. The most popular long-term future. Michael Pachter of Wedbush Securities reckFun by phone games command enormous auons that the coming generation of consoles could be the last. For Games' share of top 100 apps all but the most devoted users paying $300 for a dedicated machdiences. "CityVille", an urbanby platform , 2010,% ine that takes up space in the living room makes little sense planning game and the most Paid • Free • popular Facebook game at the when, for a little more, you can buy a smartphone or a tablet PC 0 10 20 30 40 50 60 moment (though tastes are fickthat has plenty of other uses as well. le), attracts 51m users a month. The industry likes to boast that it has become a bit like HoliPhone Its San Francisco-based devellywood, says Rod Cousens, the boss of Codemasters, a mid-sized oper, Zynga, specialises in soBritish games developer. But at least the big Hollywood studios Microsoft cial-networking games. Set up spread their risk across at least ten films a year, whereas games iPad in 2007, it now has 2,000 emdevelopers tend to work on one at a time. This is now an expensive, risky and hit-driven business, so the developers have beployees and revenues of around RIM come deeply conservative, preferring to build on past successes $8som a year. One reason why these rather than try something new. Every one of the ten bestselling Nokia games are so successful is that console games in America last year was a sequel or a development of an existing franchise. they help people do something Palm The console-makers are well aware of this. Nintendo they are already keen on: keepSource: Digi-Capital helped to pioneer the idea that games could appeal to a much ing up with their friends online. The Economist December 10th 2011
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wider audience. Its Wii console has sold 89m units over the halfdecade since its launch, outdoing both Sony's PlayStation 3 (s6m) and Microsoft's Xbox 360 (s8m), largely thanks to a games catalogue aimed at casual fans. It features titles like "Wii Fit" (a fitness game) and "Wii Sports", a version of sports like golf, tennis and ten-pin bowling. The Xbox, PlayStation3 and Wii all have their own online shops that allow consumers to download games directly to their consoles, and all three are encouraging developers to make casual games for them. Mr Merel thinks the console business will remain a smaller though mostly profitable niche within a games industry that will range over a wide vari-
ety of platforms and attract a much more mainstream audience. Categories such as "casual" or "online" games are not always neat and tidy. Not all online games are aimed at casual users. "Minecraft", developed by Mojang, a tiny Swedish firm, is an online adventure game that mixes the building qualities of Lego with the social appeal of "World of Warcraft". Despite its basic graphics and intricate game play it has sold over 4m copies. Conversely, some recent smartphone games have almost consolequality graphics and involving storylines. Development costs are already ticking up. The only safe bet about the future is that it will be more fragmented and more diverse than the past. •
Paying for pixels CASUAL GAMES MAY attract huge audiences, but it is harder to convertthose millions of eyeballs staring at screens into hands reaching for wallets. Piers HardingRolls at Screen Digest reckons that the 57m or so game consoles in use in America generate about $7.5 billion of revenue each year, but the 109m players of casual online games producejust $250m. Casual-game firms are testing a variety of ways to make more money from their users, from straightforward digital sales to subscriptions and advertising. One promising model comes from East Asia, gaming's spiritual home, where internet access is widely available and piracy is rampant. It involves giving users free access to online games but then charging them for all sorts of extras. One Western example is "The Lord of the Rings Online", which allows players to live in an online version ofJ.R.R. Tolkien's fantasy world. When the game was released in 2007, players had to buy the game for $40 and then pay a subscription for each month they played. Lastyear Turbine, the game's developers, moved to a new charging model in which the game was made available for nothing but players could spend real-world money on "Turbine Points", a sortofelectroniccurrencywith which to buy items that make the player more powerful. Turbine says its revenue from the game tripled. In "FarmVille", Zynga's wildly popular Facebook-based farming simulator, players can earn coins to spend on crops, livestock or farm equipment by playing the game, or they can buy them with real cash. Such transactions make up the bulk of Zynga's revenues. Not all virtual goods offer players an in-game advantage. "Vanity items" such as a new design for the electronic homestead are just nice to have. Spending real money on virtual luxuries may seem odd, but a The Economist December lOth 2011
minority of dedicated players wants to show off to others online, says Nick Lovell of Gamesbrief, a games-business website. "You make 80% of your revenue from 20% of your player base," he adds. Afew of them will shell out eye-watering amounts of money. In Dark Orbit, a browser-based space adventure from Bigpoint, a German online-game studio, customers can buy a "10th drone" to beef up their spaceship for around €1,000. Big Point has sold more than 2,000 of them this year. This sort of trade allows players to work out a real-world valuefortheiringameitems (and makes it possible for economists to calculate the GDP of virtual worlds). Some players sell desirable items to other players for real cash, a practice chronicled by Julian Dibbell in his 2006 book, "Play Money", in which he earned up to $3,000 a month trading in virtual goods. Such reselling is generally forbidden by the games companies, though there are exceptions, including "Second Life", a virtual world run by the American firm Linden Lab. Butthe players themselves treattheir virtual goods as if they were rea land can become extremely possessive about them. In 2005 a Chinese player, Qiu Chengwei, killed a fellow-player of"The Legend of Mir 3"forselling (on eBay) a rare virtual sword that Mr Qiu had lent him. He is now serving a life sentence. All this raises some intriguing questions for goverments. Should virtual income be reported to the real-world taxman? China thinks so, in principle at least: it has said it wants to tax its virtual-goods market, thoughtto be worth around $1.5 billion a year, although howthetaxwould work is not clear. The South Korean authorities have ruled that trading in virtual goods should be subject to a 10% sales tax. America's Internal Revenue Service is wrestling with the same problem. And if a games company goes bust, can its players claim
compensation for loss of valuable property? After all, "some players have accumulated wealth worth thousands of dollars in these games," says EyjolfurGudmundsson, chief economist aticeland's CCP Games, which makes the sci-fi trading game EVE Online. In 2010 South Korea's highest court ruled that, against the wishes of the games companies, players' virtual cash could indeed be converted freely into real-world money, provided it was generated in a game of skill rather than won in a game of chance. It is only a matter of time, says Roxanne Christ, a lawyer at Latham & Watkins, before Western courts will be faced with the same questions.
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E-sports
Gentlemen, start your computers Sport by other means IN ONE CORNER was Greg Fields, a talented young player whose psychological demons had so far stopped him from realising his full potential. In the other was Lim Yo-Hwan, an old master with a string of titles and championships, still a ferocious competitor, but one whose glory days were probably over. Mr Fields had already racked up a 3-0 lead in their best-of-seven series, but over the next 30 minutes Mr Lim put on a dazzling display of calculated risk-taking and exquisite control and won the next game, then another and another, levelling the series at three games apiece_ The game being played was "StarCraft 2", a strategy game designed by Blizzard Entertainment, an American developer, featuring three clashing science-fiction armies. The matches were part of a three-day tournament run in Orlando, Florida, by Major League Gaming (MLG), an American firm that organises "e-sports" events around the country. Besides "StarCraft 2", players can compete for thousands of dollars of prize money in "Halo: Reach", a sci-fi shooter, or "Call of Duty: Modern Warfare 2", a war game. The idea of staging video-game tournaments for money has been around for a while. In 1997 Dennis Fang, an American gamer, won a Ferrari with his brilliant playing of "Quake", an early first-person shooter. Since then professional players have also done well with other games-such as "CounterStrike", another shooter, or "Warcraft 3", a strategy game. The predecessor game of "StarCraft 2" has been on cable television in South Korea
for more than a decade. Good players there can make a reasonable living from salaries, sponsorship and prize money, and the very best can earn hundreds of thousands of dollars a year. Yet although MLG and similar organisations have been hosting tournaments for years, professional gaming has been slower to catch on in the West. After the release of "StarCraft 2", that seems to be changing. Each of MLG's events this year has set new viewing records. Besides the 15,000 who attended in person, the online live audience for the Orlando tournament peaked at more than 181,000 people in163 countries. MLG is only one of a number of firms offering such contests. They range from weekly online-only events that pay out $100 all the way up to glitzy affairs like the Global StarCraft League, a South Korean tournament that pays out 145m won ($127,000) every couple of months. IGN, a gaming website owned by News Corporation, runs the IGN Pro League, which
Good players can make a reasonable Living from salaries, sponsorship and prize money, and the very best can earn hundreds of thousands of dollars a year
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offers $30,000 to its champion. Sweden plays host to Dreamhack, a twice-yearly games party with a prize pool of 400,000 kroner ($57,000). The best players can make serious money (see table 3, next page), but Shawn Simon, an American "StarCraft 2" professional, reckons that, even outside that elite, "StarCraft 2" alone probably provides a living for about 100 players worldwide. "I've been continually shocked by how fast it's grown," says Dustin Browder, the game's chief designer. Sundance diGiovanni, MLG's founder and chief executive, concedes that many people still think playing video games for money is a strange idea. Like any sport, video games have a culture that can be baffling to outsiders. Rather like professional wrestlers, garners tend to play under pseudonyms, so Messrs Fields, Lim and Simon are known to their fans as "IdrA", "Boxer"
The Economist December 10th 2011
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SPECIAL REPORT VIDEO GAMES
and "Sheth". Some critics are bothered by the absence of physical exertion, but that nevTop "Star( raft 2" players March 2010-November 2011 er held back chess. E-sports can be a boomWinnings, Player $'000 and-bust business, says Mr di227 :• : Lim "NesTea" Giovanni, with fans' interest Jae Duk waxing as a big new game is re227 :e; Jeong "Mvp" leased and then waning again; . Jong Hye?.n and it is definitely for the co222 :• : Jang "MC" Min Chul gnoscenti. Yet the overall trend 109 is strongly upwards. One rea:• : Choi "Polt" Seong HU.~son, says Sean Plott, a "Star·-···· Lee "MarineKing" 105 Craft" player turned commenJung Hoon tator, is generational: video 102 :• : Kim "Fruitgames are becoming more Dealer" Won Gi ··-·-·-··-··-··mainstream as the people who 99 :• : Mun "MMA" Seong-Won grew up playing them for fun 76 :• : Lee "PuMa" turn into adults with the disHo Joon posable income to spend on 11· Ilyes "Stepha no" 73 watching the pros. Sa to uri Technology has made it :e; Lee "Leenock" 63 Dong Nyung easier to build tightly knit fan communities. Web-gaming serI I France :• : South Korea vices such as Microsoft's Xbox Sources: Sc2earnings.com; The Economist Live or Blizzard's Battle.net offer skilled amateurs a chance to play against professionals, which would be unthinkable in, say, professional football or basketball. Thanks to video-streaming sites like Justin. TV, players can broadcast their practice sessions online and chat with fans in real time, and enthusiastic amateurs can televise tournaments organised in their living rooms. Game designers can help, too. "StarCraft 2" was conceived from the start to offer a good experience for spectators, says Mr Browder. It may be hard for new viewers to appreciate the players' skill, at least until they try it themselves, but the game is meant to be appealing to everyone. So for newcomers who have yet to master the finer points, "we can offer the visual spectacle of alien races battling to the death for your own amusement."
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Winning streak Other developers are piling in. Riot Games is pushing "League of Legends", a free-to-play fantasy team game played online by around 4m people every day that often attracts more viewers than StarCraft 2 to its professional matches. For the game's second season of competitive play the company is offering a $sm prize pool. Valve, another big PC developer, is hoping to break in with "Defence of the Ancients 2", a direct rival to "League of Legends"; in August this year it hosted a tournament for an early version of the game with a first prize of $un. The buzz around these games is helping to attract interest from sponsors. Big brands such as Coca-Cola, Red Bull, Samsung and Intel have all sponsored tournaments recently. They see this as a good way of getting exposure to a sought-after but hard-toreach group of people: males in their late teens and early 20s, who make up the bulk of the audience. And many of the fans are unusually dedicated. One of those who attended MLG's Orlando event had come all the way from California. Another had bet a tattoo on the outcome of one match. And when it emerged that the Korean StarCraft pro Lee Jung-Hoon (a.k.a. "MarineKing"), a favourite with the fans, would not be able to get to Orlando, a donation drive raised the $3,500 needed to fly him there for the weekend. And Mr Lim? Alas, his comeback was not to be. Mr Fields held his nerve and, to the crowd's cheers, took the final game. • The Economist December 10th 2011
Violence and addiction
No killer app The moral panic about video games is subsiding IN THE LATE morning of April 2oth 1999 a pair of teenagers, Dylan Klebold and Eric Harris, walked into the cafeteria at Columbine High School in Colorado and began gunning down their classmates. The two senior-year students killed 13 people in a 45-minute rampage before turning their weapons on themselves. The massacre remains the deadliest high-school shooting in American history. In the days after the killings it emerged that, besides enjoying violent movies, the two liked playing "Doom", a gory video game from the mid-1990s in which the heavily armed players use shotguns and rocket launchers to dispose of legions of zombies and demons. Parents, politicians and psychiatrists fretted that exposure to virtual violence had prepared the ground for the real-world killings. Two years later the parents of some of the victims sued dozens of gaming companies, including id Software, the developers of "Doom", alleging that their products had contributed to the murders. The massacre fed long-standing worries about video games, particularly in America, the industry's biggest national market. Governments from California to Switzerland have tried to ban the sale of violent games to children, and most countries have an age-rating system similar to that for films. However, since gaming has become more mainstream, the proportion of violent games has fallen. According to vgchartz, a website that tracks games sales, the ten bestselling console games of 2010 included just three violent shooters. The rest were inoffensive sports and fitness titles, a Super Mario platformjumping game and a Pokemon product, a cartoony franchise of games based on a Japanese TV series for children. Many games that do feature violence serve up a slapstick version. The sort of gruesomely realistic killings found in serious war films are rare. Still, many games require the player to dispose of great numbers of Nazis, gangsters, aliens and other bad guys. A few games serve up stylised violence for its own sake. And the critics say there is a crucial difference between films, plays or books, where the players are just passive onlookers, and video games, where they are active participants in the simulated slayings. That, the argument goes, makes it more likely that they will resort to violence in the real world, too.
It's all in the mind But the evidence is hard to pin down. Violent crime in America, Britain and Japan, the three biggest video-game markets, has dropped over the past decade at the same time as sales of video games have soared (see chart 4, next page). That does not, by itself, exonerate the industry-after all, without games violent crime might have fallen still further. And several studies purport to show that playing violent video games raises aggression levels. But Chris Ferguson, a psychologist at Texas A&M International University, points out that much of this work is of poor quality. In a meta-analysis published in 2007, he found no evidence that games made their players violent. Indeed, after decades of research, he has concluded that violence in any media has little or no effect on their consumers. A review commissioned by the Australian attorney-general, published last year,
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9
SPECIAL REPORT VIDEO GAMES
backed this up. But might players not United States: get addicted to gaming? In 1983 David Sudnow, a sociolVideo-games Violent crimes, per 1,000 population sales, $bn ogist, wrote a bestselling 24 8 book, "Pilgrim in the Micro21 world", in which he de18 scribed his obsession with a 15 game called "Breakout". It 4 12 consists of the player bounc3 9 6 ing a ball off a paddle to de1 stroy a collection of bricks on 0 0 the screen. "Thirty seconds of 1995 2000 05 09 play ... and I'm on a whole Sources: US Department of Justice; NPD new plane of being, all synapses wailing," he wrote. That sensation of losing track of time will be familiar to most garners. Again, critics point to the interactive nature of video games, which allows their designers to tweak risks and rewards to make them irresistible. Some countries, including China and South Korea, are attempting to limit the number of hours that youngsters can play online games. Even games developers themselves have expressed concern about online games that rely on keeping players hooked. But there is no suggestion that games are addictive in the sense that they create physical dependence in their players. That makes them akin to other compelling but legal pastimes, such as gambling, following a football club or collecting stamps. There is a long tradition of dire warnings about new forms of media, from translations of the Bible into vernacular languages to cinema and rock music. But as time passes such novelties become uncontroversial, and eventually some of them are elevated into art forms. That mellowing process may already be under way as the average game-player gets older. Mr Ferguson notes wryly that the latest targets of attack are social media such as Facebook and Twitter, which are said to expose children to paedophiles, invade their users' privacy and facilitate riots. Perhaps video games are not so bad. •
Not proven
Alternative uses
The play's the thing What video-game technology can do in the real world A DECADE AGO the computer industry was abuzz with talk about "virtual reality" that would allow the construction of convincing digital facsimiles of the real world. As it turns out, the games industry has come quite close to delivering this. Modern games use cheap hardware and software to create threedimensional worlds with convincing textures and lighting, objects that obey real-world laws of physics and realistic sounds. Such worlds are constructed mostly to allow players to race fantasy cars across them or defend them from invading aliens. But they also have more practical uses. Codemasters is a British developer that specialises in driving games, including a Formula One racing simulator. Its fans demand a faithful recreation of the experience, says Rod Cousens, its chief executive. The firm's software can simulate real-world cars in almost every detail, and the circuits within the game are 10
true-to-life recreations of racecourses such as Silverstone and Monza. When Formula One went to India for the first time this year, the virtual version of the track was ready before the real one; several drivers took advantage of his company's software to practise. "We can recreate every aspect of the track from data given to us by the Fl authorities", explains Mr Cousens.
Toy soldiers Warfare seems an obvious application for games technology. "Steel Beasts", a tank-warfare simulation game developed by California-based eSim Games, is reportedly being used by several Western armies. The Canadian, British and Australian armed forces have experimented with training their soldiers on "Virtual Battle Space 2", a tweaked version of "Arma 2", a military wargame developed by Bohemia Interactive, a Czech games firm. Players take on the role of an individual soldier alongside dozens of other human allies or opponents. They can issue commands to computer-controlled squadmates, fire virtual versions of a variety of weapons used by armies around the world and drive tanks and armoured vehicles, all in an environment of hundreds of square kilometres that alternates between day and night and offers weather effects such as fog and rain. Armies have long used machines to simulate expensive bits of kit such as jet fighters or tanks, says Peter Morrison, who runs the part of Bohemia Interactive that focuses on the military market. But simulating the experience of individual soldiers is something new. Cost apart, his products offer other advantages over the real world. If a commander wants his troops to practise infantry combat in the fog, he does not have to wait for the weather to oblige; he can conjure it up on his computer. Satellite images and geographical data can be fed into the software to generate virtual representations of real places, allowing soldiers to rehearse specific missions. "It's quite likely that the [American special forces] team that killed Osama bin Laden would have rehearsed the raid in some sort of virtual environment," says someone familiar with the military-training business. And since everything the soldiers do is recorded by their computers, data from the mission can be analysed afterwards. There are lots of other possibilities. In 2002 the United States army released "America's Army", a game based on a comThe Economist December 10th 2011
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SPECIAL REPORT VIDEO GAMES
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mercial software package used in dozens of straightforward consumer games, as a recruitment tool. It has been downloaded millions of times and is still played online. Companies are getting interested too. Business-simulation games are available for everyone from managers to call-centre workers and have been used by companies from Coca-Cola to Shell. "Doing this sort of business education as a game can make it more compelling than a traditional chalk-and-blackboard approach," says Tim Luft, of the Serious Games Institute, a research outfit in Coventry, England. His researchers are working on virtual stores for a retail firm and a three-dimensional computer version of the city of Coventry for use by architects and planners in local government. "Big companies could build this kind of software in-house," Mr Cousens concedes. "But why would they? We've spent years and millions of dollars getting it just right. It's easier to just buy it off the shelf." Even as software written for the games industry is being put to serious uses, the element of fun in games is being exploited through the latest management tool, "gamification". This relies on working out what makes video games enjoyable and applying the same techniques to other kinds of activities, from running a business to tackling tricky scientific problems. It may seem a strange notion, but there is something in it. A good example comes from molecular biology-more specifically, the quest to understand the way in which proteins fold. Proteins are complicated chemicals made of long chains of amino acids, the tiny chemical building blocks of life. Those chains can fold up in billions of different ways, and the process by which they arrive at the correct one is still poorly understood. It is vitally important, because misfolded proteins either do not work at all or do things that they shouldn't. Badly folded proteins are implicated in various forms of cancer as well as neurological diseases such as Alzheimer's and Parkinson's. Computers can recognise a well-folded protein when presented with one, but actually finding it calls for the sort of pattern recognition and lateral thinking that they struggle with. Scientists have tried to deal with the problem by using enormous computing power to sift systematically through billions of possible configurations. But in 2008 a team from the University of Washington tried a different approach. The Economist December lOth 2011
They released a program called "Foldit" that turned protein-folding into a free online puzzle game. Players are presented with a protein and given the task of finding its most energy-efficient shape by fiddling with its structure. A better shape means a higher score; dramatic progress is rewarded with lots of extra points, pleasing sound effects and a little shower of virtual streamers. The controls are simple and intuitive, and there are friendly tutorials to tell novices what to do. Online leaderboards let players compare solutions to foster competition. By turning their problem into a game, the scientists have harnessed thousands of human brains without specialist knowledge to work on protein-folding, says Adrien Treuille, a computer scientist at the University of Columbia who helped to develop the program. "We wanted a toy," he says, "something so beautiful and such fun that you could pick it up and start playing with it without any formal training." Vital lessons were learned from professional games developers. "We needed to have a very vivid representation of what was going on. We needed an intuitive interface, and something called 'juiciness'-a game-designer's term for lots of instant positive feedback." "Foldit" and its 46,ooo-plus users have already made serious contributions to biology. A paper published in the September issue of Nature Structural and Molecular Biology shows that "Foldit" players were better than any computer algorithm at modelling the structure of a protein used by retroviruses such as HIV, which causes AIDS. And in the best video-game tradition a sequel, called "EteRNA", is already in the works. It will allow users to investigate RNA synthesis. In business, gamification has become increasingly fashionable over the past year or two. The point about games is that they make players want to perform difficult tasks and pay for the privilege, says Brian Burke of Gartner, a consultancy. Gamifiers try to capture that sense of engagement by providing rapid, continuous feedback, a clear sense of progression and goals that are challenging enough to maintain interest but not so hard as to put players off. One example is FourSquare, a social network (and rival to Facebook) that lets users post their present location for their friends to see. Those who visit a particular place (such as a restaurant or a pub) are given badges. The most dedicated are awarded titles such as "Adventurer" (for ticking ten separate locations) and may be crowned "mayor" of the place. A text-based scoring system is keeping people engaged. Since its launch in 2009 the service has picked up more than 10m users.
Easy,peasy Another example comes from Britain's Department for Work and Pensions, which is offering a gamified version of a suggestion box. Staff who come up with ideas to improve the business are awarded points called "DWPeas" that can be invested in promising suggestions made by other people. If the boss gives the go-ahead, the investors get their points back with interest, thus increasing their total. A leaderboard and a "buzz index" provide the element of competition. But not everyone is convinced. A lot of gamification efforts do not seem to offer anything very different from the old rules of good management. The motivating power of competition and leaderboards are familiar to sales managers, who have had salesman-of-the-month contests for many years. Games designers themselves say that the emphasis on rewards and feedback systems may be missing the point: if the job itself is tedious and repetitive, such bells and whistles can come across as patronising. Mr Burke accepts this. "Gamification can be powerful, but you have to use it carefully," he says. "A lot of what's going on at the moment is driven by little more than novelty andhype." • 11
SPECIAL REPORT VIDEO GAMES
The importance offun
Homo ludens Why video games will be an enduring success WHICH WAS THE very first video game? One plausible candidate is "Nim", a mathematical game with roots in China. It was played on NIMROD, a computer created by Ferranti, an electronics firm, for the 1951 Festival of Britain. In 1952 Alexander Douglas, a British computer scientist, wrote a version of noughts and crosses for the pioneering ED SAC computer at the University of Cambridge. Shooting games made their debut with "Spacewar!", written in 1961 by students at the Massachusetts Institute of Technology for a basic computer called the PDP-1. In the postwar years computing was a brand new technology, but games seem to have been among the first applications that the creators of those early computers thought of. Half a century later they have become the most exciting branch of the entertainment industry. They are a "killer app" that is helping to drive mobile-phone sales, and a key ingredient in the popularity of social-networking sites. Should other media firms worry that games will take over? The numbers can look ominous. In revenue terms, video games already dwarf radio. They are twice the size of the music business and by 2015 will be worth more than the newspaper industry. Just before the recession the games industry was growing by 20-25% a year. Things have slowed down since then, but gaming is still expected to grow by an average of over 8% a year between now and 2015, and is likely to remain the fastest-growing part of the media industry over that period. The history of media technologies suggests that it is rare for any of them to be entirely superseded by others. Long-playing
crophones to let players step into the shoes of their favourite bands. The first licensed use of the Beatles' music outside their Reprints own albums, in 2009, came in Reprints of this special report are available the shape of "The Beatles: Rock at US$7.00 each, with a minimum of 5 copies, Band", a game rumoured to plus 10% postage in the United States, 15% postage in Mexico and Canada. Add tax have earned the Fab Four tens of inCA, DC, IL, NY, VA; GSTin Canada. millions of dollars in royalties. For orders to NY, please add tax based on cost But there is something funof reprints plus postage. damentally different about For classroom use or quantities over 50, please telephone for discount information. games that sets them apart from Please send your order with payment by traditional media such as books cheque or money order to: and films. Games developers Jill Kaletha of Foster Printing Service say that technology is pushing Telephone 866 879 9144, extension 168 or [email protected] back the frontiers of their busi(American Express, Visa, MasterCard and ness in a way that is simply not Discover accepted) open to, say, books or radio. For more information and to order special They point to improving graphreportsand reprints on line, please visit ics, better artificial intelligence our website www.economist.com/rights and bigger worlds featured in their products. The more busiFuture special reports ness-minded may argue that State capitalism January 21st 2012 games offer better value for Pakistan February nth 2012 Financial innovation money than films do. Some will February 25th 2012 say that it is a generational thing, The nuclear world March 10th 2012 and that people who use comPrevious special reports and a list offorthputers in every area of life will coming ones can be found online: naturally expect to use them for economist.comfspecialreports entertainment as well. All these things are true. But the main reason why games are different is that, rather than being consumed passively like all the other media, they are interactive, marrying the power of modern technology to the human desire for play. The compulsion to play is hard-wired into the human race. It is the way people learn. Organised play offers a (fairly) safe outlet for competitive impulses that might otherwise get out of hand. Games, sports and contests feature in every documented human culture. People fill their leisure time with a dizzying variety of games, both sporty and brainy, and as participants as well as spectators. The final match in the 2010s soccer World Cup was watched by hundred of millions of people, making this one of the most widely shared cultural events in history. What the video-games industry has done is to make much of this activity better and more convenient for the players. Video games can offer anything from electronic versions of traditional pastimes, such as poker or rugby, to totally new experiences, such as abstract brain-teasers, simulations of warfare and intricate alternative realities. Consoles provide a cinematic treat in the living room; mobile phones a quick fix on the move. Thanks to the internet, opponents and team mates are never more than a few clicks away. Anyone equipped with the appropriate hardware-which in rich countries is becoming ever more affordable, as well as ever more varied-can now play any game they like, whenever and wherever they want, with anyone they choose. Ultimately the market for electronic games is limited only by the world's appetite for fun and enjoyment. •
The main reason why games are different is that they marry the power of modern technology to the insatiable human desire for play records did not make live concerts obsolete. Television did not kill radio. Books still sell in the age of the internet. This is known as "Riepl's law", after a German newspaper editor who first noticed the effect in 1913. The chances are that, even if video games overtake books and television (and they are still a long way from doing so), the earlier forms will survive alongside them. That is not to say that they will remain untouched. Video games will influence other parts of the entertainment industry and in turn be influenced by them. For example, "The Matrix", a film that first appeared in 1999, had two sequels that could be fully understood only by playing a video game called "Enter the Matrix". The game continued after the third film as "The Matrix Online", an internet-based multiplayer version that ran until 2009. Video games based on popular films or novels have been around for a long time, but now the ideas are beginning to flow the other way. Books based on the "Halo" series of sci-fi shooting games, for instance, have sold over 1m copies. Sometimes games have offered a new way for old media to make money. Musical games such as "Rock Band" and "Guitar Hero" marry the video-games industry with the music business. These games use controllers shaped like guitars, drums and mi12
The Economist December 10th 2011
55 Also in this section 56 Germany's debt brake 56 Germanophobia in France 57 Italy's budget 58 The Romanian economy 58 Macedonia's name dispute 59 Charlemagne: Those obstructive Brits
For daily analysis and debate on Europe, visit Economist.comfeurope
Political crisis in Russia
Voting, Russian-style
MOSCOW
Routine election fraud turns into full-scale protest. The regime is worried
A RIGGED election, a jailed popular blogfiger, an arrogant leader and quiescent television: in the past week the Kremlin has used all of these to trigger Russia's deepest political crisis in years. This may not be the beginning of a revolution, but it is the end of Vladimir Putin's era of alleged stability, which started over a decade ago. Only a few weeks ago Russia's Duma election looked likely to be a non-event with a predetermined outcome. Genuine opposition was barred, state TV propaganda was at full throttle and Mr Putin, Russia's prime minister, and Dmitry Medvedev, the outgoing president, were competing to make pledges of handouts. Governors were set specific targets for how many votes their region should deliver to United Russia, the ruling party. Yet the election, on December 4th, has burst open Mr Putin's political monopoly. United Russia's official result was less than so%, down from 64% at the last election, four years ago. The true figure, say independent monitors, was 15 to 20 points lower. In some regions the party could lose control over local councils. In the polling station where Mr Putin himself voted (and which was probably not tampered with) United Russia got only 23.7%, losing to the Communists, who took 26.3%. Mr Putin seemed furious. Mr Medvedev denied electoral violations but called Vladimir Churov, the head of the electoral commissian, "almost a magician".
In a country where elections are in effeet referendums on the government, this result suggested crumbling legitimacy. It also showed that discontent with the Kremlin was spreading across all social spheres. Unable to channel their protest into genuine opposition, people showed their frustration with United Russia by voting for the Communists, Just Russia, the misnamed Liberal Democratic Party or the old liberal party Yabloko, which was not allowed into parliament. None of these threaten United Russia, but in a sclerotic system they serve as a "bypass", says Lev Gudkov of the Levada Centre, a pollster. Yet it was not these signs of discontent that triggered the crisis, but the Kremlin's response. Election day started with a massive cyber-attack that brought down the websites of Ekho Moskvy, a popular radio station, and of Go los, an independent election monitor that Mr Putin had likened to Judas a few days earlier. The attacks stirred anger, but did not stop monitors and journalists from posting videos of ballot-box stuffing on YouTube and Face book. Most of the Kremlin's efforts were facused on Moscow, where an exit poll suggested that United Russia had won less than 30% support. But after a long delay the result came in at 46.5%, supporting Stalin's famous maxim that it is the counting rather than the voting that matters. The internet boiled over with stories of electionrigging. In some regions turnout appeared
to exceed 140%. In Chechnya United Russia scored 99.5%. A similar result was reported in a Moscow psychiatric hospital. The Russian authorities have "corrected" election results before, but never so blatantly and so cynically. But never before have elections been so closely monitored by volunteers inspired by the reputation of United Russia as "a party of crooks and thieves", a title promoted by Alexei Navalny, a blogger, and widely endorsed across the country. The night after the election some s,ooo Muscovites came out on to the streets. The atmosphere was angry but also jubilant. The election was never going to turn Russia into a democracy, but this was a slap in the face for the Kremlin. Hours later protesters clashed with armoured police and 300 activists were detained, including Mr Navalny, who was handed a 15-day prison sentence. On December 6th another 2,000 protesters were brutally dispersed by the riot police. A few hundred, including several journalists, were arrested and some were beaten up. Spooked by the decision of over 30,000 people to sign up online for street protests on December 1oth, the FSB (successor to the KG B) is trying to censor social networks. In the non-virtual world the Kremlin has deployed its youth movement to occupy large public spaces, brought troops into the centre of Moscow and cordoned off the main squares. To avoid further escalation, on December 8th Mr Putin said that, although the opposition is driven by self-interest, the government should talk to it. Mr Putin still seems determined to return to the Kremlin for another 12 years after next March's presidential election, but he faces a tough choice. He could allow some political competition, which risks unravelling the system, or he could try to suppress discontent and risk being ostra- ~~
56 Europe ~
cised in the West and hated at home. Mr Putin, who dislikes making radical decisions, seems to want to sit it out and leave it to his aides to defuse the tension. Dmitry Peskov, his spokesman, has tried to draw a distinction between Mr Putin and United Russia. Vladislav Surkov, the Kremlin's main political ideologue, said that the protests showed a need for "a mass liberal party, or, more precisely, a party for annoyed urban communities". But as Vedomosti, Russia's business daily, wrote, such moves are too little and too late. Mr Putin's next step could be to dump United Russia, leaving it in the hands of his faithful (and dispensable) lieutenant, Mr Medvedev. It was never more than a pedestal for the prime minister. But although such a move could buy time, it cannot provide legitimacy for another presidential term. There is a risk, say some observers, that Mr Putin will look for enemies outside the country or launch a war against liberal-minded civil society. He has always preferred money to repression as a way of staying in power. But he may have pushed himself into a corner. As he once told journalists, pushing a rat into a corner is a bad idea, because it will jump and chase you. • Germany's debt brake
Tie your hands, please BERLIN
Is Germany's fiscal straitjacket an example for others?
l 'l JILL Schuldenbremse enter the French VV or Italian languages the way "kindergarten" has become part of English? Perhaps. On December 5th the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, agreed that the 17 euro-zone countries should insert a German-style "debt brake" into their constitutions. That, say Europe's first couple, will help prevent a recurrence of the crisis that threatens the euro's survival. The European Court of Justice should verify that all the national Schuldenbremsen pass muster. Germany is not the first European country to have one. Switzerland introduced a debt brake in 2001. Poland caps its public debt at 6o% of GDP, the limit it will have to observe if it joins the euro. But Germany's constitutional Schuldenbremse of 2009 is likely to be the model for the 15 euro-zone countries that do not yet have one. Under its provisions, the federal government must cut its structural deficit (ie, adjusted for the business cycle) to 0.35% of GDP by 2016; the 16 Lander (states) must eliminate theirs entirely by 2020. The idea is to slash public debt from a decadent 83% of GDP
The Economist December lOth 2011
France and Germany
No thanl<s for the memories PARIS
When the going gets tough, the French get Germanophobic HOULDER to shoulder at the Elysee S Palace, Angela Merkel, the German chancellor, and Nicolas Sarkozy, the French president, put on a show of studied unity ahead of this week's European Union summit. Yet despite concessions on both sides there is a growing sense in France that it has given more ground. Just four months from a presidential election, such perceptions have begun to stir up some nasty germanophobie. Arnaud Monte bourg, a defeated candidate at the Socialist presidential primary, compared Mrs Merkel's policies to those of Bismarck, who he said also sought "to dominate other European countries, particularly France". JeanMarie LeGuen, another Socialist, likened Mr Sarkozy to Edouard Daladier, the French prime minister who signed the Munich agreement in 1938 that allowed Nazi Germany to annex the Sudetenland. In an attempt to calm matters, Fran~ois Hollande, the Socialist presidential candidate, who visited Berlin this week while Mrs Merkel was in Paris, insisted that it was "not Germanophobic" to guard against German dominance: "We cannot let the Germans alone appoint themselves experts and judges." Fuelling fears of a loss of sovereignty goes down well in a crisis and ahead of a close election. France, after all, voted against the EU constitution in a 2005 referendum, has always feared the consequences of German reunification and remains divided over the benefits of the single currency. There is plenty of frustration over excessive German rigour. "We all have to be German now," huffs one senior official. Mocking German dominance is in vogue. A cult television advertisement for Renault sends up German superiority by praising French engineering in a mangled mix of French and (close to France's rate) and never again to stray from the path of virtue. Spain adopted a slightly looser version in August; this week Austria passed a similar law (though not a constitutional amendment). The German measure has broad popular support. But it also has its critics. Some economists object in principle, and warn of disaster if Europe follows suit. A bigger group is in favour but sees room for improvement. Peter Bofinger, one of five economic "wise men" who advise the German government, is in the first camp. The debt
(subtitled) German. Still, there is a big step between grumbling mockery and dragging up Germany's darker past. The trouble with fearmongering is that it comes at a time when ordinary people across the Rhine know less and less about each other. There is a web of ties between elite ministries and governments, but French citizens now have fewer links to Germany. The share of secondary-school pupils picking German as a first foreign language has fallen to just 6%, less than half the level2o years ago. Some 93% now go for English, with Spanish the favourite second language. A Senate report calls the trend "preoccupying". France may not have British-style populist tabloids to fan anti-German jingoism. But it does have the far-right National Front, which wants France to quit the euro. Marine Le Pen, the party's media-friendly leader, last week accused Mr Sarkozy of selling France out to a "German diktat". She is running a strong third place in presidential-election polling-a score that, if anything, may understate her support.
brake has two flaws, he argues. First, it breaks the "golden rule" that governments should be able to borrow to make investments that pay long-term dividends, such as in education. Second, it could choke off recoveries. The structural target allows deficits to rise when output falls below its potential. These should then be offset with surpluses during upswings. But this "assumes textbook-like economic cycles," says Mr Bofinger. In real life, cycles are erratic. A recession followed by a weak recovery can shrink potential growth, which in turn could restrict the deficit spending ~~
The Economist December 10th 2011
I
Europe 57 Italy's budget
How they spend it
Saving Italy
Government structural deficit,% of GOP -
Greece Spain
-
France Italy
-
Germany 25 ROME
The new prime minister pleases markets but spooks the people
HOWING that he is not averse to a bit of spin, Italy's new prime minister, MaS rio Monti, called it his "Save Italy" decree: a PR
Source: IMF
~ needed
*Estimate tForecast
to revive demand. Most economists think the brake needs tweaking, not ditching. Germany already had a constitutional golden rule, but that did not stop public debt from climbing (Mr Bofinger blames shocks like the financial crisis). The Schuldenbremse buttresses markets' confidence in Germany. The threat on December sth by Standard & Poor's, a ratings agency, to downgrade Germany (along with other euro-zone countries) was triggered by the crisis, not by fiscal misbehaviour in Germany (see page 79). If natural or economic disaster strikes, deficit limits can be suspended. The extra debt can be paid off when conditions improve. But the Schuldenbremse is complicated and tricky to enforce, and will become no simpler if it spreads across Europe. Determining potential output is an occult discipline. The federal government thinks the output gap is negative this year (ie, the economy is below potential). The Bundesbank reckons it is positive. Spendthrift politicians could exploit such uncertainty. Germany has yet to put its debt brake to the test. The federal government made things easier for itself by a generous calculation of last year's structural deficit, which is to be cut in equal annual steps to reach the 2016 target. Flush with cash, thanks to a strong economy, it has found room for giveaways to voters without falling foul of the brake. Civil servants will get a bigger Christmas bonus next year, for example. For the Lander, the 2020 deadline seems a long way off: 13 of them budgeted for increases in structural deficits this year, laments a study by RWI Essen, a research institute. A "stability council", composed of federal and state ministers, has little power to sanction prodigals. Apparently, it is as toothless as the enforcers of European financial discipline. Yet the debt brake is "clearly better" than the regime it replaced, says Heinz Gebhardt of RWI. Better still if governments beat the deficit targets, giving them scope for stimulus during slumps. Other countries may soon discover how German engineering works in their economies. •
package of fiscal adjustments worth €30 billion ($40 billion) over three years. Susanna Camusso, leader of the CGIL, the biggest trade-union federation, retorted that it risked "saving the country and finishing off the population". On December 12th, in a rare show of unity, the CGIL will join two other labour alliances in a strike against the decree. But it will last only three hours, and essential services will be exempt. Italians may not like Mr Monti's emergency budget, which came into force on December 6th and is expected to win parliamentary approval (which it needs to remain in force) by Christmas. Indeed, it has lopped nine points off his approval rating, according to a poll in Carriere della Sera, a daily newspaper, whose cartoonist depicted the mildmannered professor as a bloodsucking vampire. Yet hardly anybody is prepared to block a measure which the prime minister said was all that stood between Italy and "the Greek risk: not being able to pay salaries and pensions". The initial details cheered the Milan bourse and sent yields on Italian bonds, which had reached worrying levels, plunging. The package will unquestionably put Italy in a stronger position to face the capital markets next year, when it has to refinance more than €300 billion of its €L9 trillion debt. And it is earning Mr Monti friends among his European Union peers, who have been keen to show that Italy is once again a valued partner. The budget includes more deficit-reduction measures to add to those previously imposed by Silvio Berlusconi's government. But Mr Monti also began to do something his predecessor had lamentably failed at: promote growth in sluggish Italy. Fully €10 billion of the savings are to be reinvested with this aim. There is a tax break to encourage firms to hire women and younger workers, a full-scale liberalisation of shopping hours and €3.8 billion for moribund infrastructure projects. Not that results are expected soon. Mr Monti's deputy finance minister, Vittorio Grilli (Mr Monti is his own finance minister), predicts a fall in GDP of up to o.s% next year, with the outlook flat for 2013. There were two main criticisms of the budget. Economists decried its reliance on tax increases-around €18 billion of the to-
tal, according to Mr Grilli. A property tax on first houses, abolished by Mr Berlusconi, was reintroduced, higher excise was slapped on petrol and the government tucked away a possible 2% rise in valueadded tax next September. The immediate spending cuts were more timid, and mostly foisted on the regions. The big savings will come more slowly from a radical shake-up of the generous pensions system. Italy's unique years-in-work system of calculating pensionable age is to be phased out, and the statutory retirement age will be pushed back. The other main criticism of Mr Monti's package was that too much was being expected of the poor. There were measures aimed at the rich: a levy on investments and taxes on private boats, aircraft and luxury cars. But the government also scrapped full inflation-proofing next year for all but the smallest pensions. The effect that could have on more vulnerable Italians was acknowledged by the welfare minister, Elsa Fornero, who was overcome by emotion as she announced the decision. Unwittingly, perhaps, that too was an effective piece of PR: it told Italians that at least the government shared their pain. •
Monti won't let it go to his head
58 Europe
The Economist December lOth 2011
Romania's economy
Bucl
A tight budget and a credit squeeze will make 2012 a tough year
A FTER two years of recession and aus.1""\. terity, Romanians could do with good news. So this week's announcement that the economy grew by 4-4% year-on-year in the third quarter of 2011 was greeted warmly. But the cheer is unlikely to last, thanks to knock-on effects from the euro-zone crisis, a banking squeeze and loan repayments to the IMF due next year. Gheorghe Ialomitianu, the finance minister, describes as "prudent" a 2012 budget that is working its way through parliament. Its measures include a freeze on public-sector wages and pensions, a levy on health care and privatisation of some state assets. Such moves, the government hopes, will trim its budget deficit to just 1.9% of G DP next year, from 4-4% this year. But this depends on some rosy assumptions, including growth of around 2% and more cash from the EU. The European Bank for Reconstruction and Development recently cut its growth forecast for Romania in 2012 from 3.8% to 1.1%. Yet the banks may present the greatest difficulties. Some 16% of Romania's banking sector is in the hands of Greek institutions. Most of the rest, including some of the largest banks, are owned by Austrian banks, which have been advised by regulators in Vienna to limit lending to their subsidiaries in order to meet EU capital requirements. This has not gone down well in Bucharest. Traian Basescu, the president, thundered against banks that had made "huge profits" in Romania getting cold feet during a crisis. Austrian banks have since given reassurances that their Romanian operations are solid and will not be affected. But, just in case, Romania's central bank is preparing a "bridge bank" that would take over any big local institution threatened by insolvency. The health-care system is another headache. Overworked and underpaid doctors have threatened to emulate their counterparts in Slovakia, who resigned en masse earlier this month. The Romanian government's proposed levy, which will oblige patients to pay for a portion of their treatment, has been welcomed by financiers. Part of a drive to privatise the strained postCommunist health-care system, the fee aims to bring in 378m lei ($n6m), money that hospitals can then spend on better equipment or salaries. But medical professionals don't like it. "This fee will hit the most vulnerable and increase inequalities," says Vasile Astarastoae, head of the
Macedonia's name dispute
Call it what you want A legal victory for Macedonia looks hollow
of this small, poor country's 2o·year history there have been few triumphs. Since independence in 1991Macedonia has been locked in a debilitating dispute with Greece over its name. (Greece believes it implies a claim to a northern Greek region of the same name.) But on December sth judges at the International Court of Justice in The Hague at last gave the Macedonians a victory. In1995 the United Nations brokered an accord under which, until the issue was resolved, Greece would not prevent Macedonia from joining international organisations so long as it went under the clunky label of the Former Yugoslav Republic of Macedonia, or FYROM. In 2008, however, Greece stopped NATO extending Macedonia an invitation to join. The Macedonians argued that this represented a breach of the 1995 agreement. It is this claim that the ICJ has now upheld. Yet Macedonia's victory looks hollow, at least for now. The court refused to instruct Greece to refrain from similar conduct in the future, arguing that there
was no reason to suppose it would behave this way again. And after the ruling Anders Fogh Rasmussen, NATo's secretary-general, said that in 2008 the alliance had decided not to invite Macedonia until the name issue was resolved; this, he made clear, had not changed. What about the European Union? Since 2009 Greece has blocked it from offering Macedonia a date for accession talks. Lucas Papademos, the new Greek prime minister, is preoccupied with the financial crisis and uncomfortable dealing with the name row. With Greece now surviving on European loans, some spy an opportunity for its EU creditors, many of whom find Greek intransigence tiresome, to demand more flexibility over the long-running dispute. But that looks naive. Spyros Economides, an academic at the London School of Economics, says that no pressure has been put on Greece to let Macedonia begin EU accession talks, and he does not expect any now. The euro crisis means that enlargement is hardly a priority for Europe. Indeed, many countries are quite happy to find any excuse not to pursue it. Greek objections over Macedonia's name will do nicely.
country's medical council. To add to the squeeze "social contributions" will continue to be levied on all revenues, including pensions and rents, and an increase in value-added tax passed last year will stay despite calls from foreign investors to lower it again. Red tape and corruption are still a plague, and court procedures are lengthy and inconsistent. One of the country's most senior judges, Gabriela
Birsan, is under investigation for allegedly accepting bribes in exchange for issuing favourable verdicts. Almost half of Romanians tell pollsters they believe the economic crisis will last for more than three years. Two-thirds say they have been affected by redundancies or wage cuts. Only 7% approve of the government's handling of the crisis. Bracing for stormy times ahead seems sensible. •
UILDERS are putting the finishing B touches to a triumphal arch in Skopje, Macedonia's capital (above). Yet for most
The Economist December lOth 2011
Europe 59
Charlemagne I Those obstructive Brits A more integrated Europe is heading for a showdown with Britain
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HERE was a time, just a few months ago, when David CamerT on was the toast of Brussels. Those who fretted about Britain's new Conservative prime minister, a declared Eurosceptic, were surprised by how accommodating he could be. He did not stand in the way of the euro zone's new treaty to create a permanent rescue fund. He even helped to bail out Ireland. But now that yet another treaty change looms, the old resentment of the perfidious Brits is returning. For many European leaders, it is Britain that stands in the way of their attempt to save their currency from catastrophe. It is not the only problem facing them, of course, but as this column went to press Mr Cameron was set for a hard negotiation at a summit on December 8th-9th. Days earlier in Paris, Nicolas Sarkozy and Angela Merkel, the French president and German chancellor, had all but given Britain an ultimatum: accept their plan to rewrite the laws of the EU, or prompt the17 members of the euro zone to seek a separate deal and risk British isolation. Mr Cameron said he would veto any treaty that did not contain "safeguards" to protect British interests; if the euro zone wanted a treaty change, so did Britain. A whiff of Margaret Thatcher and her battles for a budget rebate? The zealots on the Tory backbenches wish it were so. Just as the iron lady wanted her money back, they want Mr Cameron to get some (or all) EU powers back. For them, the prime minister is far too flexible. He has resisted calls for a British referendum. He has said his priority is to find a solution to the euro crisis. And he has given himself lots of room to decide which interests to defend. The EU's lawyers, moreover, have come up with a partial fix so that changes to governance rules will require only a vote by the 27 leaders, rather than a full revision procedure involving a convention, an inter-governmental conference and ratification in all27 countries (including some referendums). British officials like this idea (though their parliament would still have to ratify the changes), but the Germans think it does not provide enough powers to impose fiscal discipline. Yet even if a bust-up can be averted, it would only postpone the reckoning. Slowly or quickly, Britain and the euro zone are moving apart. EU veterans might see this as just another British spat. Initially excluded from the club by Charles de Gaulle, Britain has been equivocal about European integration ever since it joined in 1973.
It got its budget rebate, stayed out of the Schengen free-travel area, opted out of the euro, stayed half-out of co-operation on judicial and police affairs and is blocking attempts to create stronger common defence and foreign policies. Its big reason for sticking with the EU is the single market. This is one area where Britain seeks deeper integration, particularly in freeing up services. But this crisis really is different. Like the churning of milk to make butter, the financial turmoil is separating Britain from the euro zone. As it forces euro-zone countries to bind closer, the crisis convinces Britons of the wisdom of keeping the pound. Some say Britain would grow faster if it could shed more EU rules. Eurofederalists and Eurosceptics alike feel vindicated: monetary union cannot work without economic and political unity. Under pressure from the markets, leaders are having to address what the French call the .finalite politique, the end point: United Nations, or United States of Europe? Nobody will say. Either way, the euro zone is heading for more federalism, and Britain may try to regain more sovereignty. Mr Sarkozy, in particular, sees an opportunity to turn the euro zone into an exclusive (and perhaps more protectionist) hard core, dominated by France and Germany. There would be ever more summits of the euro members: during the crisis, he wants them monthly. Germany is more careful about ensuring the involvement of EU bodies and the ten non-euro members. But time and again Mrs Merkel has yielded to Mr Sarkozy on the form of "economic government" to try to win tougher controls on national debt and deficits. Whatever the process, the euro zone will be tempted to tamper with the single market. Take the latest German-French missive, on December 7th: it speaks of euro-zone action on financial regulation, labour markets, a financial-transactions tax and the harmonisation of the corporate-tax base. These should all be matters for the EU at 27, not at 17. What price Britain's interest? Britain should worry. Mr Cameron's price for his assent to treaty change is unclear. Officials speak of changes to EU employment laws; guarantees that EU regulation will not harm Britain's financial-services industry; mechanisms to ensure that the euro "ins" don't dominate the "outs"; and preserving the single market. None of this will be easy. France and others will resist any hint of "social dumping" by Britain. Special pleading for the City of London gets short shrift from those who think "Anglo-Saxon speculators" caused the crisis and may be plotting to destroy the euro. Britain has more support when it seeks to defend the single market and the interests of the euro "outs". But its friends are wary: if Britain gets special protection for the City, why not extend favours for the car industry in Germany or agriculture in France? And most "outs" do not want to be too closely associated with Britain; their ultimate aim is to become "ins". Mr Cameron has to balance aims that may be irreconcilable. In the short term he must avert the collapse of the euro zone and prevent a debilitating mutiny within his own party. This could push him into letting the euro zone go its own way in order to avoid a difficult British ratification. But his longer-term interests suggest he should moderate his bidding to allow treaty change at 27 and remain at the table. Why? To preserve the single market, promote British influence and act as a promoter of economic liberalism-for the sake of Britain and Europe. • Economist.comfblogsfcharlemagne
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61 Also in this section 62 Shrinking dgars 63 Bagehot: God in austerity Britain
For daily analysis and debate on Britain, visit Economist.comfbritain
Reforming welfare
Nice worl< if you can find it LONDON AND SOLIHULL
An ambitious, well-intentioned welfare-to-work programme is struggling against the economic current HE scene in a grey industrial estate in T Solihull, in the West Midlands, looks like a typical factory floor. Security guards pace the premises as workers go about their tasks. Some sit at terminals completing forms on computers. In the canteen staff prepare for the lunchtime rush. The difference is that most of the people here are not in a job at all, but at an employment centre run by a private contractor-part of a bold government-funded project to get the unemployed into work. The backdrop is forbidding. Job growth in the private sector is weak, and publicsector jobs are disappearing. Fully 2.62m people, representing 8.3% of Britain's potential workforce, are unemployed. A growing number of people have languished on benefits for many months and even years (see chart). Ministers desperately want to avoid a return to "hysteresis", an ugly word for the ugly phenomenon of systemic unemployment that persists even when the economy improves. Other countries have successfully implemented welfare-to-work programmes. Few have done so in such daunting circumstances. America's Clinton-era reforms were enacted at a time of falling unemployment. Australia, which ministers visited when drawing up the British plan, also faced a less dire economic outlook when it began serious reforms in 2004.
Sweden delivered changes in a harsher climate soon after the 2008 recession, but many of the resulting jobs were sponsored by local authorities-not what Britain's Conservative-led coalition has in mind. The government has set about a thorough reform of benefits. lain Duncan Smith, the work and pensions secretary, wants to replace six housing and work benefits with a single universal credit. He also wants a cap of £26,ooo ($40,747) on the amount that can be paid to a single household, to ensure that those relying on welfare do not make more than average working folic Some Church of England
I
A mountain to climb down Unemployment claimant count, m Up to 3 months •
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Between 6 and 12 months •
Over 12 months 1.6
1.2 0.8
0.4
(HI il ri I jill 1111 iijllf II I lijl I loll Iii ! I l rlf iiji I IIIII I
2006
07
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bishops have declared this cap "profoundly unjust" (see Bagehot). But the Work Programme, launched in June, is the big idea for getting more people off handouts. It has commissioned 18 main providers to deliver 40 contracts across Britain at a cost of up to £5 billion. Sevenyear contracts to remove the uncertainty of changeable government schemes are coupled with incentives to get people into long-term jobs and keep them there. EOS, the contractor which runs the Solihull centre, has attempted to replicate workplaces. Local firms can set up shop in its employment centres to try out employees. From a gallery above the shop floor, prospective bosses can look down on those going about their tasks and select the most diligent workers. Trade skills like plumbing and basic construction are taught, while in classrooms, jobseekersknown as "clients"-learn how to use the internet and personal networks to sniff out local jobs. Steven Bell, an EOS manager, brushes aside the worry that there are few jobs to be had. In a tight labour market, he says, people have to adjust their expectations: there are always unfilled vacancies. Twothirds of those on the company's programme are on job seekers' allowance-basic unemployment benefit. Placing one of them in sustained work earns the contractor between £3,800 and £4.400. The remaining third suffer from a variety of health problems, from physical disability to chronic depression. Readying a member of this group for a job and sustaining him or her in one is worth a total of £13,700. Besides delightful things like a gym, a cafe and free computer facilities lurks the threat of benefits forfeited. EOS quickly sends out reminders to those referred by ~~
62 Britain
The Economist December lOth 2011
~ jobcentres
who fail to turn up. After that, they are notified that welfare payments can be withdrawn. No figures are yet available for how often this has happened, though Chris Grayling, the minister responsible for the measures, insists that the threat is "already changing behaviour". But perhaps not quickly enough. Departmental sources admit that it is proving hard to move people off incapacity benefit. The number of appeals against decisions by independent assessors that people are fit for work has quadrupled in two years, from 68,ooo in 2009 to a projected 240,000 by the end of this financial year-at a cost to the taxpayer of £8om. Some believe that the payment-by-results system itself is failing. Ian Mulheirn of the Social Market Foundation, a pro-reform think-tank, says the scheme is in danger of financial collapse because many contractors are missing their targets: "The only question is when ministers will face up to it." He estimates that even the most efficient schemes can move only 10% more people to jobs who would not have found work by themselves.
And you can find it if you try Hard data are frustratingly lacking. Mr Grayling said recently that the Birmingham programme had placed its 1,oooth person in a job, without revealing how many it had tried to help. And there is another gripe. Besides cutting worklessness, the programme was intended to involve small charitable and voluntary providers as part of the Tories' inclusive "Big Society". In practice, these small outfits have ended up as subcontractors; they receive only a small share of the funding pot. Some resist involvement with the Work Programme. Amber, a charity supported by a mixture of private fund-raising and grants, focuses on readying young people from poor backgrounds for work. Many are ex-offenders with drug and alcohol problems. Its chief executive, Charles Drew, argues that the amounts earmarked for moving such hard cases off sickness benefits are too low to cover the kind of long-term rehabilitation required. "They need their lives rebuilt before they can stay in work reliably," he says. As the jobless figures continue to rise, some unfashionable ideas are returning. Graeme Cook, an analyst with the Institute for Public Policy Research, a centre-left think-tank, believes that the coalition should provide state-sponsored jobs to ensure that young and long-termjobseekers don't stay in the cold for too long. Although the coalition formally resists this New Labour-era idea, the chancellor recently agreed to provide some wage subsidies for companies employing people who have struggled to find work-and to channel £300m into apprenticeship schemes. But the fiscal squeeze limits options.
Cigars
Up insmol<e Why size matters more than ever
A GOOD cigar should be smoked slow.1"\..ly and relished, reckoned Zino Davidoff, a Swiss tobacco merchant; a puff a minute is about right, according to his 1967 "Guide to Cigar Etiquette". But fewer people are sparing the time. Cigar sales have declined by a fifth in the past five years-part of a general decline in smoking. Yet miniature cigars are holding steady. They now make up 6o% of the British cigar market, according to Nielsen, a research firm. Fat cigars are handmade-each dried tobacco leaf is visible-and must be carefully stored to keep them moist. Like wine, they have vintage years. Aficionados relish the girth, firmness and fragrance of their cigars. They sport special equipment (mini-guillotines to take off the cap) and follow clear rules (always light your own cigar). They also have famous patrons: Winston Churchill smoked six to ten a day, usually Cuban, and gave his name to a brand. Miniature cigars, by contrast, are uniform, mass-produced and drier, filled with a blend of chopped tobacco rather than rolled leaves from a single crop. There are even flavoured varieties, such as vanilla, espresso rum twist and caramel cream cigars. They have become more popular than larger versions for two reasons. First, the ban on smoking in workplaces, introduced in Scotland in 2006 and the rest of Britain in 2007. A typical cigar lasts The programme cannot, for instance, hand out lavish child-care credits to entice more women back to work. Spending cuts mean that measures like state-sponsored jobsupport schemes will not be as generous as they were under Labour. The coalition's impatience with what David Cameron, the prime minister, calls "sick-note culture" is laudable. So is its determination to make state handouts a last
at least 45 minutes, but minis take between three and five minutes to smoke-a better choice for those forced out into the cold from formerly ashfriendly venues such as pubs and gentlemen's clubs. Manufacturers have taken note: STG, a tobacco company, launched "Moments" in April, named to reflect the appeal of a shorter smoke. The second reason is that people have less money to burn. The fashion for handmade smokes in the 1990s pushed up their prices: a single cigar costs upwards of £10 ($16). But a ten-pack of Cafe Creme, the most popular brand of massproduced cigars, retails for a little over £4 and is sold in supermarkets and corner shops. Moments cigars and Calistos, another new brand launched this year, are even cheaper. Since cigars are taxed by weight, the duty on a fat cigar is far higher than the 43% on a standard pack, according to the Tobacco Manufacturers' Association. Even firms that hand-roll cigars are responding to these shifts. Sales are rising of"short robustos", stubby fat cigars around four inches long made from high-quality tobacco, which take about 20 minutes to smoke. Smoking a massproduced mini is a completely different experience to a hand-rolled variety, says Ryan Curtis of JJ Fox, a cigar merchant since 1787 that is located round the corner from The Economist's offices. Connoisseurs might say it was close, but no cigar. resort rather than a way of life-a goal that eluded the previous government, which nonetheless threw a lot more money at the problem. Opinion polls show strong support for an overhaul of welfare. But overhyping the impact of a single programme when the stubborn central problem is slow economic growth does not seem wise. It is not just the unemployed who have their work cut out. •
The Economist December lOth 2011
Britain 63
Bagehot I God in austerity Britain As recession looms, the Church of England is active and vocal, but in the wrong way responding high point for the Church of England, says Lord Harries, a former bishop of Oxford and long-standing BB c broadcaster. The beginnings of a similar seriousness can be felt today. The Bishop of Leicester, Tim Stevens, points to the headlines generated when church leaders question government policies. If bishops can make the front page, is the country as secular as all that, he asks? Actually, yes. The latest British Social Attitudes Survey shows just 20% of the British public calling themselves members of the Church of England, down from 40% in 1983. Roman Catholicism (about one in ten of the population) is more stable. Half of the population say they have "no religion". More than half "never" attend a religious service. Non-Christian faiths are growing but small (6% of the population).
ONSIDERING that Britain is a deeply secular country, there is a lot of God about this Christmas. Austerity is a part of the C explanation. With the core cultural activity of modern Britainshopping for stuff-losing its lustre, there are hints of a nation groping for something more profound. For millions, austerity Christmas will include a dose of carols. The trend has been noticeable for a couple of years. The great cathedrals expect to be packed on Christmas Eve. Charity services, family services, carols by candlelight and sing-along concerts abound. A London church, St Martin-in-the-Fields, is offering "carols for shoppers", while across town the grand organ of the Royal Albert Hall, a 9,997-pipe monster, will pound through some two dozen carol concerts in December. Anglican voices are prominent in less cosy contexts, too. On December 6th the Archbishop of Canterbury, Rowan Williams, made front-page news with a commentary on the riots that gripped English towns last August. Too many young people feel they have nothing to lose, the archbishop argued, decrying consumerism and government cuts to youth services. A fortnight earlier,18 Anglican bishops wrote a joint letter condemning plans for a per-household benefits cap (intended to ensure that welfare recipients do no better than the average working family). This risked being "profoundly unjust" to poor families with children, said the bishops. The Anglican church has become rather proprietorial about anti-finance protesters camped in the City of London outside St Paul's Cathedral, after a muddled initial response that saw two senior clergymen resign. Yes, the protesters' demands are vague, but that just shows that the Church of England is used as a place to air society's "unspoken anxieties", suggested Archbishop Williams last month. The Bishop of London has organised meetings between Occupy London protesters and the chief financial regulator, Hector Sants. On a homelier note, a priest reports that two protesters have started attending cathedral services. It is possible to see why some Anglican clergymen are bullish about their church's relevance in austerity Britain, despite decades of falling attendance and gibes about woolly, waffly priests wringing their hands at how complicated life is. The decade after the second world war witnessed a "new seriousness", and a cor-
Come all ye faithful, and not The evidence that the Church of England is returning to the centre of public life is ambiguous. True, religious music is popular. In some places that shows a yearning for faith. But if cathedrals are increasingly popular, it is in part because they are anonymous, admits a priest: there is no danger of being asked to visit a sick parishioner afterwards. Business is also booming for commercial carol concerts in non-church settings, where a mince pie and nostalgia are as much the lure as harking the singing of herald angels. Across the country, Raymond Gubbay, an impresario behind several shows at the Royal Albert Hall, is putting on 200 such Christmas concerts. Nor is the St Paul's Cathedral camp as flattering as it seems. The protesters wanted to surround the London Stock Exchange. Thwarted, they ended up at St Paul's largely by accident. Headlines about bishops chiding the government are also doubleedged. Too often, what is striking is not the daring of Anglican prelates but their lack of self-confidence. Time and again, bishops sound like shop stewards for the welfare state, taking to the airwaves to demand the preservation of specific benefits without mentioning the church, the role of faith or Christianity. Welfare utopianism is an Anglican tradition. In the 1940s the church embraced the welfare state as a modern, professional alternative to charity, willingly dismantling voluntary relief networks and signing over thousands of church schools, hospitals and other bodies to the state, notes Linda Woodhead of Lancaster University. In a 1985 report the church attacked Margaret Thatcher for putting economic efficiency ahead of welfare. She retorted that church-going is not about wanting "social reforms and benefits" but about spiritual redemption and, indeed, God. The church has a perfect right to comment on politics, says Lord Harries. If you love your neighbour, you must have a view on policies that affect his welfare. At the same time, he argues, the English have always been reticent about religious language. The clergy must use religious imagery "very shyly", otherwise the English immediately back away. Fair enough. England is an odd place: a secular country where an established church still has a role in public life (and, on the ground, does much unsung good). But the economy may be about to fall off a cliff. That poses a huge test for the Church of England and its claims to be a source of national strength. If the church cannot offer a message more spiky and distinctive than social democracy in a clerical collar, it will fail that test. • Economist.comfblogsfbagehot
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65
City building
Also in this section
Hong Kong in Honduras
67 Realising a libertarian dream
An ambitious development project aims to pull a Central American country out of its economic misery. Can it work? RUJILLO is a sleepy backwater, but one T with a lot of history. The beautiful bay surrounded by lagoons and mountains on the northern coast of Honduras was where Christopher Columbus set foot on the American continent during his fourth voyage in 1502. But in a few decades, it might be known for something entirely different: being the Hong Kong of the West. Scores of skyscrapers and millions of people could one day surround the natural harbour. The new city could dominate Honduras, today one of the poorest and most crime-ridden countries in Central America, becoming a magnet for most of the region's migrants. The prospect may sound fantastic, but this is the goal of an ambitious development project that Honduras is about to embark upon. In a nutshell, the Honduran government wants to create what amounts to internal start-ups-quasi-independent city-states that begin with a clean slate and are then overseen by outside experts. They will have their own government, write their own laws, manage their own currency and, eventually, hold their own elections. This year the Honduran legislature has taken the first big steps towards the creation of what it called "special development regions". It has passed a constitution-
a! amendment making them possible and approved a "constitutional statute" that creates their autonomous legal framework. Mauritius has just announced that it will allow its supreme court to hear cases from the new entities (beyond that, in a relic of colonialism, is Britain's Privy Council, to which the decisions of the island state's supreme court can be appealed). And on December 6th Porfirio Lobo, the Honduran president, appointed the first members of the "transparency commission", the body that will oversee the new entities' integrity. Finding new worlds The road to a Honduran Hong Kong will be long and rough. Forming the transparency commission proved more difficult than expected. It has taken longer to find candidates with the right skills. Then Honduran officials seemed to have second thoughts about the commission. But for enthusiasts, the progress so far is still thrilling. The development regions, they say, will allow policies to be tested on a small scale. If their laws and institutions make them an attractive place to live and do business, people will move there. They could also provide healthy competition for the government and spur reform. The Honduran regions are modelled on a concept called "charter cities" developed
by Paul Romer, an economics professor at New York University. The principle is simple: take a piece of uninhabited land big enough for a city of several million, govern it by well-tried rules and let those who like the idea move there. The aim is to replicate the success of such places as Hong Kong, not as colonial outposts but as models of development. Mr Romer is best known for his insights about technology, not as a constitutional theorist. But the project stems naturally from his research, chiefly the "new growth theory" that he helped develop in the 1990s. This adds ideas-particularly technological know-how-to the inputs of land, labour and capital that in traditional economic theory are needed for growth. More recently he has focused on the rules of open science and governance systems, which help people to deal with each other and think up ideas. Today his main interest is "meta-rules": how to move from bad rules, which keep people in poverty, to the sort that lets them thrive. These, he reckons, matter just as much as the better-studied questions around technological change. "What types of mechanisms will allow developing countries to copy the rules that work well in the rest of the world?" he asks. Changing such bad rules singly is hard ~~
66 International
The Economist December lOth 2011
~ enough.
But insider interests and institutional inertia make reforming an entire country at best excruciatingly slow. Coercion offers a tempting shortcut, but it usually backfires. Outside help, whether in the form of cash, advice or "nation-building" efforts, has a generally poor record too. The idea of setting up a charter city echoes the way that big companies adapt to change. They often set up new divisions unencumbered by old rules. These can be dramatic successes. Target, America's second-largest discount retailer, began life as an internal start-up but eventually took over its parent company, Dayton Hudson. A clean slate allows government authorities to experiment with laws and governance or copy those that have worked elsewhere, says Mr Romer. A further spinoff, potentially of great interest to rich countries such as America struggling with illegal migration, is that the new entity's open door gives the huddled masses analternative: instead of risking their lives on perilous journeys to cross borders illegally, they can move legally to a charter city. Boots not ballots More fundamentally, Mr Romer argues, when people vote with their feet to come and live in a charter city, they opt in to its rules, in a way that makes possible a new form of governance: neither authoritarian nor (at least initially) fully democratic. Migration to Britain gives the legal system there legitimacy in the eyes of those who move there, even if they cannot vote. If the English legal system were enforced on the same person in his home country, Mr Romer notes, that would be colonial rule. For this reason he wants rich countries to oversee the administration of charter cities, in particular the judicial system and the police. This would not only protect them from interference by the host nation but avoid a common problem in poor countries: that elected leaders, once in office, abuse their power to entrench their rule and enrich themselves. Honduras has not adopted Mr Romer's ideas wholesale, although the project as planned still enjoys his strong support. Doing away with new autonomous entities or even changing their framework will require a two-thirds majority in the country's congress and the passage of a referendum by the cities' inhabitants. But the Honduran charter cities will remain legally intertwined with the local judicial system. Although nominated by the cities' governing authorities, judges must be approved by a two-thirds majority in the Honduran legislature. Lawmakers will also need to ratify the region's laws, albeit only by a simple majority to say yes or no. Perhaps the most important feature of the new venture is the "transparency commission", a kind of board of trustees that appoints the governors, supervises their
actions and is meant to make sure that the entities are beyond reproach, not least when it comes to the corruption (often fuelled by the drugs trade) that plagues the region. "It is easier to create a board of trustees than to give control of part of your territory to a foreign nation," says Octavia Sanchez Barrientos, the presidential chief of staff. A role for foreign government is still an option, but only Mauritius has so far signed on-as part of its push to become a global provider of legal services. In other areas, Mr Romer's original ideas have prevailed. At least one new region will be big-about the size of Hong Kong (some1,ooo square kilometres). Most revenues will not come from taxes (which are capped at 12% for individuals and 16% for corporations) but from leasing land to investors. And democracy will be introduced gradually. Only when the transparency commission deems that the time is ripe will citizens be able to elect the members of the "normative councils"-in effect, local parliaments. This aspect of the plan is just one of those attracting heated criticism. Some find the explicit (if temporary) rejection of democracy repellent. Others detect a whiff of neocolonialism: gimmicks dreamed up in rich countries being foisted on poor ones. They believe that the project is especially misplaced in Honduras, a country crippled by weak state machinery and courts that flounder in the face of organised crime. The new entity may suck tax revenues and talent away from the rest of the country, critics fear. Another worry is that the new entities may prove more like Macau than Hong Kong: easy prey for gangsters, money-launderers and other shady characters. Much will depend on the transparency commission. The first batch of members appointed this week comprise George Akerlof, another economist and Nobellau-
reate; Nancy Birdsall, formerly at the InterAmerican Development Bank, who now runs the Centre for Global Development, a think-tank; Ong Boon Hwee, a former senior executive at Temasek Holdings and Singapore Power; and Harry Strachan, an investor who used to run IN CAE, a leading Latin American business school, with Mr Romer himself in the chair. The commission's first job is to fill all of its nine seats. Then the hard work will start, first on investigating whether any foul play has already taken place: rumours are circulating that insiders have bought land in or near Trujillo and other potential sites. Next comes helping pick the regions' locations and choosing developers in a way that inspires confidence not suspicion. The Honduran agency for publicprivate partnerships has already signed several memoranda of understanding with firms including South Korea's Pasco and two start-ups with libertarian leanings (see next article). Wanted: people Then there is the general population. The regions are supposed to be open to anybody, but the inflow of people may have to be controlled. What is more, success or failure will depend not just on good rules, as in laws, but on the social norms that are established by its first inhabitants, explains Mr Romer. The key, he says, is to begin with a core of people who share certain new norms-rather as when William Penn attracted people to Pennsylvania who were committed to his charter's legal promise of freedom of religion. Once the norms are well established in a community, subsequent immigrants will adapt to them. Last, but not least, comes security. Private security firms will have to protect the population in the new cities. Honduras is one of the world's more corrupt countries, in 129th place out of 183 in a survey of out- ~~
The Economist December ~
International 67
lOth 2011
siders' perceptions by Transparency International, a Berlin-based lobby group. It also has the region's highest murder rate. The local police have a poor reputation. Last month 176 police officers were arrested in a corruption crackdown. Many uncertainties remain about both the theory and the practice of charter cities, and about whether a small and troubled country like Honduras is the right place to start. Mr Romer's response is that if his ideas can work there, they can work anywhere. Even if no charter city ever rises
in the country, the project has helped torefine and promote his ideas. Other countries have already shown some interest in the concept (among the locations talked about are north Africa and Asia Minor). It is not just the connection with Columbus that makes Trujillo a suitable site for the first charter city. It was there in 1896 that the pseudonymous American writer 0 . Henry wrote "Cabbages and Kings", a derisive tale of torpor, in which he coined the term "banana republic". Skyscrapers would be a suitable riposte. •
Free cities
Honduras shrugged Two start-ups want to try out libertarian ideas in the country's new special development regions
IS GUSTED by an increasingly invasive D state, America's most capable entrepreneurs retreat to Galt's Gulch, a libertarian commune. That was the theme of Ayn Rand's magnum opus, "Atlas Shrugged", a sacred text for libertarians ever since it was published in1957. Actually creating such an enclave has been the dream of many fans of small government (or of none at all). Several have had a try at it, but their efforts have always ended in disaster (see table). Now, for the first time, libertarians have a real chance to implement their ideas. In addition to a big special development region, the Honduran government intends to approve two smaller zones. And two libertarian-leaning start-ups have already signed a preliminary memorandum of understanding with the Honduran government to develop them. One firm goes by the name of Future Cities Development Corporation. It was co-founded by Patri Friedman, a grandson of Milton Friedman, a Nobel laureate in economics, and until recently executive director of the Seasteading Institute, a group producing research on how to build oceanbased communes. The other is called Grupo Ciudades Libres (Free Cities Group) and is the brainchild of Michael Strong and Kevin Lyons, two entrepreneurs and libertarian activists. Both share a purpose: to build "free cities". Last April all three spoke at a conference organised by Universidad Francisco Marroquin, a libertarian outfit in Guatemala. In September they and Giancarlo Ibargiien, the university's president, launched the Free Cities Institute, a thinktank, to foster the cause. As so often with enthusiasts, divisions within the cause run deep. The two firms hail from different parts of the libertarian spectrum. Mr Friedman is an outspoken
critic of democracy. It is "ill-suited for a libertarian state", he wrote in an essay in 2009-because it is "rigged against libertarians" (they would always lose) and inefficient. Rather than giving its citizens a voice, he argues, they should be free to exit; cities should compete for them by offering the best services. The second firm's backers appear to be less radical. A founder of several charter schools, Mr Strong is now the force behind FLOW, a movement that claims to combine libertarian thinking "with love, compassion, social and environmental consciousness", says its website. He too prefers exit over voice (meaning that he thinks that leaving and joining are better constraints on executive power than the ballot box). But he also believes that democratic consent is needed in certain areas, such as criminal justice. His goal in Honduras is less to implement libertarian ideals than to reduce poverty and to speed up economic development. Some in the Honduran government
I
have libertarian leanings, which is one reason why the authorities have moved so quickly. But when the master developers for the new zones are selected next year, strong political credentials will not be enough-and may even prove to be a drawback. Mr Friedman is stressing a difference between his political beliefs and his firm. "Ideology makes bad business," he says, adding that Future Cities Development wants to focus on the needs of the people who live in the city. Yet the biggest hurdle for the libertarian start-ups may be that the transparency commission, which will oversee the development regions, is unlikely to give them free rein. The "constitutional statute" for the development zones, which the Honduran national congress passed in August, does not leave much wiggle room in key areas, not least when it comes to democracy: ultimately their citizens will vote. Both firms, however, have links to prominent libertarians with deep pockets. Mr Strong is close to John Mackey, the cofounder and chief executive of Whole Foods, a high-end supermarket chainthough Mr Strong says that Mr Mackey already has too many other things on his plate. Mr Friedman's contacts seem more promising: the Seasteading Institute received lots of cash from Peter Thiel, a Silicon Valley billionaire who founded the internet payment service Pay Pal and was an early investor in Face book, the world's biggest social network. Mr Thiel's ambitions go far beyond scouting out the next big thing in technology. "I no longer believe that freedom and democracy are compatible," he wrote in an essay in 2009. This is why libertarians should find an escape from politics, he added. "Because there are no truly free places left in our world, I suspect that the mode of escape must involve some sort of new and hitherto untried process that leads us to some undiscovered country." Back then he had the ocean or space in mind. Honduras would certainly be more convenient. •
Libertarians of the world, unite! Attempted new microstates and other libertarian efforts, selected Principality ofSealand
Who
When How
Paddy Roy Bates, fisherman
1967
Outcome
Seized gun tower off British coast, Disabled by fire in 2006; declared statehood, issued passports, internet efforts flopped .... ......... ~?~~!'d!.~ter.~.~~ ~~~~es .... b~~ on.~~~.~ .casi.~? P. ~~~ n.~? Operation Werner Stiefel, 1970 Built a huge ferrocement boat which Sank in a hurricane in the Atlantis dermatology tycoon made it to the Bahamas early 1970s ..... an.~ .AY~.. RaF.J.? f~.~- ...... ...... ...... .... ..... ..... ............ .............. .. Republic of Michael Oliver, 1971 Dumped sand on two coral reefs in Seized by neighbouring Minerva real-estate the South Pacific Tonga in 1972; dissolved millionaire .. ............................ back into ocean ........... -······························ ······-·· ............................................................................... . The Atlantis Eric Klien, investor 1993 Planned to set up floating sea city Fund raising failed in 1994 . P.r.o.J~.ct:. .............................. ........................................ ....................... ...................... ...................... .................................... .. Free State Political activists 2001 Plan ned to recruit at least 20,000 Claims 1,000 have moved . P.r.C>J~.ct: .................................................................l.i.~~0:a.~~.~.s.~? .f!l.C>~~.~C>.~.~~.~.~.~~.s .h.i :.e... a.~~..n .2.99..~.~~~.~i~.n.~?..~.P. Freedom Peter Banas, 2009 Planned to establish tax haven in a Looking for financing Ship big ship former FBI agent Source: The Economist
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69 Also in this section 70 America's spectrum scramble 71 Glocer goes from Thomson Reuters 71 The doyen of French advertising 72 A biotech patent battle 73 Carmakers and greenery 74 Schumpeter: University challenge
For daily analysis and debate on business and our weekly "Money talks" pod cast, visit Economist.comfbusiness-finance
Macau's gambling industry
A window on China MACAU
What an offshore gambling mecca reveals about business in China OT far from China's coast, Macau's caN sinos buzz with the energy and abandon of the wildly wealthy. Marble columns, gold decor and money are everywhere. But behind the glittering facades there are signs of something darker. Macau's success is not built purely on the Chinese love of gambling. It is also fuelled by a stampede of nervous money fleeing the mainland. A look behind the scenes at Macau reveals a lot about Chinese corruption, and also about how scared many Chinese businessfolk are about the political climate back home. Since 2004 when American casino operators first opened there, Macau has grown faster than a dealer sorts chips. Gaming revenues in the first 11 months of the year were 44% higher than in 2010; Macau is now four times bigger than Las Vegas. The former Portuguese colony, a "special administrative region" of China since 1999, is now the world's gambling capital. High-flyers who gamble with borrowed money in private rooms, known as VIPS, contributed around 72% of Macau's $23.5 billion in revenues last year (see chart). Because gambling is illegal in mainland China, Macau is their destination of choice. The island's idiosyncratic "junket" system helps to bring rich Chinese to Macau. Junkets are middlemen who lend high-rollers money, arrange accommodation and are paid around 40% of the casinos' take in return. (In Las Vegas casinos carry out background checks on gamblers
and lend to them directly.) But it is not just a passion for cards that brought more than 13.2m mainlanders to Macau in the first ten months of this year. Many come to elude China's strict limits on the amount of yuan people can take out of the country. A government official who has embezzled state funds, for example, may arrange to gamble in Macau through a junket. When he arrives, his chips are waiting for him. When he cashes out, his winnings are paid in Hong Kong dollars, which he can stash in a bank in Hong Kong or take farther afield. "There are many ways to launder money, more than we can think of," says Davis Fong, an associate business professor at the University of Macau. Some bypass junkets and instead use pawnshops and other
I
Treasure island Macau casinos, revenue, $bn 40
-
Mass-markettables and slot machines VIP tables
30
20
10
0
2004 05
06
07
Source: Goldman Sachs
08
09
10
11* 12* *Forecast
stores, where they buy an item with yuan and promptly sell it back for Macanese pataca or Hong Kong dollars-less, of course, a generous cut for the shopkeeper. No one can quantify how much money is laundered in Macau, but it's "such an obscene amount of money you would die", one resident avows. Mainland China offers scant legal protection for private property. The rich, many of whom cut corners to get that way, know they could lose it all suddenly. Many also fear losing their political patrons next autumn, when China's Communist Party will anoint a new generation of leaders. Small wonder they are seeking havens for their money and their families. According to the Hurun Report, a wealth researcher, some 14% of rich Chinese say they have already left the country or are filling out paperwork to obtain a foreign passport. Another 46% are considering one of these steps. A recent report by Bank of America Merrill Lynch warned about the destabilising effects of "hot money" speeding out of China this year. The flow of money through Macau has caught the eye of the government in Beijing and may explain a temporary crackdown in 2008 on the number of Macau visas given to mainland Chinese. According to cables made public by WikiLeaks, an online troublemaker, others are also watching. A memo sent in December 2009 from the American consulate in Hong Kong to the secretary of state said that "[Macau's] phenomenal success is based on a formula that facilitates if not encourages money laundering." In a cable in 2008 Joseph Donovan, then the American consul-general in Hong Kong, wrote that "some of these mainlanders are betting with embezzled state money or proceeds from official corruption, and substantial portions of these funds are flowing on to organised crime groups in mainland Chi- ~~
70 Business ~
na, if not Macau itself." Many have also started to worry about the junkets' health, partly out of concern about the stability of China's "shadow lending" system. If rich Chinese saw their businesses collapse or property investments plunge, as some fret could happen if the mainland's economy slows, the 200 or so junkets that operate in Macau could have trouble getting their money back from gamblers. At best there would be less money to lend. But junkets that could not collect debts might implode, leaving the casinos that had extended credit to them with big losses. Many casino executives do not seem to know how much money they have lent to junkets, which makes it hard to assess the possible extent of defaults. Casino operators, like their customers, remain sanguine about future winnings. According to analysts, no big junket has reported any issues with bad loans so far. A casino executive said recently that he worried less about a junket going under than
The Economist December lOth 2011
he did about the implication of a Macanese official in a corruption scandal or a murder at a casino. Any big crime would probably encourage China to intervene more heavily in Macau's affairs and specifically in the gaming industry. You can bet that the casinos want to avoid that. They are trying to attract more "mass-market" customers, who actually want to gamble for fun. Such people do not need loans to play and offer better margins, because casinos do not need to pay junkets a cut. A high-speed railway being built from Guangzhou province to Macau will make it easier to lure them. Some casinos are also building venues with less floor space for blackjack and more for shops, theatres and restaurants. This may help placate the government in Beijing, which would rather see its citizens shop for jewellery than for a different currency. But as long as money feels nervous in China, it will seek a way out, and Macau is awfully convenient. •
American telecoms
A breath of fresh airwaves WASHINGTON, DC
The scramble for spectrum could reshape America's telecoms industry ULIUS GENACHOWSKI, the head of America's Federal Communications Commission (Fcc), has called wireless spectrum "the oxygen that sustains our mobile devices". Yet unlike oxygen, the airwaves over which telecoms companies transmit their wireless signals are in ever shorter supply. According to the FCC's calculations, America needs to make 300 megahertz (MHZ) of additional spectrum available by 2014 to avoid a "crunch" that drives up consumers' mobile-phone bills and holds back innovation. Some critics reckon the regulator's projections are too pessimistic. But telecoms firms say an explosion of wireless data triggered by smartphones and tablet computers is indeed soaking up capacity fast. Hence the scramble for more airwaves. On December 2nd Verizon Wireless, the country's largest mobile operator, announced a $3.6 billion deal to buy spectrum from several cable-television companies. AT&T, another telecoms behemoth, has been telling anyone who will listen that its $39 billion bid for T-Mobile usA, a smaller rival, should be approved in part because it would ease a capacity headache: AT&T has plenty of capital but needs more spectrum, while T-Mobile has the airwaves but lacks the capital to exploit them fully. The snag is that allowing AT&T and TMobile to merge would stifle competition
J
in the wireless market-which is why both the Department of Justice and the FCC oppose it. AT&T and Deutsche Telekom, TMobile's German parent, have pledged to fight on, but the merger's chances are slim. Verizon's deal, by contrast, will probably be cleared by the FCC, which must approve transfers of licensed spectrum. Could more wireless capacity be liberated from other businesses that do not need it? The FCC thinks so. It has come up with a proposal to persuade TV companies
Fighting over spectrum, not the sofa
to part with some of their airwaves. It would solicit spectrum from broadcasters and then repackage it into larger lots to be sold in an auction. The revenue raised would be shared between the government and the broadcasters. The FCC thinks this could release up to 120MHz of TV broadcast spectrum. TV companies could instead sell their holdings to telecoms companies directly. But this would probably mean lots of tiny, fragmented packets of airwaves changing hands. Wireless operators will pay more for large, contiguous parcels of spectrum, which is why the FCC wants to orchestrate the process. Legislation to give it permission to do so is making its way through Congress. It may be passed by the end of the year. But some broadcasters have given warning that the plan could hurt some stations. "We're concerned this will have unintended consequences," says Alan Frank, the chief executive of Post-Newsweek Stations, which has operations in Detroit, San Antonio and other cities. TV folk fret that the FCC wants to be able to force stations to swap channels if necessary, even if they do not take part in the auction, so that it can create attractive parcels. This will raise their costs and could lead to the disappearance of some stations in cities near the Mexican and Canadian borders, where TV spectrum is already limited. Such concerns can be dealt with. Legislators are likely to create a fund to compensate broadcasters who have to move channels. And they will probably require the FCC to try hard to preserve existing TV coverage when it repackages airwaves. Congress's enthusiasm to get something done is understandable. For one thing, an auction will raise billions of dollars for the public purse. For another, it will create jobs by encouraging firms to invest in their networks. Failure to act would send the wrong signal to one of America's fastest-growing industries. •
The Economist December 10th
Business 71
2011
Thomson Reuters
Screen test
I
Blooming close Business-information companies' market shares % of glo ba l tota l
40
~
Reut~
35
--------------
30
Thomson
LONDON AND NEW YORK
The information company, in danger of losing its top spot, gets a new boss N SEVEN years as head of Reuters, Tom Glocer brought the British-based news agency from the verge of bankruptcy to a state of rude health. But he has done less well as chief executive of Thomson Reuters, the company created when Thomson, a Canadian purveyor of professional information for lawyers, accountants and others, bought Reuters in 2008. Bloomberg, the firm's American rival, has almost wiped out its once-clear lead (see chart). On December 1st Mr Glocer said he would step down at the end of the year. His replacement, James Smith, the chief operating officer, is a former Thomson man. The revenues of the professional division of Thomson Reuters grew by 10% in the year to the third quarter, but those of the markets division-which provides financial data and services, and accounts for more than half of total sales-managed only 1%. Last year that division launched a new information platform, Eikon, to compete with the terminals offered by Bloomberg, but just 8,ooo customers have taken it up. The company has 40o,ooo financialdata subscribers in all. Thomson Reuters and Bloomberg are the big fish in the professional-publishing pond, at least eight times larger than their nearest competitor. Bloomberg, besides expanding its terminals business, which has over 300,000 customers (at about $2o,ooo a pop), is pushing into government-related news and data. In 2010 it launched Bloomberg Government, which competes with Congressional Quarterly, a sister company of The Economist. In September it made its biggest purchase ever, spending $990m on BN A, a legal- and tax-information firm. So what happened to Mr Glocer's winning streak? His allies say his departure was always just a matter of time: once a firm buys another, it completes the takeover by putting its own people in charge. The Thomson family still owns 55% of the company, and some think the generous price Mr Glocer secured from Thomson for Reuters made him all the more vulnerable. But he might have stayed longer were it not for a mix of bad luck and overconfidence. Eikon, intended to replace Reuters' grab bag of services with a single offering, was designed to be more user-friendly than Bloomberg's devices, but it was launched hastily and with flaws. With hindsight, a more gradual upgrade might have been more prudent. This summer, under pressure from the Thomson family,
Other
25
Bloomberg
I
2005
06
07
Source: Bu rton -Taylor Internatio nal Consulting
08
09
10
20
"' 11 t
*Before 2008, co mbi ned market sha re of Reuters and Tho mson Financial t Forecast
Mr Glocer fired Devin Wenig, a close ally he had put in charge of creating Eikon, and took it over himself-tying his prospects even more closely to Eikon's. Perhaps Mr Smith can do better. He will almost certainly have a freer hand, and some upgrades to Eikon are planned for
next year. But these are still stormy seas. According to Claudio Aspesi, an analyst at Sanford C. Bernstein, an investment bank, it took most professional-publishing firms three to four years to recover from the 2001 recession. This time, Bernstein predicts, revenue growth at Thomson Reuters will not reach pre-crash levels until at least 2015. One area of potential growth, though, is trading services. Changes in financial regulation in America and Europe will force a lot of trading in derivatives from the murky world of private "over-the-counter" deals onto exchanges, where contracts will be standardised and prices quoted. This presents both Thomson Reuters and Bloomberg with an opportunity to gather and sell data on these markets and perhaps to capture a share of the trade by linking banks and their clients through their own electronic trading platforms. The market for these derivatives is gigantic. A competitive edge there could make a big difference to both companies' fortunes. •
Advertising
Four more years PARIS
The doyen of French advertising shows no sign of slowing down, still less of standing down "MAURICE is immortal," says the chief executive of a French multinational. When told of his friend's comment, Maurice Levy, boss of Publicis, one of the world's biggest advertising firms, is visibly flattered. But he demurs. "When you think you are immortal, you will make the biggest errors of your life," he says. "I know that if I fail to find the right successor, my entire career will be a failure." Mr Levy's longevity at the top is unusual in a business known for short attention spans. But Publicis is unusual, too. Since the Paris-based firm was founded by Marcel Bleustein-Blanchet in 1926, it has had only two bosses: the founder and Mr Levy, who took over in 1987. Mr Levy, who turns 70 in February, had planned to retire at the end of this year, but the board recently raised the age limit for its members to 75. On November 29th Publicis said that all of them had been reappointed for four years. The board wants him to stay, says Mr Levy, because the economic crisis could last, so they want a safe pair of hands at the top. He sees lots of uncertainty next year, though he does not think that companies will cut back advertising spending as sharply as they did after the collapse of Lehman Brothers in 2008. Their response to the dire state of the economy will vary from one industry and country to the next. In Europe, not surprisingly, the outlook is
Practising Levytation bleaker the farther south you go. Yet the forecast for global ad spending in the next few years released on December 5th by ZenithOptimedia, an agency owned by Publicis, is fairly rosy. It says spending will rise by 4.7% in 2012 to $486 billion, having gone up by 3.5% this year. A good chunk of next year's increase is due to events that come around every four years: a presidential election in America, the summer Olympics and the European football championship. The forecast for the next two years, though, is even better: 5.2% growth in 2013 and 5.8% in 2014 (see ~~ chart on next page).
72 Business
The Economist December lOth 2011
The internet and emerging economies are the two fastest-growing areas in the ad world. Mr Levy is betting big on both. Five years ago he bought Digitas, an internet-ad agency, for $1.3 billion. Some thought that pricey. Undeterred, Mr Levy bought Razorfish, an American digital agency, for $530m in 2009, and Rosetta, another, for $575m in May this year. Today internet advertising accounts for more than 30% of the revenue of Publicis, against around 20% for WPP, its British rival. In China, by far the biggest advertising market among emerging economies, Publicis is pushing hard, taking over local agencies. Mr Levy admits that WPP entered sooner and is bigger. (WPP's approach in emerging economies is different too, with more weight on public relations and market research.) Success in China may determine who takes over from Mr Levy. The company has put Jean-Yves Naouri, the chief operating officer, in charge there. Insiders say that if Mr Naouri doubles the size of Publicis in China, as planned, from €2oom ($265m) in 2010 to €400m by 2012, he will make it to the top. Whoever succeeds Mr Levy will have big shoes to fill. Mr Levy transformed Publicis from a French also-ran at the end of the 1990s into the world's number three, behind WPP and Omnicom, an American firm. He did this through the conquest of other agencies on a Napoleonic scalemost notably the takeover of Britain's Saatchi & Saatchi and America's Bcom3, which came with a coveted collection of clients. "They bought quality companies for a full price," says Christophe Cherblanc, a media analyst at Societe Generale, a French bank. Mr Levy is not planning another transformative takeover in the near future. Publicis is regularly rumoured to be sniffing around Interpublic, a big American ad firm, Aegis, a British group, and even Ipsos, a French market researcher. But that would mean taking on more debt, and Mr Levy says that this is not a good time to borrow money. And he will not want to hand over a highly indebted company to his successor-whenever that happens. •
The Olympics, and beyond! World media advertising spending, $bn
@
550 525 500 475 450 425
FORECAST 400
12008
09
10
11
Source: ZenithOptimedia
12
13
14 *Estimate
Biotech patents
Tal
NEW YORK
A legal fight over a new generation of medicine
RUG research is in dark times, as pipeD lines dry up and development budgets are cut. But one shaft of light pierces the gloom. "Personalised medicine" promises to craft drugs for individuals. Genetic tests will identify those who will benefit from specific medicines. Treatment will be more effective; waste will drop. Personalised medicine has sparked excitement among drugmakers, doctors, hospitals and patients. It has also sparked a legal brawl. On December 7th America's Supreme Court heard arguments in Mayo v Prometheus. The suit, despite a name that suggests an ancient liver sandwich, may be crucial for biotechnology firms. America is the world's hub for drug research. By definition, personalised medicine includes the study of genetic mutations and other personal characteristics. However, American law bars patents of nature and abstract ideas. The question is which discoveries in personalised medicine may be patented. Prometheus is part of a series of suits over biotech patents. Courts have been active because Congress has not. A recent patent reform provided little clarity. Congress merely ordered a study of genetic testing. Judges have been bolder: in July a federal court ruled that genes could be patented. On December 7th the suit's losers appealed to the Supreme Court. But Prometheus may have greater practical import, says Hans Sauer of the Biotechnology Industry Organisation (BIO), a trade group. Firms are studying genetic correlations that might predict a drug's effica-
cy or determine the cause of a disease. Prometheus may determine whether methods using such correlations may be patented. The fight has attracted the heavyweights of health care. On one side is Prometheus Laboratories, a Californian company that has patented a way to optimise certain drug treatments for individuals. On the other is the Mayo Clinic, a health and research centre. Prometheus's supporters include BIO and several tech firms. Roche and Abbott, two big drugmakers, gave warning against invalidating patents on diagnostic tests. Mayo's allies include the American Medical Association. The patents in question do not concern genetic tests, though the suit's outcome will affect them. They concern tests for the effectiveness of thiopurines, drugs that have long been used to treat gastrointestinal disorders such as Crohn's disease. Their effect depends on how they are metabolised. Neither thiopurines nor tests for metabolites (substances produced by metabolism) were new when Prometheus's patents were filed in 1998. But the patents cover the process for determining whether a given dose produces concentrations of metabolites within a recommended range. The dose of thiopurines could be adjusted accordingly. Prometheus sells a test based on its patents to hospitals and clinics. In 2004 Mayo developed a competing test, with different recommended levels of metabolites. Prometheus sued. Mayo's lawyers say Prometheus has patented a mere observation of the body's ~~
The Economist December 10th ~
Business 73
2011
natural workings. Let the claim stand, Mayo argues, and firms will win broad patents over basic biological relationships, stifling innovation. Prometheus and its allies warn of an alternative apocalypse. A judgment in Mayo's favour, they contend, will undermine existing patents and shrivel investment in personalised medicine. The Supreme Court may not make such a broad judgment. It may instead hand
down a narrower ruling that leaves many questions unanswered. A natural phenomenon may not be patented, but which applications of that phenomenon might be? When studying genetic correlations, which so-called discoveries are truly novel? Eventually personalised medicine may transform patients' care and firms' business models. In the near future, the greatest beneficiaries may be patent lawyers. •
Carmakers
Revenge of the petrolheads
Fossil-fuel cars are getting much cleaner, making life hard for green ones HE Chevrolet Volt, a compact, petrolT a year electric hybrid launched by ago, was already selling poorly before it GM
emerged last month that its batteries had caught fire in crash tests. GM is likely to fall several thousand short of its target of selling 1o,ooo Volts this year. Despite subsidies, electric cars and hybrids (which can run off batteries or a generator powered by an engine) are shifting sluggishly. The Volt's battery problem should be fairly easy to fix. But the profusion of hybrid and all-electric cars now hitting the roads faces a far bigger challenge. Petroland diesel-engined vehicles are becoming much more fuel-efficient. That means motorists will remain reluctant to pay a fat premium for a green car. Between now and 2025 regulators in Europe, America and elsewhere plan to impose ever greater curbs on cars' emissions of carbon dioxide (or higher fuel efficiency, which has much the same effect). This is forcing carmakers to invest both in developing electrics and hybrids and in making the conventional engine cleaner. Ricardo, an engineering consultancy, and Sanford C. Bernstein, an investment bank, have crunched a bunch of numbers
I
Closing the gap Exhaust-pipe C0 2 emi ssions*, gj km , forecast -
Petrol Hybrid
Diesel Plug-in hybrid
-
(petrol/electric)
(petrol/electric) 150 120 90 60 30
-L------~------L-----~- 0
2010
15
20
So urces: Ricardo; Sanford C. Bernstein
25 *Class Ccars
on the technology race between conventional and green vehicles. They conclude that petrol and diesel cars will keep closing the emissions gap (see chart), while hybrids and, especially, electrics, will be more expensive to own for years to come. The internal-combustion engine will still be king of the road in the early 2020s, when only a fifth of cars sold in Europe will be hybrid or electric. America's regulators are only now getting tough on fuel efficiency, so its cars are guzzling as much petrol as they did 20 years ago. However, in Europe, which got strict sooner and where fuel is heavily taxed, petrol and diesel vehicles have become much cleaner. The average new car sold in Britain now does 52.5 miles per galIon, up from 40.6mpg ten years ago. Even so, says Neville Jackson of Ricardo, there remains much scope for improvement: petrol and diesel cars still typically use less than a fifth of the energy stored in their fuel to turn the wheels. Plenty more miles can be squeezed out of each gallon. It is simply a matter of cost. To meet a series of deadlines to cut emissions, carmakers are putting into their cheaper models all sorts of gear hitherto
mostly seen on pricey high-performance cars: turbochargers and superchargers (which mean the engine can be smaller and more fuel-efficient), fancy fuel-injection systems and valve trains; grilles with variable aerodynamics, and so on. Next year Ford will offer a new Focus compact car in Europe, with a one-litre, three-cylinder engine that performs as well as the 1.6 litre, four-cylinder engine it replaces, yet uses about 20% less fuel. Joe Bakaj, an engineer at Ford, says that even American buyers of the company's F-150 pickups, who would normally scoff at anything with less than a v8 engine, are switching to a new v6 version that performs at least as well but drinks less fuel. The analysis by Ricardo and Bernstein shows the carmakers are in a tight spot: given motorists' aversion to the cost of electrics and hybrids, the quickest route towards meeting the deadlines for cutting emissions is to invest heavily in cleaning up their petrol and diesel cars. But to squeak past the finishing line they will still need a small proportion of hybrids and electrics. So they will have to keep spending on designing these, without their reaching a level of sales that will make them profitable. Stefanie Lang of Bernstein says this will force carmakers to work together on developing new technology: Toyota, for example, has agreed to work with Ford on hybrid sport-utility vehicles and with BMW on both electric batteries and diesel engines. Carmakers are also dabbling in battery leasing (Renault) and car-sharing (Daimler) as they seek ways to persuade motorists that electric cars are affordable. Hybrids and electrics will be a drag on carmakers' profits for years. But they are a useful marketing tool. GM has found that adding the hybrid Volt (pictured) to its model range is enticing into its showrooms the sort of young urban buyers who normally ignore Detroit-made cars. Many balk at the Volt's $32,000 price (after a generous government subsidy), but some end up driving away in a petrol-engined car like the Cruze, costing around half as much. •
The Economist December lOth 2011
74 Business
Schumpeter I University challenge Slim down, focus and embrace technology: American universities need to be more businesslike
ARACK OBAMA invited a puzzling group of people into the White House on December 5th: university presidents. What should one make of these strange creatures? Are they chief executives or labour leaders? Heads of pre-industrial guilds or champions of one of America's most successful industries? Defenders of civilisation or merciless rack-renters? Whatever they might be, they are at the heart of a political firestorm. Anger about the cost of college extends from the preppiest of parents to the grungiest of Occupiers. Mr Obama is trying to channel the anger, to avoid being sideswiped by it. The White House invitation complained that costs have trebled in the past three decades. Arne Duncan, the secretary of education, has urged universities to address costs with "much greater urgency". A sense of urgency is justified: ex-students have debts approaching $1 trillion. But calm reflection is needed too. America's universities suffer from many maladies besides cost. And rising costs are often symptoms of much deeper problems: problems that were irritating during the years of affluence but which are cancerous in an age of austerity. The first problem is the inability to say "no". For decades American universities have been offering more of everythingmore courses for undergraduates, more research students for professors and more rock walls for everybody-on the merry assumption that there would always be more money to pay for it all. The second is Ivy League envy. The vast majority of American universities are obsessed by rising up the academic hierarchy, becoming a bit less like Yokel-u and a bit more like Yale. Ivy League envy leads to an obsession with research. This can be a problem even in the best universities: students feel shortchanged by professors fixated on crawling along the frontiers of knowledge with a magnifying glass. At lower-level universities it causes dysfunction. American professors of literature crank out 70,000 scholarly publications a year, compared with 13,757 in 1959. Most of these simply moulder: Mark Bauerlein of Emory University points out that, of the 16 research papers produced in 2004 by the University of Vermont's literature department, a fairly representative institution, n have since received between zero and two citations. The time wasted writing articles that will never be read cannot be spent teaching. In "Academically Adrift"
B
Richard Arum and]osipa Roksa argue that over a third of America's students show no improvement in critical thinking or analytical reasoning after four years in college. Popular anger about universities' costs is rising just as technology is shaking colleges to their foundations. The internet is changing the rules. Star academics can lecture to millions online rather than the chosen few in person. Testing and marking can be automated. And for-profit companies such as the University of Phoenix are stripping out costs by concentrating on a handful of popular courses as well as making full use of the internet. The Sloan Foundation reports that online enrolments grew by 10% in 2010, against 2% for the sector as a whole. Many universities' first instinct will be to batten down the hatches and wait for this storm to pass. But the storm is not going to pass. The higher-education industry faces a stark choice: either adapt to a rapidly changing world or face a future of cheeseparing. It is surely better to rethink the career structure of your employees than to see it wither (the proportion of professors at fouryear universities who are on track to win tenure fell from so% in 1997 to 39% ten years later). And it is surely better to reform yourself than to have hostile politicians take you into receivership. A growing number of universities are beginning to recognise this. They understand that the beginning of wisdom in academia, as in business in general, is choosing what not to do. They are in recovery from their Ivy League envy. They are also striking up relations with private-sector organisations. And a growing number of foundations, such as the Kauffman Foundation, are doing their best to spread the gospel of reform and renewal. Seats of learning Western Governors University (WGU) in Salt Lake City was founded in 1996 by 19 state governors who saw the crisis coming. To squeeze costs, it does all of its teaching online. It also separates lots of things that are bundled together in traditional universities. Professors decide what they want students to know and design tests to see whether they have learned it. But they buy teaching materials from independent publishers and employ "mentors" to guide students. It is notable that the head of WGU was one of the nine university bosses invited to the White House. BYu-Idaho has decided that focusing on teaching undergraduates is the way forward. It has got rid of expensive encrustations such as the athletics and PhD programmes and introduced yearround courses. Cornell teaches 1o,ooo students online every year, most of them working adults. Southern New Hampshire University has five satellite colleges that make it easier for students to live at home while studying. The University of Southern California's Rossier School of Education has formed a partnership with a private company, 2tor, to design courses for students in 45 states and13 countries. Nearly 100 years ago American universities faced similar worries about rising costs and detachment from the rest of society. Lawrence Lowell, the president of Harvard, argued that "institutions are rarely murdered; they meet their end by suicide ... They die because they have outlived their usefulness, or fail to do the work that the world wants done." America's universities quickly began "the work that the world wants done" and started a century of American dominance of higher education. They need to repeat the trick if that century is not to end in failure. • Economist.comfblogsjschumpeter
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There could be trouble ahead In 2008 the world dodged a second Depression by avoiding the mistakes that led to the first. But there are further lessons to be learned for both Europe and America "VOU'RE right, we did it," Ben Ber.1. nanke told Milton Friedman in a speech celebrating the Nobel laureate's 90th birthday in 2002. He was referring to Mr Friedman's conclusion that central bankers were responsible for much of the suffering in the Depression. "But thanks to you," the future chairman of the Federal Reserve continued, "we won't do it again." Nine years later Mr Bernanke's peers are congratulating themselves for delivering on that promise. "We prevented a Great Depression," the Bank of England's governor, Mervyn King, told the Daily Telegraph in March this year. The shock that hit the world economy in 2008 was on a par with that which launched the Depression. In the 12 months following the economic peak in 2008, industrial production fell by as much as it did in the first year of the Depression. Equity prices and global trade fell more. Yet this time no depression followed. Although world industrial output dropped by 13% from peak to trough in what was definitely a deep recession, it fell by nearly 40% in the 1930s. American and European unemployment rates rose to barely more than 10% in the recent crisis; they are estimated to have
topped 25% in the 1930s. This remarkable difference in outcomes owes a lot to lessons learned from the Depression. Debate continues as to what made the Depression so long and deep. Some economists emphasise structural factors such as labour costs. Amity Shlaes, an economic historian, argues that "government intervention helped make the Depression Great." She notes that President Franklin Roosevelt criminalised farmers who sold chickens too cheaply and "generated more paper than the entire legislative output of the federal government since 1789". Her book, "The Forgotten Man", is hugely influential among America's Republicans. Newt Gingrich loves it. A more common view among economists, however, is that the simultaneous tightening of fiscal and monetary policy turned a tough situation into an awful one. Governments made no such mistake this time round. Where leaders slashed budgets and central banks raised rates in the 1930s, policy was almost uniformly expansionary after the crash of 2008. Where international co-operation fell apart during the Depression, leading to currency wars and protectionism, leaders hung together
in 2008 and 2009. Sir Mervyn has a point. Look closer, however, and the picture is less comforting. For in two important-and related-areas, the rich world could still make mistakes that were also made in the 1930s. It risks repeating the fiscal tightening that produced America's "recession within a depression" of 1937-38. And the crisis in Europe looks eerily similar to the financial turmoil of the late 1920s and early 1930s, in which economies fell like dominoes under pressure from austerity, tight money and the lack of a lender of last resort. There are, in short, further lessons to be learned. Riding for a fall It was far easier to stimulate the economy in the 2ooos than in the 1930s. Social safety nets-introduced in the aftermath of the Depression-mean that today's unemployed have money to spend, providing a cushion against recession without any active intervention. States are more relaxed about running deficits, and control much larger shares of national economies. The package of public works, spending and tax cuts that President Herbert Hoover introduced after the crash of 1929 amounted to less than 0.5% of GDP. President Barack Obama's stimulus plan, by contrast, was equivalent to 2-3% of GDP in both 2009 and 2010. Hoover's entire budget covered only about 2.5% of GDP; Mr Obama's takes 25% of GDP and runs a deficit of 10%. Roosevelt raised spending to 10.7% of output in 1934, by which point the American economy was growing strongly. By 1936 inflation-adjusted GDP was back to
~~
Briefing Lessons of the 1930s 77
The Economist December 10th 2011 ~ 1929
levels. Just how much the New Deal spending helped the recovery is still debated. Some economists, such as John Cochrane of the University of Chicago and Robert Barro of Harvard, say not at all. Fiscal measures never work, they say. Those who think that fiscal measures do work nonetheless tend to believe that, in the 1930s, spending was less important than monetary policy, which they see as the prime cause of suffering. In a paper in 1989 Mr Bernanke and Martin Parkinson, now the top civil servant in Australia's finance ministry, wrote that rather than providing recovery itself "the New Deal is better characterised as having 'cleared the way' for a natural recovery." Others, such as Paul Krugman, would ascribe a more positive role to stimulus spending. Whatever relative importance is assigned to monetary and fiscal policy, though, there is little doubt that their simultaneous tightening five years into the Depression led to a vicious relapse. Spurred by his treasury secretary, Henry Morgenthau-who worried in 1935 that "we cannot help but be riding for a fall unless we continue to decrease our deficit each year and the budget is balanced"Roosevelt urged fiscal restraint on Congress in 1937. By that point the national debt had reached an unheard of 40% of GDP (huge by the standards of the day, but half what Germany's debt is now). Congress cut spending, increased taxes and wiped out a deficit of s.s% of GDP between 1936 and 1938. That was a larger consolidation than Greece now faces over two years (see chart 1), but is much smaller than what is planned for it in the longer term. At the same time the Federal Reserve doubled reserve requirements between mid-1936 and mid-1937, encouraging banks to pull money out of the economy. The Treasury began to restrict the money supply in step with the level of gold imports. In 1937 and 1938, the recession within a depression brought a drop in real GDP of n% and an additional four percentage points of unemployment, which peaked at 13% or 19%, depending on how you count it.
The Snowdens of yesteryear Today's monetary policy hasn't turned contractionary, as America's did in the 1930s. As The Economist went to press, the European Central Bank (ECB) was expected to announce a further reduction in interest rates. But in many places fiscal policy is moving rapidly in that direction. Mr Obama's stimulus is winding down; stateand local-government cuts continue. Republican candidates for the presidency echo the arguments of Mr Morgenthau, claiming that deficit-financed stimulus spending has done little but add to the obligations of future taxpayers. Mr Obama, like Roosevelt, has started to stress the
I
Contraction has consequences Change in budget balance as a% ofGDP 2009-13 forecast (unless otherwise indicated) Annual average
I Total change,% of ~ 0
0.5 1.0 1.5 2.0 2.5 3.0
United States (1936·38)
~
Greece
[iQ3J
Spain
WJ
United States
[IT]
Britain
[ll]
Italy
[llJ
Germany
[ll]
Sources: BEA; IMF; White House
need for budget-cutting. If the current payroll-tax cut and emergency unemployment benefits were to lapse, growth over the next year would be reduced by around one percentage point of GDP. America is not alone. Under David Cameron, Britain's hugely indebted government introduced a harsh programme of fiscal consolidation in 2010 to avert a loss of confidence in its creditworthiness. The rationale was similar to that for chancellor Philip Snowden's emergency austerity budget of 1931, with its tax rises and spending cuts. On that occasion confidence was not restored, and Britain was forced to devalue the pound and abandon the gold standard. On this occasion the measures have indeed boosted investor confidence, and thus bond yields; that the country still faces a second recession is in large part due to the euro zone's woes. That said, the possibility of such shocks should always be a counsel for caution when a government embarks on fiscal tightening. Some say tightening need not hurt. In 2009 Alberto Alesina and Silvia Ardagna of Harvard published a paper claiming that austerity could be expansionary, particularly if focused on spending cuts, not tax increases. Budget cuts that reduce interest rates stimulate private borrowing and investment, and by changing expectations about future tax burdens governments can also boost growth. Others doubt it. An International Monetary Fund (IMF) study in July this year found that Mr Alesina and Ms Ardagna misidentified episodes of austerity and thus overstated the benefits of budget cuts, which typically bring contraction not expansion. Roberto Perotti of Bocconi University has studied examples of expansion at times of austerity and showed that it is almost always attributable to rising exports associated with currency depreciation. In the 1930s the contractionary impact of America's fiscal cuts was mitigated to some extent by an improvement in net exports; America's trade balance swung from a deficit of 0.2% of G DP to a surplus of u% of GDP between 1936 and 1938. Now,
most of the world is cutting budgets and not every economy can reduce the pain by boosting exports. The importance of monetary policy in the 1930s might suggest that central banks could offset the effects of fiscal cuts. In 2010 the IMF wrote that Britain's expansionary monetary policy should mitigate the contractionary impact of big budget cuts and "establish the basis for sustainable recovery". Yet Britain is now close to recession and unemployment is rising, suggesting limits to what a central bank can do. The move to austerity is most dramatic within the euro zone-which can least afford it. Operating without floating currencies or a lender of last resort, its present predicament carries painful echoes of the gold-standard world of the early 1930s. In the mid-1920s, after an initially untenable schedule of war reparations payments was revised, French and American creditors struck by the possibility of rapid growth in the battered German economy began to pile in. The massive flow of capital helped fund Germany's sovereign obligations and led to soaring wages. Germany underwent a credit-driven boom like those seen on the European periphery in the mid-2ooos. In 1928 and 1929 the party ended and the flow of capital reversed. First, investors sent their money to America to bet on its soaring market. Then they yanked it out of Germany in response to financial panic. To defend its gold reserves, Germany's Reichsbank was forced to raise interest rates. Suddenly deprived of foreign money, and unable to rely on exports for growth as the earlier boom generated an unsustainable rise in wages, Germany turned to austerity to meet its obligations, as Ireland, Portugal, Greece and Spain have done. A country with a floating currency could expect a silver lining to capital out- ~~
I
Debtors throttled M1 money supply,% change on two years ago October 2011 or latest (unless otherwise indicated)
Creditor countries* (1929·31}
Debtor countries* (1929·31}
Euro-area core! Euro-area periphery! Germany France Netherlands Euro area Italy Spain Greece Sources: Bank of Greece;
"Golden Fetters" by Barry Eichengreen; Haver
Analytics; The Economist
,.= ~ 'Within the gold standard !Austria, Belgium, Finland, France, Germany & Netherlands !Greece, Ireland, Italy, Portugal & Spain
78 Briefing Lessons of the 1930s ~ flows :
the exchange rate would fall, boosting exports. But Germany's exchange rate was fixed by the gold standard. Competitiveness could only be restored through a slow decline in wages, which occurred even as unemployment rose. As the screws tightened, banks came under pressure. The Austrian economy faced troubles like those in Germany, and in 1931 the failure of Austria's largest bank, Credit Anstalt, triggered a loss of confidence in the banks that quickly spread. As pressure built in Germany, the leaders of the largest economies repeatedly met to discuss the possibility of assistance for the flailing economy. But the French, in particular, would brook no reduction in Germany's debt and reparations payments. Recognising that the absence of a lender of last resort was fuelling panic, the governor of the Bank of England, Montagu Norman, proposed the creation of an international lender. He recommended a fund be set up and capitalised with $250m, to be leveraged up by an additional $750m and empowered to lend to governments and banks in need of capital. The plan, probably too modest, went nowhere because France and America, owners of the gold needed for the leveraging, didn't like it. So the dominoes fell. Just two months after the Credit Anstalt bankruptcy a big German bank, Danatbank, failed. The government was forced to introduce capital controls and suspend gold payments, in effect unpegging its currency. Germany's economy collapsed, and the horrors of the 1930s began. It is all dreadfully familiar (though no European country is about to elect another Hitler). Membership in the euro zone, like adherence to the gold standard, means that uncompetitive countries can't devalue their currencies to reduce trade deficits. Austerity brings with it a vicious circle of decline, squeezing domestic demand and raising unemployment, thereby hurting revenues, sustaining big deficits and draining away confidence in banks and sovereign debt. As residents of the periphery move their money to safer banks in the core, the money supply declines, just as it did in the 1930s (see chart 2). High-level meetings with creditor nations bring no surcease. There is no lender of last resort. Though the European Financial Stability Facility (EFSF) has got further off the ground than Norman's scheme, which it chillingly resembles, euro-zone leaders have yet to find a way to leverage its €440 billion up to €2 trillion. Even if they succeed, that may be too little to end the panic. Investors driven by turmoil in Italian markets are pre-emptively reducing their exposure to banks and sovereign bonds elsewhere in the euro zone. Even countries with relatively robust economies such as France and the Netherlands have not been spared. No matter
The Economist December lOth 2011
how secure an economy's fiscal position, a short-term liquidity crunch driven by panic can drive it into insolvency. History need not repeat itself. Norman's Bank of England was created in the 17th century to lend to the government when necessary; central banks have always been obliged to lend to governments when others will not. The ECB could take on this role. It is prohibited by its charter from buying debt directly from governments, but it can purchase debt securities on the secondary market. It has been doing so piecemeal and could declare its intention to do so systematically. Its power to create an unlimited amount of money would allow it credibly to announce its willingness to buy any bonds markets want to sell, thus removing the main cause of panic and contagion. This week France and Germany proposed the adoption of legally binding budgetary "golden rules" by euro-zone members, ahead of a summit of European leaders in Brussels on December 8th-9th. Mario Draghi, the ECB's new president, has hinted that were a fiscal pact to be agreed, the ECB might buy bonds on a larger scale. What scale he has in mind, though, is unclear. ]ens Weidmann, president of Germany's Bundesbank and an influential member of the ECB's governing council, has clearly stated that the ECB "must not be" the euro zone's lender of last resort. Where this path leads On the present course, conditions in developed economies look like getting worse before they get better. Growth in America and Britain will probably be less than 2% in 2012 on current policy, and in both recession is quite possible. A euro-zone recession is likely. The ECB could improve the euro zone's economic outlook by loosening its monetary policy, but widespread austerity and uncertainty will be difficult
Then and now
to overcome. As in 1931 and 2008, a grave financial crisis may cause a large drop in output. That, in turn, would place more pressure on euro-zone economies struggling to avoid default. As panic built in 1931, country after country faced capital flight. The effort to defend against bank and currency runs prompted rounds of austerity and plummeting money supplies in pressured economies, helping generate the collapse in output and employment that turned a nasty downturn into a Depression. It took the end of the gold standard, which freed central banks to expand the money supply and reflate their economies, to spark recovery. Today the ECB has the tools needed to salvage the situation without breaking up the euro. But the fact that the ECB and eurozone governments have options does not mean that they will take them. The collapse of the gold standard led to recovery, but caused terrible economic damage as countries erected trade barriers to stem the flood of imports from those that had devalued their currencies. Governments elected to fight unemployment experimented with wage and price controls, cartelisation of industry and other interventions that often impeded the recovery enabled by expansionary monetary and fiscal policies. In the worst-hit countries long-suffering citizens turned to fascism in the false hope of relief. The world today is better placed to cope with disaster than it was in the 1930s. Then, most large economies were on the gold standard. Today, the euro zone represents less than 15% of world output. In developed countries unemployment, scourge though it is, does not lead to utter destitution as it did in the 1930s. Then, the world lacked a global leader; today, America is probably still up to the job of co-ordinating disaster response in troubled times. International institutions are much stronger, and democracy is more firmly entrenched. Even so, prolonged economic weakness is contributing to a broad rethinking of the value of liberal capitalism. Countries scrapping for scarce demand are now intervening in currency markets-the Swiss are fed up with their franc appreciating against the euro. America's Senate has sought to punish China for currency manipulation with tariffs. Within Europe the turmoil of the euro crisis is encouraging ugly nationalists, some of them racist. Their extremism is mild when compared with the continent-wrecking horrors of Nazism, but that hardly makes it welcome. The situation is not yet beyond repair. But the task of repairing it grows harder the longer it is delayed. The lessons of the 1930s spared the world a lot of economic pain after the shock of the 2008 financial crisis. It is not too late to recall other critical lessons of the Depression. Ignore them, and history may well repeat itself. •
79
Also in this section 80 The IMF and the euro 80 Mexico's plunging peso 81 Buttonwood: The equity gap 82 When tax cuts hurt 82 Private equity's secondary stakes 84 Helping the poor to save 86 Economics focus: The BRICS at ten
For daily analysis and debate on economics, visit Economist.comfeconomics
Europe's sovereign-debt crisis
Scaling the summit
Once again, EU leaders have raised high hopes of a solution ECOND marriages supposedly represent the triumph of hope over experiS ence. Similarly, in the lead-up to every EU summit, investors become optimistic that this time-finally-leaders will manufacture a solution to the debt crisis. So it was with the latest summit on December 8th and 9th, due to take place after The Economist went to press. Beforehand, Angela Merkel, Germany's chancellor, and Nicolas Sarkozy, the French president, had thrashed out a deal which promises future restrictions on the ability of euro-zone countries to run large fiscal deficits. The hope was that this would be enough to persuade the European Central Bank to open its wallet and buy more government bonds. The leaders also agreed to bring forward to next year the creation of the European Stability Mechanism (ESM), a fund designed to bail out ailing coun-
I
Hope springs eternal Ten-year government bond yields,% 8
6
Spain Jun
Jul
Aug
Sep
2011 Source: Thomson Reuters
Oct
Nov Dec
tries-reducing the risk that the likes of Italy and Spain would struggle to refinance maturing debts. The markets were also boosted by a promise that, unlike the Greek deal, future bail-outs would not require a write-off for private-sector creditors. Italian and Spanish bond yields fell sharply (see chart 1). Standard & Poor's, a rating agency, added to the pressure on the leaders to come up with a convincing deal by placing all euro-zone countries on negative "credit watch" with a view to reducing their ratings. The agency cited "continuing disagreements among European policymakers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial and fiscal convergence among euro-zone members." It also worried about the rising risk of a recession in the euro zone in 2012. Europe's leaders face an agonising dilemma. They needed to produce a plan to limit the region's debt accumulation over the long run. But too great an emphasis on austerity in the short run risks sending the continent's economy into a deep recession; the latest data on Italian industrial production showed an annual fall of 4.1% in October, even before budget cuts were introduced by the new government. In protest against the reforms, Italian trade unions called private- and public-sector national strikes. Some feared that the outline of the Merkel-Sarkozy deal looked remarkably like the Stability and Growth Pact, which failed
to control deficits over the past decade. Countries will apparently be required to keep to a deficit target of 3% of GDP, on pain of automatic sanctions (under the pact, penalties were usually waived). "The EU has learned nothing about the shortcomings of the previous Stability and Growth Pact," says Simon Smith, chief economist at FxPro, a foreign-exchange broker. "Investors would be correct in doubting the EU's ability to enforce any debt or deficit rules." Andrew Benito of Goldman Sachs laments that "two options that would have resolved the past impasse most cleanly have been ruled out. Chancellor Merkel has ruled out the Eurobond that would have directly 'mutualised' excessive debt in the peripheral economies. President Sarkozy, meanwhile, has ruled out the fiscal intrusion that would have given a formal veto against national budgets." Back to the pact Market optimism was tempered a little on December 7th when hopes were dashed that the ESM would be combined with the existing European Financial Stability Facility to create a much larger rescue fund. Indeed, s&P warned that the EFSF's credit rating would be downgraded along with the
I
Shaking the banks Three-month Euribor spread over three-month euro overnight-indexed swap, basis points 120 100 80 60 40
20 '-----'----L----L---L---'---'-'-
Jun
Jul
Aug
Sep
2011 Source: Bloomberg
Oct
Nov Dec
0
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The Economist December lOth 2011
80 Finance and economics ~
countries that backstop the facility. Even a package that successfully bails out European countries in the short term would not deal with the long-term problem that has afflicted the region-that some countries have become less and less competitive, relative to Germany. Another worry for the markets is the continued pressure on banks. The co-ordinated action of central banks on November 30th gave European banks cheaper access to much-needed dollars; they borrowed $50.7 billion from the ECB under the latest three-month deal, compared with just $395m under the previous facility, which levied an interest rate twice as high. Nevertheless, banks remain wary of lending to each other, as is shown by the gap between their borrowing costs and official interest rates (see chart 2 on previous page). Banks may respond by cutting credit to firms and households, worsening the pressure on the economy. The danger is that the markets will repeat the pattern that followed previous summits-a rally on news of a deal that peters out once investors examine the fine print. Only a move to full fiscal union, with the northern countries subsidising the periphery, or unlimited bond purchases by the ECB, seems likely to satisfy investors. Before the summit, Jonathan Loynes of Capital Economics said that "we remain to be convinced that the proposals will bring the debt crisis to an end and ensure that the euro survives in its present form." • The IMF and the euro
Cash for credibility WASHINGTON , DC
Laundering European rescue funds through the IMF AS A new game plan for saving the euro fiby enforcing fiscal discipline takes shape (see previous story), there is growing speculation that Europe's central bankers could help in another way-by channelling rescue funds through the IMF. The ECB is not allowed to fund member governments, but it or national central banks could lend to the IMF. Those national central banks have provided resources to the fund before, which is why the ultraorthodox Bundesbank does not object to filling the IMF's coffers-even if that money were then used to provide rescue funds for countries such as Italy or Spain. In many ways this money-laundering would be a clever wheeze. It gets around the central bankers' hang-ups. It provides discipline, since the fund's conditionality would help to keep Europe's peripheral economies on track. And it could elicit
funds from others. America won't contribute anything more to the IMF, but big emerging markets seem willing to top up the fund's resources, provided the Europeans do so too. With Europe's own rescue fund-the European Financial Stability Facility-floundering, the IMF may be the best route to raising real money. How much could be raised is still up for grabs. Eswar Prasad, an economist at Cornell University who follows the IMF closely, reckons that if Europeans come up with $150 billion-2oo billion, then emerging economies might add a similar sum to the pot. Those are the kind of sums that would be needed. The IMF currently has some $390 billion of lendable cash in its kitty (see chart). That's enough to deal with smaller economies, but not to back stop Italy and Spain, which need to refinance some €320 billion ($430 billion) and €142 billion respectively in 2012. Unfortunately, like many clever wheezes, this one is full of pitfalls, both for the Europeans and for the IMF. The fund, which already has over half of its outstanding loans in the euro zone, would become even more heavily exposed to one region. For Italy or Spain, borrowing from the IMF is not the same as the ECB buying their bonds. The IMF is a preferred creditor, which means it always gets paid back first. Thus the more the fund lends to a country, the bigger the write-down for private creditors if there were ever a default. An IMF rescue plan could spook investors rather than reassure them, particularly if parallels were drawn with Greece, Portugal and Ireland, which have already had rescue packages from the IMF and the Europeans, and show no sign of regaining access to financial markets. The experience of those countries does not bode well for the IMF's credibility either. In each case the Fund's technocrats are not in sole charge. Against their better judgment, they have often compromised on reform plans with European rescuers, who usually push for harsher austerity. The same danger exists for Italy or Spain. Even if the Europeans launder rescue funds through the IMF, they are unlikely to outsource fiscal oversight entirely. The inevitable compromises could easily lead to rescue plans that fail. If the euro then falls apart, the IMF, the one institution that could pick up the pieces, will lack both the cash and credibility to do the job. • In need of a top up December 1st 2011, $bn 0
200
400
600
IMF current commitments IMF lending capacity • • • • • Sovereign-debt rollovers due 2012 Sources: IMF; Bloomberg
• ••
• • SPAIN
Mexico's plunging peso
iArriba, arriba! MEXICO CITY
A wobbly currency has not hurt growth-for now OLLARS and pesos cross the border D between America and Mexico in greater numbers than ever. The $400 billion-worth of trade in 2010 made Mexico America's biggest trading partner after China and Canada. Greenbacks are so common south of the frontier that in some neighbourhoods peso coins are known as cuoras, a mispronunciation of "quarters". Lately the relationship between the currencies has been rocky. Between July and November the peso fell by 19% against the dollar, hitting its lowest level since the 2009 financial crisis. It has since bobbed back a little as prospects across the border have improved a tad. Nonetheless, its performance so far in the second half of this year has been the weakest of any Latin American currency. Mexico is not the only emerging market with wobbly money. Nervousness about the global economy, thanks to the euro zone's debt crisis, has sent investors running from exotic currencies into safe, familiar ones. Big manufacturing countries everywhere, from South Korea to Poland, have suffered from worries about the impact of another recession on manufacturing, says Jose Wynne of Barclays Capital. Three more forces have pulled the peso down. Mexico has stronger ties to America than any other big Latin American country: nearly 8o% of its exports go there. (Brazil, by contrast, sends less than half its ex-
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The Economist December 10th 2011
Finance and economics 81
Buttonwood The coming shortage of equity investors
HE world has accumulated too much T debt. Issuing more equity would reduce risk, particularly in the banking sector, and create the seed capital for new industries to emerge. But global investors may be losing their appetite for shares. That is the conclusion of a new report* by the McKinsey Global Institute, which argues that by 2020 a $12.3 trillion gap will have emerged between the amount of equity that needs to be supplied and the likely level of demand. The problem is that investors in the developed world are shifting from equities into other assets, thanks to demographic changes, regulatory pressures and the disappointing returns suffered over the past ten years. Pension funds are maturing, with more of their members in retirement and fewer in work, so bonds are a more appropriate investment than equities. Insurance companies have shed equities in the face of regulations such as the European Union's Solvency II regime; they could sell as much as $150 billion of shares over the next five years. Meanwhile, the financial assets of developing-world investors are growing fast, but such investors tend to have a very small exposure to stockmarkets. Indians have only 8% of their wealth in equities. As they get richer, investors in the developing world will diversify their portfolios. But McKinsey estimates they would have to raise their equity allocations to the 42% owned by American households to close the gap completely. Developing-world investors have understandable reasons for caution. Companies in emerging markets are often not as transparent as those in the developed world, nor do they have a record of treating minority shareholders well. Institutional investors-mutual funds, insurance companies, pension schemes-are not as well established in developing countries • ports to rich countries.) Bad news from America hits the peso hard. Second, traders use the peso as a proxy hedge for theregion, as it is the only Latin American currency to be traded around the clock. Some of the peso's biggest dips have happened overnight, during trading in Europe and Asia, notes Sergio Martin, chief economist at HSBC in Mexico. Finally, Mexico's central bank is less willing than others to intervene. Whereas Brazil, Colombia and Peru have all sold dollars to support their currencies, the Banco de Mexico has left the peso to the
as they are in Europe and America. Despite the subdued level of demand, companies will still need to issue equity, either to strengthen their balance sheets or to support their expansion. The banks will need to raise equity to meet the Basel rules. Meanwhile, the faster growth rate of developing countries means that more companies are likely to float on their domestic markets; more than half of all new issues in 2010, by volume and by value, were in emerging markets. Indeed, McKinsey reckons the net excess of supply over demand for equities in emerging markets will be some $7 trillion. Now, of course, this gap is entirely notional. The actual level of equity supply and demand will exactly balance out. But if desired supply exceeds desired demand one of two things can happen. Share prices will fall, so that expected returns rise and investors become willing to buy shares again. This might happen if dividend yields on shares exceed government-bond yields for an extended period, as was the case in the first half of the 2oth century.
It is also possible that governments can encourage greater demand for equities. In the developing world, that would require better protection for the small investor. In the developed world, tax-code reform is the big issue. Corporate interest payments are tax-deductible in most countries while dividends are not. But that would be a difficult reform to pull off. Given the state of public finances, governments are unlikely to be handing out new tax breaks. And removing the tax-deductibility of interest, even if it was accompanied by a lowering of the overall corporate-tax rate, would endanger the health of highly indebted companies. The alternative possibility is that firms will eschew issuing equity and raise capital in the form of debt instead. There may well be an appetite for such paper, since government bond yields are so low (at least, in the likes of America, Britain and Germany) that investors will be attracted to the higher income offered by corporate bonds. But the risks ought to be obvious after the past few years. A highly geared economy is likely to suffer from bigger booms and bigger busts. Equity is a very useful form of longterm capital for the corporate sector, and also offers a way for private investors to participate in the long-term growth of the economy. But in Europe and America, companies have been retiring equities through share buy-backs, while the volume of initial public offerings has dropped considerably from the peak years of 2000 and 2007. If the developed world is to recover its mojo, equity issuance has to come back into fashion. * "The emerging equity gap: Growth and stability in the new investor landscape", McKinsey Global Institute, December 2011
Economist.comfblogsfbuttonwood
markets, even buying dollars now and then to build up its foreign reserves. That is changing: on November 29th Mexico's currency commission (made up of central bankers and finance-ministry officials) announced that the dollar-buying would end, and that up to $400m would be sold on days when the peso dipped by over 2%. The mechanism, last used in 2009, will temper volatility rather than defend the peso's value, the bank says. The peso rallied a little after the announcement. The cheap peso has helped Mexican exporters through a time of weak demand in
their main market and rising competition in Asia. Mr Martin calculates that the real depreciation of the peso since the 2008 crisis is about 13%. "We are probably very close now to the Chinese unit labour cost," he says. Nissan and Honda are among the carmakers persuaded to build new plants in Mexico. The country's share of America's imports last year was 12%, the highest ever. Partly for this reason, Mexico's economy has held up better than its currency (see chart on next page). This year it will grow faster than Brazil, which this week reported flat GDP in the latest quarter. ••
82 Finance and economics
I
The Economist December lOth Private equity
Gulf of Mexico Mexico's: GOP, %change on a year earlier
pesos per$ (Inverted scale)
10
8
One careful owner? What the secondary market says about the state of private equity IS COUNTED prices, outdated modD els and a glut of inventory. Customers can tell plenty about the state of the
2006
07
2011
08
09
10
Sources: Thomson Reuters; JPMorgan
11 *Forecast
But growth could eventually be threatened by the country's weak currency. It has meant pricier imports, which have put pressure on inflation, currently only 3-4% but creeping up. The sickly state of the American economy means that Mexico's central bank is hoping to cut interest rates to keep growth on track. But as long as inflation remains a risk, that decision will be postponed. Most analysts forecast that the peso will appreciate next year. Frustratingly for Mexico, that hinges more on events in Europe and America than what happens at home. •
Finandal accounting
Double-edged deferral NEW YORK
How lower taxes could hurt America's big banks
'l 'I ]HEN is a corporate-tax cut bad for a VV corporation? When it would trigger hefty write-downs of peculiar but critical assets, as is the case at some of America's largest banks. The accounting item in question is the deferred-tax asset (DTA). This is a legacy of the financial crisis. America's tax code allows losses amassed during the meltdown (with some restrictions) to be used to offset future tax bills. Since a bank is increasing its future cashflows by reducing expected tax payments, this is recorded as an asset on the balance-sheet. JPMorgan Chase held DTAS of $16 billion at the end of last year, while Bank of America had $27 billion-worth. The undisputed deferred-tax king, however, is Citigroup with slightly more than $50 billionworth, the largest discretionary accounting item in the company's history. To some, this looks highly optimistic. Mike Mayo, an analyst with CLSA, a broker, has relentlessly questioned Citi's ability to produce enough taxable income to justify the asset and has suggested that it could be overvalued by $10 billion-a view
auto industry while kicking tyres at a used-car dealership. The same is true for the second-hand market for privateequity stakes. What used to be a tiny part of the industry has flourished (see chart). "Secondary" stakes change hands when investors, who typically agree to lock up their money for a decade, decide to sell early. Triago, a firm that arranges secondary transactions, reckons that deals worth $25 billion will take place in 2011, up by 25% from last year's record. Banks and insurers are largely responsible, since they need to sell their investments in private equity and free capital to comply with an onslaught of new regulations, such as Basel3 and Solvency II in Europe, and the Volcker rule in America. Cash-strapped European banks are also eager to peddle their private-equity investments. In August HSH Nordbank, a German bank, sold a €62om ($1 billion) portfolio that included stakes in well-known firms such as Carlyle and KKR. A flurry of secondary activity has been predicted for years. But until recently only the most desperate investors wanted to offload their stakes at rockbottom prices. Transactions have picked up because sellers can now get better prices. Neil Campbell of Tullett Pre bon, an interdealer broker, says that investors today can expect around 95 cents on the dollar for many of their stakes, compared with only 6o cents in 2009. Some assets have doubled in price in the past year. Prices have risen because of a glut of capital that firms specialising in the secondary market, such as Coller Capital and Harbourvest, have raised to take advantage of the opportunity to buy. These firms aren't the only ones shopping. Some pensions and funds of funds have begun to use the secondary market to invest in promising funds or regions. Some say that the secondary market's for which he was, for a time, blackballed and badmouthed by the firm's top brass. Citi rejects the suggestion that it is counting imaginary beans. Its DTA is, according to its latest filing, "recognised subject to management's judgment that realisation is more likely than not" (though it acknowledges that some help from "tax-planning strategies" may be needed). Banks with DT As have to worry about
growth shows that institutional investors are becoming more familiar with private equity as an asset class-and are becoming more aware of its attractions. It helps that secondaries can be bought and sold more easily than ever before. But transactions in them are still more arduous to complete, not to mention more opaque, than other investments. Unlike face-toface bargaining over a dodgy motor, deals are negotiated through an intermediary. Attempts to launch exchanges and derivative products, which would make for more transparent pricing, have not taken off. Mathieu Drean of Triago predicts that by 2015 the annual tally will be $75 billion-worth of secondary transactions annually. The struggles of the privateequity industry will partly fuel this growth. Buy-out firms bought too many companies at top prices. They must now wait until the economy improves to sell or float them and return money to impatient investors. Private-equity firms are now holding on to companies for five years on average, compared with threeand-a-half years in 2007. Some investors don't want to wait that long to pocket returns. They are turning to the secondary market to hand in the keys for their old model and grab what cash they can.
I
Secondary education Global private-equity secondary market, $bn -
Funds raised
-
Transactions 25 20 15 10
0
1995 97
99 2001 03
Source : Triago
05
07
09
11 * *Forecast
electoral politics as well as future profits. With Barack Obama and all the Republican presidential candidates either keen or at least prepared to lower the top rate of federal corporate tax from to day's 35%, areduction over the next year or two looks reasonably likely, with an outside chance of a sharp cut. Any such move would make DT As less valuable since future tax deductions would be worth less. With tax
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84 Finance and economics
The Economist December lOth 2011
~ at
35%, a dollar of such deductions saves a company 35 cents. A cut to 20% would reduce the benefit to 20 cents. A decline of that order would hit the three big banks' combined book value by $41 billion, according to Edward Ketz of Pennsylvania State University and Anthony Catanach of Villanova University and the American College Centre for Ethics in Financial Services (see chart). This loss would feed straight through to profits and shareholders' equity. The impact on "core" tier-one capital, the measure of equity that financial markets care most about, would be more muted (since only part of a DTA can be counted when determining regulatory-capital ratios) but still "potentially painful", says Mr Catanach. There would, of course, be offsetting benefits. Less tax means more net profit. But the boost to income would be spread over years (assuming profits rebound), whereas the write-downs would have to be taken straight away. And any deal on tax cuts is likely to include the closing of loop-
Please don't cut my taxes December 31st 2010, $bn -
Deferred-tax assets at current 35% rate 0
10
20
-
Writedown at 20% rate
30
40
50
60
Citigroup Bank of America JPMorgan Chase Source: Anthony Catanach and Ed ward Ketz
holes that have long allowed banks and other big companies to cut their effective tax bills to well below the official rate. No doubt the banks' lobbying agenda includes a plea for special provisions that would soften the blow, should corporate taxes come down. But some in Washington might reasonably wonder why they should help to protect assets that probably should have been valued more conservatively in the first place. •
Helping the poor to save
Small wonder ACCRA
A new model of microfinance for the very poor is spreading
"My
GROUP has rescued me and my children from poverty," says Fa ustina Kwei, rearranging baskets piled high with cassavas and plantains around her market stall in a poor suburb of Accra, Ghana's capital. She used a combination of savings, dividends and loans from a savings group to rent her stall and buy stock. For the first time, she can feed her two children well and send them to school. Ms Kwei (pictured) is one of millions of poor people to have benefited from the
hottest trend in microfinance: village savings and loans associations. Millions of people like her survive on meagre and erratic earnings. Access to the simplest financial services can help stabilise their incomes, which in turn makes them less vulnerable to diseases and natural disasters. An unexpected flood or fever can push a poor family into utter destitution, or the muscular arms of loan sharks. Most of the estimated 2 billion people who live on less than $2 a day do not have
access to formal banks. Over the past 20 years, legions of microlenders have tried to extend financial services to them. But some communities-the poorest, the least densely populated and the most remoteare not attractive to traditional microlenders. And the poorest of the poor are often wary of racking up any kind of debt, even a small one. Some economists argue that what the poor really need, if they are to manage their cash better, is savings. CARE International, a charity, began a novel scheme in Niger in 1991 to help the poor save-a basic form of banking called a village savings and loans association. This is based on savings rather than debt and managed by members of the community rather than professionals. Since then, CARE and other NGOs, including Plan International, Oxfam us, Catholic Relief Services and the Aga Khan Foundation, have promoted village savings. The schemes are so successful that they are now spreading across Africa, Asia and Latin America-savings groups now have 4.6m members in 54 countries. People like these schemes because they are easy to understand, says John Schiller, a microfinance expert with Plan International. And returns on savings are extremely high-generally 20-30% a year. Borrowers typically pay interest rates of 5-10% a month on loans that usually have to be repaid within three months. The rates may seem usurious but they are set by people who are in effect lending to themselves and saving the interest that they charge. A village savings scheme typically involves a small group (perhaps 15-30 people) who pool their savings. Each buys a share in a fund from which they can all borrow. All must also contribute a small sum to a social fund, which acts as microinsurance. If a member suffers a sudden misfortune, she will receive a payout. Members select leaders and draft a constitution. The rules spell out how often the group will meet, what interest rates it will charge and what loans may be used for. At the end of a cycle (usually about one year), all the money accumulated through savings and interest is shared out according to members' contributions, and a new cycle starts. Once members have mastered the system, the groups they have formed can take on additional tasks such as providing training in agriculture, health, leadership and business. Members may go on to spread what they have learned to other villages. Ms Kwei's village scheme shared its accumulated savings and dividends after nine months. With her portion she was able to register her family for Ghana's National Health Insurance Scheme and pay rent on her market stall. Now Ms Kwei plans to organise other women in her home town of Abokobi, near Accra. Savings could improve their lives, too, she reckons. •
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86 Finance and economics
The Economist December lOth 2011
Economics focus Puns and punditry I
How the BRICs were baked EOPLE are bad at judging the speed of large objects, especially PIndians those coming towards them. That is one reason why so many die crossing Mumbai's railway tracks. What is true of locomotives is also true of the world's large, fast-moving countries. People struggle to wrap their heads around the size and speed of populous emerging economies so are taken aback by the impact as those countries come thundering on. Among economists alert to the arrival of the emerging markets, none has tooted the horn louder than Jim O'Neill of Goldman Sachs. In 2001 he coined the "BRIC" acronym to describe four countries (Brazil, Russia, India and China) that would soon shake up the world economy. Ten years down the line, "The Growth Map" reflects on the idea's successful career, now inseparable from his own. The acronym provoked much excitement, some reflection and countless puns (see chart title and article rubric). The name was adopted by a bevy of investment funds, a leaders' summit (which did not invite Mr O'Neill) and even an art exhibition (which did). The investment mania was interrupted by the financial crisis; the paronomasia seems unstoppable. For this decade, Mr O'Neill has suggested another term, "growth markets", defined as an emerging economy that accounts for more than 1% of global GDP. The BRrcs qualify alongside Indonesia, Mexico, South Korea and Turkey. What sets them apart is not their size or their growth, but the combination of the two. That means the BRICs will make an outsize contribution to increases in global GDP. Between 2011 and 2020 their contribution will be twice that of the G7, Mr O'Neill predicts. Such numbers are arresting. Indeed, what "really put BRICs on the map", according to Mr O'Neill, were the audacious projections, first made by two of his colleagues, Dominic Wilson and Roopa Purushothaman, in 2003 and updated again this week, showing just how big the four economies could become by midcentury. They described the projections not as a forecast, but as a "dream" that the BRICs might fulfil. But how credible is such fortune-telling? The scenarios may be bold but they rely on ideas that are reassuringly old. They assume that the BRICs will enjoy two kinds of economic convergence: of productivity and purchasing power. Poor countries grow faster than rich ones, because it is easier for them to imitate better techniques than it is to invent them. At the same time, prices and exchange rates tend to rise more quickly in "cheap"
I
BRIC building BRIC GOP, $trn, contribution from: real exchange-rate appreciation
•
real growth 100 80
60
2010 GOP, projection v actual, $trn -
2003 projection 0
Brazil
Russia
40 20
2010
20
30
Source: Goldman Sachs
40
50
0
India
China
4
Actual
countries (like India, where a dollar's worth of rupees stretches much further than a dollar in America), until things cost as much as they do in more expensive locations. Thanks to both kinds of convergence, the combined GDP of the BRICS might exceed $95 trillion by 2050. That is more than six times the size of America's economy but $35 trillion less than the bank calculated in its previous projection. This is not because it expects the BRrcs to grow less quickly but because the bank now expects BRIC currencies to rise much less against the dollar. Brazil's real, indeed, will even fall a little (see chart, left paneD. In painting these pictures, the economists from Goldman Sachs draw most directly on the work of Robert Barro of Harvard. He found that a poor country could expect to grow faster than a rich one, but only if the rule of law prevailed, the terms of trade were favourable, inflation and government profligacy remained in check and families were sufficiently small, healthy and educated. That list of factors has carried on growing. According to Steven Durlauf of the University of Wisconsin and his co-authors, economists have found almost as many "determinants of growth" (from coups to Confucianism) as there are countries with data. Goldman Sachs takes the BRrcs' income per person, relative to that of America, as a proxy for their economic backwardness. The bigger the gap, the greater the potential for catch-up growth. The bank also assumes that countries differ in how well they exploit this potential. Some absorb know-how from abroad quicker than others. Their "convergence speeds" would vary, even if the distance they had to cover were the same. These convergence speeds are the most important variables in the whole BRrcs endeavour, and the hardest to pin down. Small tweaks produce vastly different outcomes. To make the choice less arbitrary, Goldman Sachs has drawn on 13 of the innumerable "growth determinants " identified by Mr Barra and others. The bank now diligently rates and ranks emerging economies on such attributes as openness to trade, corruption, the diffusion of mobile phones and so on.
Tracking error But a puzzle remains. Two of the BRrcs, China and Russia, tend to grow much faster than their mediocre scores would suggest. They benefit from a "secret sauce", as Goldman Sachs put it. Were it not for this ingredient, their 2050 GDPS would be $10.2 trillion and $1.9 trillion lower. That's a lot of sauce. In Mumbai, a consultancy called FinalMile has painted yellow lines at regular intervals across the tracks to help trespassers judge the speed of a train's approach. Goldman Sachs also laid down markers to help track the BRrcs' progress. In 2003, it suggested that Brazil's GDP would overtake Italy's in 2025 and China's would overtake Japan's in 2015. In fact, both economies passed their markers last year. By 2008, the BRrcs' combined GDP was about 75% bigger than Goldman Sachs had suggested five years before. "My only regret", writes Mr O'Neill, "is that we weren't bolder." Of course no one can hope to look so far ahead with great accuracy. But, interestingly, the bank's scenario for 2010 was a little closer to the mark. In other words, they did a better job of projecting seven years ahead than five. If the goal is to trace out longterm trends, forecasts may do better over the long run than the short. Predicting the distant future is forbiddingly difficult. Predicting the near future is no easier. •
87 Also in this section
3D printing
The shape of things to come
88 Arthritis and botulinum toxin 90 The first beds 90 Another Earth?
FRANKFURT
When products are printed, they often look like nature intended
UROMOLD, a big manufacturing trade fair held in Frankfurt from November 29th to December 2nd, was-as might be expected-full of machines and robots demonstrating their ability to cut, bend, weld and bash all sorts of objects into shape. But in one of the halls the scene was very different. It was here that 300 or so exhibitors working in three-dimensional printing (or "additive manufacturing" as they prefer to call it) were gathered. Some of their 3D printers were the size of cars; others were desktop models. All worked, though, by building products up layer by layer from powered metal, droplets of plastic or whatever was the appropriate material. The range of those products was as unusual as the way they were made: an exhaust manifold; an artificial leg; an aircraft door-hinge; dozens of shoes; even entire dresses can be fashioned this way. Many of these printed items look strikingly different from their conventional counterparts. They are more elegant, less clunky and have flowing lines. The result, shown off on plinths and in display cases, was more like an art gallery than an industrial exhibition. Additive manufacturing, then, is changing not only how things are made, but what is made. In particular, many of the objects on display had an organic look to them. That is no accident. In some cases, designers have deliberately copied nature. In others, they have started from first principles, drawn conclusions (usually aided by clever software), and found that nature got there first. And in some, the decisions have been aesthetic-presumably reflecting an evolved preference in the human psyche for objects that look natural.
E
Growing goods An excellent example of deliberately copying nature is an artificial hip made by Materialise, a Belgian firm. Not only do real bones have curves that mass production would find it impossible to reproduce, they
are also slightly different from one individual to another. Additive manufacturing has no difficulty with such bespoke products. Each hip can be crafted precisely for the intended patient. All that is required is a slight tweak of the software that controls the printer. Even better, the technique can do something that not even a human craftsman could manage: it can copy in the titanium of which the implant is made, the fine, lattice-like internal structure of natural bone. This makes the implant lighter, without loss of strength. It also lets it integrate easily with the patient's actual bone.
Similarly, researchers at the Massachusetts Institute of Technology, led by Neri Oxman, have found that you cannot beat the basic design of a plant stem-a bundle of vertical filaments of different densities-when it comes to making a structure that is both light and able to support a heavy load. They have used that insight to print a load-bearing column constructed from filaments of concrete. That an artificial hip looks like a natural one, and that a concrete "tree" behaves like a real one, is, of course the whole point of the exercise. Other additive manufacturers, though, have found that they are copying nature by accident-natural selection having arrived at a similar way of solving the problem first. A British firm called Within Technologies, for example, makes heat exchangers. These need to pack a large surface area into a small space-an ideal task for additive manufacturing. Freed from the need to worry about how to make what they design, the company's engineers have found that the optimum shape resembles a fish gill. Exchanging heat is a similar process to exchanging oxygen and carbon dioxide. The nervous systems of animals, too, turn out to be similar to things made possible by additive manufacturing. Lionel Dean, the head of a firm called FutureFactories, has designed a car mirror that includes channels which carry the electrical signals that operate its adjustment and folding mechanisms. Theresult resembles the nerves in an arm, which are also carried in channels (the joints in the mirror behave like the arm itself). At the moment, Mr Dean cannot find suitable conductive materials with which to print his new mirror. The rate of progress in the field suggests, though, that he will not have to wait long. The flow of hydraulic fluid in a gearbox also turns out to be surprisingly biological. Ian Halliday, the boss of 3T RPD, a British engineering firm, says that by making a ~~
88 Science and technology ~ gearbox's
hydraulics using additive manufacturing, its weight can be reduced by 30%. These days, that is par for the additive-manufacturing course. What is novel is that the box will also change gear faster, because the pathways through which the fluid flows can be made smoother. Like blood, hydraulic fluid flows better through smooth arteries than ones filled with obstructions and sharp corners. Some designs even resemble sub-cellular structures. At Southampton University in Britain, researchers have printed an unmanned aircraft from laser-sintered nylon (sintering is a way of making objects by heating powders). This drone, which has a wingspan of 1.2 metres, incorporates a geodetic structure-a lattice-like frame developed in the 1930s by Barnes Wallis, a British aeronautical engineer. Though Wallace could not have known this at the time, his geodetic approach is similar in concept to the "cytoskeleton" of fibrous proteins that holds a cell in shape. While notably strong and light, geodetic structures are slow and costly to make by traditional methods-but not by 3D printing.
The hole is greater than the parts That ability to create light, strong structures which have complex internal shapes may well turn out to be additive manufacturing's killer app. The layering of powders or droplets that are then sintered into solidity, or cured with heat or ultraviolet light, allows spaces to be left inside the product. And if such a space would otherwise collapse, it can be filled with a powder that remains intact during curing and is then washed out or blown away. Even moving parts, like clock mechanisms, have thus been made in one go in a 3D printer. 3D printing can even mix materials that could not be compounded with traditional methods. According to David Leigh, the president of Harvest Technologies, a Texan firm that uses additive manufacturing, it is now possible to produce things that are rubberlike at one end and stiff at the other. A camera body, for instance, could be made in one piece but be soft where it is gripped and hard where the lens and the operating mechanism are installed. All of which is very useful and practical. But additive manufacturing can also be fun. Ping Fu, the boss of Geomagic, an American firm that specialises in 3D design software, prints her own shoes. Their elegant, twisting shapes make them look intriguingly plantlike. A BlackBerry case which Mr Dean has made looks as if it has been constructed from linguini. His lamps, chairs and jewellery borrow heavily from natural history. And Iris van Herpen, a Dutch fashion designer, has (see picture on previous page) taken 3D printing to the catwalks, with striking clothing collections that reflect natural shapes and yet seem to come from a future age. •
The Economist December lOth 2011
Arthritis and botulinum toxin
Something to celebrate Botulinum toxin may help relieve chronic pain ARTHRITIS is the bane of millions of 1""\.lives. Though it comes in many forms, their common theme is inflammation of the tissues around a joint in the skeleton. Treatment is merely palliative: anti-inflammatory drugs, painkillers or both. But a piece of research published this week in Biochemistry, by Edwin Chapman of the University of Wisconsin and his colleagues, offers arthritis sufferers hope from a strange quarter: botulinum toxin. This toxin is one of the most dangerous substances on earth. It is made by a bacterium called Clostridium botulinum. Even a small amount (less than a microgram) is enough to kill a healthy adult. The toxin molecules attach themselves to a protein called synaptotagmin, which is found on the surface membranes of nerve cells at their junctions with muscle cells. Thence they are ingested into the cell, where they disable another protein, SNAP-25, the role of which is to help release a chemical messenger called acetylcholine. This messenger's job is to tell muscle cells to contract. Without that signal, muscles stops working. If this happens all over the body, death is rapid. Inject the toxin locally, though, and you can do some good. It wipes away frown lines and other wrinkles, which are caused by overstimulated muscles, thus allowing ageing celebs to appear on the covers of gossip magazines without embarrassment. More seriously, it is used to treat disorders ranging from headaches to muscle spasms. It only works, however, in cells that have synaptotagmin on their surfaces.
An inflammatory problem
Which is where Dr Chapman comes in. Inflammation is also caused by chemical signalling. Cells called macrophages summon all sorts of others to an injury, to try to repair it. If repair cannot be effected, though (as is the case in arthritis), the signalling never stops. The swelling causes pain, and the patient suffers. But macrophage signalling also involves SN AP-25, so Dr Chapman thinks he can use botulinum toxin to shut the cells up. The problem is that macrophages have no synaptotagmin on their surfaces. They do, though, have other proteins, called FC receptors. What is needed is a way to get toxin molecules to attach themselves to Fc receptors. And this is what Dr Chapman thinks he has managed. His trick is to link each molecule to an antibody. An antibody is a protein that binds to a hostile invading organism. If this does not kill the invader outright, then it acts as a flag for the bug in question to be eaten by a macrophage. That happens when the antibody that is attached to the invader also attaches itself to an Fc-receptor molecule. This done, the invader is ingested. Dr Chapman's plan was to use this mechanism to get macrophages to eat toxin molecules. Once inside, they would disable SNAP-25 and thus stop the release of signalling molecules in the way they do in nerve cells. The result, the theory goes, would be an end to the chronic inflammation that arthritis causes, and thus to the chronic pain. The first stage works. The toxin/antibody complex successfully gloms onto the macrophages. The toxin does get inside them. And the cells do stop signalling. It is a long way from there to a treatment, but Dr Chapman has made the trick work in mice as well as Petri dishes (injecting the complex does, indeed, stop macrophages recruiting). Many more animal trials will be needed before it can be tested on people. But for those who suffer the chronic pain of arthritis, it is a hopeful start. •
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90 Science and technology
The Economist December lOth 2011
Human evolution
A place to rest your weary head The world's oldest mattresses have just turned up in South Africa ETTING up home in the modern world means acquiring some furniture-parS ticularly a bed. And things were not so different 77,000 years ago, according to the latest research on the behaviour of early man in South Africa. Caves in that country have yielded a lot of discoveries about how Homo sapiens made the transition to modernity. That he liked to sleep on a comfortable mattress is the latest. That, at least, is the conclusion of a study just published in Science by Lyn Wadley of the University of Witwatersrand and her colleagues. The bedroom in question is in a natural rock shelter called Sibudu, 40km (25 miles) north of Durban. As is often the case with such shelters, it was not occupied continuously. Dr Wadley has found evidence for at least15 different occasions when it acted as a home, with periods in between when it was abandoned. Each occupation left debris behind, though, and as this accumulated, the cave floor gradually rose. The most interesting layer is the oldest. It is this stratum that dates from nooo years ago. Among the things Dr Wadley's team found in it were sheets of plant matter several square metres in area, themselves divided into layers. The lower part of these layers, compressed to a thickness of about a centimetre, consists of sedges, rushes and grasses. The upperpart,justunder a millimetre thick, is made of leaves from Cryptocarya woodii, a tree whose foliage contains chemicals that kill insects. These insecticidal leaves would have discouraged fleas and other biting arthropods-and possibly mosquitoes, too. Dr Wadley thus thinks that what she has found are mattresses on which the inhabitants of Sibudu slept. They may also have walked and worked on them, in a way similar to the use of tatami in modern Japanese houses. Other evidence, too, suggests pests were a problem. More recent mattress-like layers of plant matter at Sibudu, dating from between 73,000 and 58,ooo years ago, show signs of having been burned. That was probably a regular procedure, again undertaken to get rid of unwanted creepy crawlies. The upshot is another piece of evidence of how, around this period, humans were creating a range of hitherto unknown artefacts. Adhesives, arrows, sewing needles, ochre-decorated pictograms and jewellery made from shells are all contemporary
with Dr Wadley's finds. And stone tools became more delicate and sophisticated during this period. It was also a time when humanity went through several drastic shrinkages of population, which probably applied selective pressures that forced the pace of evolution. The origins of modern, consumer-good-loving humanity might thus be illuminated by this scene of ancient domestic bliss. • Another Earth?
Home away from home The existence of the most Earthlike planet yet has just been confirmed NE of the more memorable slogans to 0 come out of the climate-change talks in Durban over the past few days is: "there is no planet B". But what if there were? Over the past couple of decades astronomers have logged thousands of so-called "exoplanets"-worlds which orbit stars other than the sun. On December 5th the scientists in charge of Kepler, a space telescope designed to look for such planets, confirmed their instrument's discovery of its first Earthlike world. It is dubbed, rather unromantically, Kepler 22b. The existence of this planet, which circles a star 6oo light-years away, in the constellation of Lyra, had previously been suspected. Kepler, which belongs to NASA, America's space agency, works by observing dips in a star's brightness as a planet passes in front of it. It flags likely looking reductions as "candidate planets", of which Kepler 22b was one. But three passes are needed to confirm a planet's existence, and Kepler 22b has now passed this test. Crucially, it orbits well within its star's "Goldilocks zone": neither too close nor too far away for liquid water (and therefore, per-
haps, life) to exist on its surface. It joins two other Earthlike planetsGliese 581d and HD 85512 b-discovered by another instrument within the past few years. In truth, the term "Earthlike" is a stretch. Kepler 22b has a radius 2-4 times that of Earth, and if it is made from roughly the same stuff its surface gravity will also be about 2-4 times as strong. But NASA's astronomers remain unsure whether it is predominantly gaseous, liquid or solid. Nevertheless, Kepler 22b is the most promising exoplanet yet found. Unlike the others, which skirt the edges of their stars' Goldilocks zones, Kepler 22b orbits comfortably within its own. NASA's researchers reckon its surface temperature is about 22°C, compared with l5°C (at least for now) on Earth. Its parent star is similar to the sun, again unlike those of the other two candidates, both of which orbit cooler, dimmer stars. Indeed Gliese 581d's parent is a red dwarf-the tiniest stellar species. That means its Goldilocks zone is so close to it that the planet may be tidally locked, as the moon is to the Earth. If that were the case, one side of Gliese 581d would be permanently lit (and heated) while the other experienced unending darkness. These three potentially habitable exoplanets may soon be joined by many more. In the two and a half years since its launch, Kepler has spotted 2,326 candidate planets. About 650 others have been discovered by other instruments. That plethora allows astronomers to start drawing conclusions about how common various sorts of planets are. Of Kepler's haul, 9% seem to be of a similar size to Earth (though not all are in the Goldilocks zone of their star); a further 29% are Super Earths-planets substantially larger than Earth that are nevertheless rocky. Forty-eight of Kepler's unconfirmed candidates look as if they orbit within their stars' habitable zones; of those, ten seem to be Earth-sized. The ultimate goal, of course, is to let astronomers make a plausible estimate of the total number of planets in the galaxy, of the number that could conceivably support life, and of the fraction of those that could (at least in theory) sustain human colonists. If only a few of Kepler's possible Earthlike planets turn out to be real, that third number is likely to be in the millions. Such knowledge will mark an historic transition, says Chris Lintott, an astronomer at Oxford University who is giving the Kepler team a hand with the data analysis, since the uncertainties around the question of whether life exists elsewhere will cease to be astronomical (how many suitable planets are there?) and become purely biological (how easy is it for life to get going, and how easy is it for it to become intelligent?). Based on the preliminary data, it looks as if there are numerous suitable planets. The science of exobiology may soon cease to be an oxymoron. •
91
Books of the Year
Page-turners
The best books of zon were about China, Congo, Afghanistan, Charles Dickens, Vincent van Gogh, the "Flora Delanica", Jerusalem, Mumbai's dance bars, quantum physics, sugar, orgasms, blue nights, two moons and other people's money
Politics and current affairs Exceptional People: How Migration Shaped Our World and Will Define Our Future. By Ian Goldin, Geoffrey Cameron and Meera Balarajan. Princeton University Press; 352 pages; $35 and£24.95 Few things will affect our future more than migration. By calculating the how, where and why of future labour shortages, the authors analyse the costs and benefits of human migration. Tide Players: The Movers and Shakers of a Rising China. By Jianying Zha. The New Press; 240 pages; $24.95 and £18.99 A highly readable study from a Beijingborn writer for the New Yorker about China's "tide players", the intellectual and entrepreneurial pragmatists who prosper by pushing at the boundaries of what the state permits while taking care never to overstep the mark. The Economist Books of the Year festival
Edmund de Waal, Simon Sebag Montefiore, Neil MacGregor, Geoffrey Hill, Janine di Giovanni, Brian Cox and Jeff Forshaw will all be speaking at The Economist Books of the Year festival at London's South Bank Centre from December 9th-11th. Tickets are available from www .south ban kcentre.co. uk
Dancing in the Glory of Monsters: The Collapse of the Congo and the Great War of Africa. By Jason Stearns. PublicAffairs; 400 pages; $28.99 and £18.99 A serious account of the social and political forces behind one of the most violent clashes of modern times-a1s·year war in Congo that has spilled over into neighbouring countries and claimed as many as sm lives-by one of its most meticulous and empathetic observers. Cables from Kabul: The Inside Story of the West's Afghanistan Campaign. By Sherard Cowper-Cales. Harper Press; 352 pages; £25 A former British ambassador to Afghanistan-and an outspoken early critic of Western policy-breaks out of the static group-think and argues that the current military-led strategy in the country is fatally flawed. The 9/11 Wars. By Jason Burke. Penguin Global; 709 pages; $20. Allen Lane; £30 An ambitious attempt to knit into a coherent whole the sprawling fabric of the "war on terror".Jason Burke of the Guardian, who has covered Afghanistan, Pakistan and the Middle East through every phase of the conflict, focuses on the ordinary people affected by the troubles rather than on decision-makers in far-off capitals.
Pakistan: A Hard Country. By Anatol Lieven. PublicAffairs; 558 pages; $35. Allen Lane; £30 A former Times reporter who now teaches at King's College London, Anatol Lieven has travelled widely through Pakistan talking to generals, shopkeepers, farmers, lawyers and bureaucrats. A book that captures all the drama and colour of this complex Muslim nation. Red Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise. By Carl Walter and Fraser Howie. Wiley; 250 pages; $29.95 and £19.99 Two bankers with years of experience in China shine an unprecedented light on the remarkable 32-year effort to build the country's financial system-on its vices, virtues and many conflicts of interest.
Biography and memoir Deng Xiaoping and the Transformation of China. By Ezra Vogel. Belknap Press; 928 pages; $39.95 An American former intelligence officer in East Asia examines Deng Xiaoping's role in transforming impoverished, brutalised China into an economic and political superpower.
The Economist December lOth 2011
92 Books and arts ~
Hemingway's Boat: Everything He Loved in Life, and Lost, 1934-1961. By Paul Hendrick-
son . Knopf; 544 pages; $30. To be published in Britain in January by Bodley Head; £20 The author, an accomplished storyteller, interprets myriad tiny details of Ernest Hemingway's life, and through them says something new about a writer everyone thinks they know. Blue Nights. By Joan Didion . Knopf; 208 pages; $25. Fourth Estate; £14.99 Even when Joan Didion writes about the hard drama of her own life, particularly the sudden death of her husband followed by the death of her only daughter, her memoirs manage to be larger than her own grief. This is a beautiful book, tragic and profound. Van Gogh: The Life. By Steven Naifeh and
Gregory White Smith. Random House; 953 pages; $40. Profile; £30 An ambitious, original book, by two energetic art-history researchers, which describes the sublime Impressionist as a lonely, syphilitic boozer who bit the hands that fed him. Charles Dickens: A Life. By Claire Tomalin .
Penguin Press; 576 pages; $36. Viking; £30 This is a superb life of Britain's greatest novelist by its greatest literary biographer. Ghosts by Daylight: A Memoir of Love, War and Redemption. By Janine di Giovanni .
Knopf; 304 pages; $26.95. Bloomsbury; £16.99 A beautifully written memoir, by a Parisbased American war reporter, about the pain of adjusting to normal life after being exposed to the intensity of battle. The Paper Garden: An Artist Begins her Life's Work at 72. By Molly Peacock. Blooms-
bury; 397 pages; $30 and £20 How Mary Delaney-aristocrat, gardener, woman of fashion and friend to Jonathan Swift and King George III-created the "Flora Delanica". Less a biography, more an extended prose poem.
Economics and business Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty. By Abhijit
Banerjee and Esther Duflo . PublicAffairs; 336 pages; $26.99 and £17.99 An engrossing book by two young economists who draw on some intrepid research and a store of personal anecdotes to illuminate the lives of the 86sm people who live on less than $0.99 a day. Winner of the 2011 Financial Times/Goldman Sachs business book of the year award. The Great Stagnation: How America Ate All the Low-Hanging Fruit of Modern History, Got Sick, and Will (Eventually) Feel Better.
By Tyler Cowen. Dutton Adult; 128 pages; $12.95
A small book full of big ideas about the historic changes wrought through education and innovation. An American economist offers plenty to think about for readers of every ideological stripe. Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon. By Gretchen Morgen -
son and Joshua Rosner. Times Books; 331 pages; $30 and £19.99 Gretchen Morgenson, a veteran New York Times reporter, and Joshua Rosner, a consultant,join up the dots between Congress, special-interest groups, government-sponsored enterprises and Wall Street, including many that other books failed to link, and provide the best account yet of how the American mortgage system went off the rails. Money and Power: How Goldman Sachs Came to Rule the World. By William Cohan. Double-
day; 672 pages; $30.50. Allen Lane; £25 A rollercoaster account of how Goldman Sachs does business, and the best analysis yet of its increasingly tangled web of conflicts, by a master-storyteller.
History Jerusalem: The Biography. By Simon Sebag
Montefiore. Knopf; 638 pages; $35. Weidenfeld & Nicolson; £25 The rich and absorbing story of the only city that exists both on heaven and on Earth, as told through its prophets, poets, peasants, kings and conquerors. After his acclaimed biographies of Stalin, Catherine the Great and her lover, Potemkin, Simon Sebag Montefiore has finally turned to the book he was born to write. The Great Sea: A Human History ofthe Mediterranean. By David Abulafia. Oxford
University Press; 783 pages; $34.95. Allen Lane; £30 How the Mediterranean became a net exporter of economic and cultural might and the thoroughfare between the Atlantic and Asia. The author is an influential Cambridge historian. The Anatomy of a Moment: Thirty-five Minutes in History and Imagination. By
Javier Cercas. Bloomsbury; 403 pages; $18 and £18.99 The most widely read book on the 1981 failed coup in Spain, which was first published in 2009 and has now been translated into English. A persuasive and absorbing work by a Spanish novelist and former academic. Berlin 1961: Kennedy, Khrushchev, and the Most Dangerous Place on Earth. By Frederick
Kempe. Putnam Adult; 608 pages; $29.95 A lively, meticulous account of a crucial year in history, when the third world war nearly started in Berlin. The Pursuit of Italy: A History of a Land, its Regions and their Peoples. By David Gilmour.
Farrar, Straus and Giroux; 480 pages; $32.50. Allen Lane; £25 On the 150th anniversary of Italy's unification some of its countrymen are asking whether the Risorgimento did more harm than good. A richly detailed account of a controversial question by a British historian and biographer. The Sugar Barons: Family, Corruption, Empire, and War in the West Indies. By
Matthew Parker. Walker& Co; 446 pages; $30. Hutchinson; £25 A tale of wealth, bravery and debauchery-and how the foundations of the modern globalised world were made of sugar-by the author of an excellent earlier work, "Panama Fever".
~~
The Economist December 10th 2011
Books and arts 93 to make it on your own in India's biggest commercial city.
Science and technology
The Possessed: Adventures with Russian Books and the People Who Read Them. By Elif Batuman . Farrar, Straus and Giroux; 298
Quantum Universe: Everything That Can Happen Does Happen. By Brian Cox and Jeff Forshaw. Allen Lane; 255 pages; £20. To be
~ The
pages; $15. Granta,· £16.99
published in America in January by Da Capo Press; $25
A bracing travelogue of literary adventures by a six-foot-tall American-born Turkish academic. Her erudite enthusiasm for Russia's big, gloomy and occasionally illogical fiction is as vivid as her humour and sense of romance.
A book that breaks all the rules of popular science-writing, by two of Britain's best known physicists.
Thinking, Fast and Slow. By Daniel Kahnema n. Farrar, Straus and Giroux; 512 pages;
People Who Eat Darkness: The Fate of Lude Blackman. By Richard Lloyd Parry. Jonathan
$30. Allen Lane; £25
The Nobel prize-winning father of behavioural economics and one of the world's most influential psychologists, Daniel Kahneman shows how we are not at all the paragons of reason that we so often believe ourselves to be.
Cape; 404 pages; £17.99. To be published in America by Farrar, Straus and Giroux in May; $16
A page-turning, if horrifying, read about the murder of a young Englishwoman in Japan and the dubious workings of the Japanese criminal-justice system. Thorough, fair-minded and full of insight.
Global Warming Gridlock: Creating More Effective Strategies for Protecting the Planet. By David Victor. Cambridge University
Iphigenia in Forest Hills: Anatomy of a Murder Trial. By Janet Malcolm. Yale Universi-
Press; 392 pages; $40 and £25
A sophisticated analysis of the effects of global warming which shows that the current approach to the problem of climate change is a mostly ineffective mess and that alternative approaches will be hard and time-consuming to get up and running-but worth it in the end.
The God Species: Saving the Planet in the Age of Humans. By Mark Lynas. National Geographic; 280 pages; $25. Fourth Estate; £14.99
A highly readable account of how we came to be living in the Anthropocene age and what we can do about it.
The Information: AHistory, a Theory, a Flood. By James Gleick. Pantheon; 544 pages; $29.95. Fourth Estate; £25
A sprawling yet fascinating book by an acclaimed American science writer, "The Information" ranges from biology to particle physics and explores the links between information, communications, data and meaning from earliest times to the present day.
The Beginning oflnfinity: Explanations That Transform the World. By David Deutsch . Viking; 487 pages; $30. Allen Lane; £25
The long-awaited survey of humanity's quest for explanation and understanding by an Oxford University quantum physicist who believes that science is as infinite as the human thirst for knowledge.
Revolutions that Made the Earth. By Tim Lenton and Andrew Watson. Oxford University Press; 440 pages; $52.95 and £29.95
An analysis of the evolutionary changes that took place on Earth in response to sudden changes in temperature or atmospheric conditions, by two followers of James Lovelock, the father of the popular theory of Gaia, the self-regulating planetary system.
Culture, society and travel The Better Angels of our Nature: Why Violence Has Declined. By Steven Pinker. Viking; 802 pages; $40. Published in Britain as " The Better Angels of our Nature: The Decline of Violence in History and its Causes" by Allen Lane; £30
Steven Pinker's exploration, within psychology, neuroscience, politics and economics, of why all forms of violence have seen huge long-term declines is a subtle piece of natural philosophy to rival that of the great thinkers of the Enlightenment. He writes like an angel too.
Adventures in the Orgasmatron: How the Sexual Revolution Came to America. By Christopher Turner. Farrar, Straus and Giroux; 544 pages; $35. Fourth Estate; £25
A smart and engaging work of social history that considers sex, psychoanalysis, consumerism and some of the darkest moments of the 2oth century.
Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier and Happier. By Edward Glaeser. Penguin; 336 pages; $29.95. Macmillan; £25
This enthusiastic guide to the blessings of human proximity explains why half of humanity now lives in cities and why sm more are moving there from the countryside every month.
Beautiful Thing: Inside the Secret World of Bombay's Dance Bars. By Sonia Faleiro. Canongate; 240 pages; £12.99. To be published in America in March by Grove Press; $15
A pitch-perfect conga through the dance bars of Mumbai. The author also explores middle-class marriage in India and its hypocrisies, and the challenges of trying
ty Press; 168 pages; $25 and £18
An unputdownable story that takes in child abuse, sexual taboo and a ringside trial seat in front of the famous Supreme Court "hanging judge", Robert Hanophy.
Is That a Fish in Your Ear?: Translation and the Meaning of Everything. By David Bellas. Faber & Faber; 400 pages; $27. Particular Books; £20
A wonderful, witty book about words, language and cultural anthropology by a scholar whose fascination with his subject is itself endlessly fascinating.
The Art of Camping: The History and Practice of Sleeping Under the Stars. By Matthew De Abaitua. Hamish Hamilton; 294 pages; £14.99 A memoir of how camping means exploring an unfamiliar place while recreating the safe comforts of home, by an editor-atlarge of the Idler and an inveterate fan of guys and poles.
Fiction 1084. By Haruki Murakami. Books 1 and 2 translated by Jay Rubin and Book 3 by Philip Gabriel. Knopf; 944 pages; $30.50. Harvill; £34.99
A wild and wilful romance involving a black cat, two moons and a host of nocturnal little people-as well as a boy and a girl.
Other People's Money. By Justin Cartwright. Bloomsbury; 258 pages; $15 and £18.99
Born in South Africa, now living in Britain, Justin Cartwright casts a sharp outsider's eye on the City of London and its shenanigans. A novel that is both funny and wise.
Open City. ByTeju Cole. Random House; 272 pages; $25. Faber& Faber; £12.99
We commit to supporting scieuce, technology, eugiueering and math educatiou by itl piring tlte next generation of ciet&tists, equipping te(l hers 111ith better traini11g, and preparing adult to etrter or re-enter the workfo~e through irwe. tment itt teclmical education programs.
The Economist December lOth 2011
96 Books and arts ~ An unusual
accomplishment, "Open City" is a precise and poetic meditation on love, race, identity, friendship, memory, dislocation and Manhattan bird life.
Books by Economist writers in 2011
ofldentity. By Robert Lane Greene. Delacorte
Pages and pages
Press; 336 pages; $25 and £9.95
The Marriage Plot. By Jeffrey Eugenides. Farrar, Straus and Giroux; 416 pages; $28. Fourth Estate; £20
A rich and textured evocation of the quest for marriage or how true love never works out, except at the end of an English novel.
Train Dreams. By Denis Johnson. Farrar, Straus and Giroux; 128 pages; $18
This dense, mesmerising novella about a labourer in the American West conjures up a life lived in the 2oth century that reads like it was long, long ago.
The Tiger's Wife. By Tea Obreht. Random House; 352 pages; $15. Weidenfeld & Nicolson; £12.99
This story, by a 25-year-old Serbian-American woman, of a young Balkan doctor named Natalia, her family and their homeland, is highly original, funny and frightening, and proof that there is no formula for precocity. Winner of the 2011 Orange prize for fiction.
The Cat's Table. By Michael Ondaatje. Knopf; 304 pages; $26. Jonathan Cape; £16.99
A personal story of dislocation by a Sri Lankan-born Canadian novelist. Superbly poised between the magic of innocence and the melancholy of experience.
The Afrika Reich. By Guy Saville. Hodder & Stoughton; 433 pages; £12.99
A rich and unusual what-if historical thriller that is politically sophisticated and hard to forget.
Poetry Australian Poetry Since 1788. Edited by Geoffrey Lehmann and Robert Gray. University of New South Wales Press; 1,108 pages; $66.95 and£54.95
An exemplary anthology and a generous account of a poetry that deserves to be better known; from Aboriginal song cycles and settler ballads to recent work by Les Murray, Philip Hodgkins and the editors themselves.
Memorial. By Alice Oswald . Faber& Faber; 84 pages; £12.99
This vivid and moving poem weaves together two vital threads from the "Iliad": the unique ephemerality of each man killed in war and the recurrent, timeless pictures of nature and human activity captured in Homer's similes.
Clavics. By Geoffrey Hill. Enitharmon Press; 41
What we wrote when we weren't in the office
UR policy is not to review books written by our staff or former staff for at least five years after they have left the paper, or even regular freelance contributors, because readers might doubt the independence of such reviews. Some readers, however, have asked what books our journalists have produced. So here is a list of those published in 2011.
0
The Gated City. By Ryan Avent. Kindle Singles; 90 pages; $1.99 and £2.10
A study of how cities can boost productivity, creativity and opportunity, by our economics correspondent.
Paper Promises: Money, Debt and the New World Order. By Philip Coggan. Allen Lane; 304 pages; £20. To be published in America in February by PublicAffairs; $27.99
Our Buttonwood columnist explains how economic history is a battle between creditors and debtors and how the latest skirmish is transforming the global financial system.
Young Wisden: ANew Fan's Guide to Cricket. By Tim de Lisle and Lawrence Booth . A&C Black; 128 pages; $15.95 and £12.99
Tim de Lisle-the editor of our sister publication, Intelligent Life, and a former sports writer-explains the intricacies of the game to eight-to-13-year-olds.
You Are What You Speak: Grammar Grouches, Language Laws, and the Politics
An analysis of the politics and mythology of language by our Johnson blogger (who himself speaks nine languages).
Borderless Economics: Chinese Sea Turtles, Indian Fridges and the New Fruits of Global Capitalism. By Robert Guest. Palgrave Macmillan; 256 pages; $27 and £18.99
With reporting from nearly 70 countries, our business editor describes how migration makes the world brainier. He argues that migrants spread ideas, create trading networks and may one day turn China democratic.
Poegles: AShort History and Collection. By Justin Hendrix and Dave Gunton. Fast Pencil; 138 pages; $14.95and £9.95
"Poem"+ "Google" ="Poegle", a book of poetry created by rearranging the sentences generated by internet search engines.Justin Hendrix is our vice-president for innovation and development.
Reluctant Hero: The Life of Captain Robert RyderVC. By Richard Hopton. Pen & Sword; 240 pages; £19.99. To be published in America in February; $39.95
The first biography of the man who led the second-world-war raid on the Naziheld French port of Saint Nazaire, by one of our history reviewers.
Hannibal and Me: What History's Greatest Military Strategist Can Teach Us About Success and Failure. By Andreas Kluth. Riverhead; 336 pages; $26.95
Drawing on the lessons of decision-makers throughout history, our us West Coast correspondent analyses why some people overcome failure and others succumb to it.
Submergence. By J. M. Ledga rd. Jonathan Cape; 208 pages; £16.99
In his second novel, our east Africa correspondent writes of a British secret agent who is held hostage by jihadist fighters in Somalia, a deep-ocean researcher and their brief but memorable love affair.
Snowdrops. By A.D. Miller. Doubleday; 272 pages; $24 .95. Atlantic; £7.99 Shortlisted for the 2011 Man Booker prize, "Snowdrops" is an amorality tale that unfolds during a Russian winter, by our former Moscow correspondent.
Masters of Management: How the Business Gurus and Their Ideas Have Changed the World-for Better and for Worse. By Adrian Wooldridge. HarperBusiness; 464 pages; $29 .99 and £19.99
An updated version of "The Witch Doctors", a critique of management theory, by our Schum peter columnist.
pages; $29.95 and £12
Orpheus: The Song of Life. By Ann Wroe.
An intense and austere new collection by the Oxford professor of poetry, who has been called "the greatest living poet in the English language".
Jonathan Cape; 272 pages; £17.99. To be published in America by Overlook in May; $26
An evocation of the first poet's lasting power to inspire, by our obituaries editor.
Courses
97
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The IE Brown Executive MBA challenges participants to open their minds to fresh ways of thinking, continuous innovation, and sustainable value creation on a global scale.
To find out more, please contact: Vam darajah I Admi SIOilS 01rector, IE Brown Executiv MBA I 11 1: +34 91 568 96 10 I blended.programs ie.edu I www.lebrown.com
The Economist December lOth 2011
Advanced Management Program 2006
98
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The Ultimate Degree for Finance xecutives EDHEC-Risk Institute PhD in Finance London • Nice · Singapore Since 2008, EDHEC-Risk Institute has been offering a unique PhD in Fmance programme to ell e practitioners who aspire to h1gher mtellectuallevels and a1m to rede me the mvestment bankmg and asset management 1ndustnes. Drawing 1ts faculty from the world's best univers1t1es and enJoymg the support of a leader m mdustry-relevant academ1c research, the EDHEC-Risk lnst1tute PhD in Finance creates an extraordinary platform for professional development and indu try mnovation. Following a stimulating sc1entific curriculum and working individually with leading specialists on research issues of particular relevance to the1r organisations, practitioners on the programme's execut1ve track learn to I verage the1r expert1se and mstgh to make ongmal contnbut1ons at the frontiers of financ1al knowledge and practices. Challenging professionals to step back, reflect. and generate rad1cal•nnovations, the EDHEC-R1sk Institute PhD m Finance is the ultimate degree for finance executives.
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The Economist December lOth 2011
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www.isn1.edu ESMT European School of Management and Technology • Berlin
The Economist December lOth 2011
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MERDEKA SCHOLARSHIPS Appljcations are invited from Malaysian citizens for the Merdeka Scholarships, tenable from October 2012. The scholarships are awarded to those wishing to undertake postgraduate degrees at the University of Oxford. Successful candidates will be of exceptional academic calibre. They will have shown promise as future national leaders in their respective fields . Candidates should be able to demonstrate how their study will make a beneficial contribution to Malaysia. The scholarships will cover university and college fees, maintenance allowance and return air fares. They will be renewable annually for the duration of the course. Further details and application forms may be obtained from the Academic Assistant or from the website of the Oxford Centre for Islamic Studies: The Academic Administrator, Oxford Centre for Islamic Studies, George Street, Oxford OXl 2AR, UK Tel: 44 1865 278730 Fax: 44 1865 248942 e-mail: [email protected] Web site: www.oxcis.ac.uk/merdeka
The Economist December lOth 2011
Appointments
101
Established in December 1950, the Office of the United Nations High Commissioner for Refugees is mandated to lead and coordin ate intern ation al acti on to protect and assist refugees and other persons of concern. In more than s ix decades, UNHC R has hel ped tens of millions of people restart the ir Ii ves. The Di vis ion of Financial and Admini strati ve M anage men t is
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Education: Advanced university degree in Accounting , Finance, Business, Public Administration or related field .
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Work experience: A minimum of 15 years in the area of finance/ accounting, of which at least 5 years in an inter-governmental public sector organization such as the UN. Solid experience in accrual accounting at international level (IPSAS or similar).
We offer an exciting and wide-ranging function at the forefront of humanitarian assistance impacting on UNHCR's global operations, on the basis of a UN type employment contract and benefits. Applications: A complete job description and details on how to apply are available on the UNHCR website at: www.unhcr.org/careers. Closing date for receipt of applications: 3 January 2012 UNHCR aims for wor!..force diversity and strongly encourages qualified women to apply. Acknowledgments will only be sent to short-listed candidates under serious consideration.
Courses
lATA, UFTAA, WTAAA and ECTAA are currently recruiting for the following position:
Travel Agency CommissionerEurope, Africa, Middle East The Travel Agency Commissioner ("TAC") is an independent arbiter appointed jointly by the International Air Transport Association (lATA), the United Federation of Travel Agency Associations (UFTAA) and the World Travel Agents Associations Alliance (WTAAA) including the European Travel Agents and Tour Operators Association (ECT AA). The TAG's role is to conduct reviews affecting agents and applicants under the lATA Passenger Agency Programme - more details in lATA Resolutions 820d and 820e available at:
http://www.iata.org/whatwedo/travel-tourism/resolutions.htm The vacancy concerns Area 2 (Europe, Africa, Middle East), while the rest of the world is serviced by two other TAGs. The appointee, resident in Area 2, will mostly work out of his/her office, with some travel required within the Area. The position is part time and the caseload is variable. The ideal candidate will meet the following criteria: • Experience in the travel industry ideally gained from previous employment within the travel industry • Have a good knowledge of the IATA Passenger Agency Programme or a demonstrated ability to acquire such knowledge • Be fluent in written and oral English with the same skills in at least one other major language • Experience in dispute resolution and/or legal background will be highly regarded • Be an independent contractor not associated, employed or involved with an airline, travel agency, travel agency association or lATA. Candidates are invited to send a cover letter and Curriculum Vitae to jobs@wtaaa. org by 15 January 2012. Position to be filled as soon as practicable.
www.aif.nl The Economist December lOth 2011
We thank all candidates for applying, but can only acknowledge those under consideration.
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To advertise within the classified section, contact: United Kingdom Martin Cheng- Tel: (44-20) 7576 8408 [email protected]
United States Beth Huber- Tel: (212) 541-0500 [email protected]
Europe Sandra Singharaj- Tel: (33) 153 936614 [email protected]
Middle East & Africa Mirasol Galindo- Tel: (971) 4433 4202 [email protected]
Asia David E. Smith -Tel: (852) 2585 3232 [email protected]
The Economist December lOth 2011
Tenders
103 I SLAMI C R E P U B L I C O F" AF"G HANI STAN
VISAKHAPATNAM URBAN DEVELOPMENT AUTHORITY
MtNUiTRY DF" M IN EII
MIN E RAL TE ND E R S
REQUEST F"OR EXPRESSIONS OF" I NTEREST
GOVERNMENT OF ANOHRA PRADESH Ill Floor, Udyog Bhavan, S ripuram, Visakhapatnam-530003, A.P., India Phones: +91..s91-2754133134 Fax; +91-891-2754189 Ema 1· [email protected] Web rta· www vuda.gov In
GLOBAL EXPRESSION OF INTEREST 1110VATM I UIIQUE EmRTAIIMEIT AIO AMUSEMEIT AREU' At VUDA Park, Visakhapatnam, Andhra Pradesh, India
The full Wfslon of this Request for Expressions of Interest and further InformatiOn is available on the Monistry Mbsue (www.mom gov.af) . Th1s ndu
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Business & Personal
PERSONAL 8t CORPORATE TAX PLANNING WEALTH 8t ASSET PROTECTION PRIVATE BANKING
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to make appropriate enquiries and take appropriate advi ce before sending money, incurring any expense or entering into a binding commitm ent 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 December lOth 2011
VI khapatnam Urban OevelopmentAulhonty (VUDA) in tes Globai'Expression of Interest (EOI) w proposed concept from renowned global players from Enl.el1aJnment I Amu ment/ Reaeabon Sedot WI proven track record for 11\e selection of pnvate partners for the development of WOOcklass Innovative & Unique En rta•nment and Amuseme I Arena' at VUDA Pari!, Visa hapatnam, on BOT basis In Public Private Partlcipabon (PPP) mode for a rrin!Joom period of 16 years or more basmg on 11\e proposed project concept. SIZ8, technology &~ ly, per the telmS and condJbonS laid down 11111\e EOI Document The proposed location IS at VUOAPark, which is an excallenl Tourism Destination ol Visa patnam Cdy, strategiCaly located In lhe heart of hapatnam City WI a brea!Maklng Beach Front. besides Park Hotel, on RK Beach Road. AA 81N of Ae.6.00 Cts. (24,280 Sq. Mt&.) earmarked by VUDA for lhe proposed 'Enlelta ment and AmusementArena'. P,.,u vis VUDA Website: www.vuda.govJn for detailed vwslon of 'EO/ No~tlon ' wtththedetal/sof'Locatlon ' andproposed'Pro}ectDetafls'.
The Stcrttary, VUDA (Mob le No.98660·76930) can be contacted for VISiting the poor IntimatiOn. In ested parties can coUecl 11\e 'EOI Documenf from 03.12.2011 onwards from I Oversea Ba (lOB), VUDA Branch, Vi patnam on aU wcrting days on a payment of INR.10,000/- (Rupees Ten Thousand only). EOI Document can so be downloaded from VUDA website: www.vudagov.ln and furnish a Demand Draft I Pay Order b INR.10,0001· (OR) US.$.225/· drawn in favour of VIce Cha rman, VUDA payable at V11akhapalnlm, along with the EOI Document, while submitting, duly fil ed-
SdJ- Kona S sldhar, lAS. VIce • Chalnnan, VUDA.
Appointments
AMRO
ASEAN+3 MACROECONOMIC RESEARCH OFFICE (AMRO)
ECONOMIST I BUDGET, HR & COORDINATION OFFICER I LEGAL OFFICER I SENIOR COORDINATION OFFICER AM RO, located in Singapore, was established in Apri l 2011 by ASEAN+3 Finance Min istries and Central Banks to (a) conduct macroeconom ic and fi nancial surveilla nce of the members, (b) provide the members wi th policy recommendations to mitigate economic and fi nancial risks, and (c) assist the members if they are utilising financial resources of the CMIM. AMRO is looking for 5 Economists, 1 Budget, HR & Coordination Officer, 1 Legal Officer, and 1 Senior Coordination Officer, starting fro m early 2012 (three-year fi xed term, to be extendable at the discretion of AMRO Director). The details of job scopes are available at http://jobs.economist.com/employer/971 /amro/. The candidate should possess: (i) an advanced deg ree in Economics, Finance, Business Administration, Laws or re lated fields from a reputable university; (ii) Excel lent analytic skills in relevant areas; (iii) At least 5 yea rs (or 10 years for Senior Coord ination Officer) of relevant working experiences; (iv) Excellent oral and written com munication ski lls in Engl ish; and (v) a nationa lity of AS EAN+3 countries. AMRO offers com petitive level of re muneration and, for non-Singaporeans, expatriate benefit packages (e.g., housing assistance) pursuant to the internal gu idelines. Qualified candidates should send your (a) CV, (b) brief description on the rel evant working experi ences, and (c) ea rl iest starting date of employment at AMRO, by 18 December (GMT+8) to the following: Economist: economist20 [email protected] Budget, HR & Coordination Officer: [email protected] Legal Officer: /ega/[email protected] Senior Coordination Officer: [email protected] AMRO will acknowledge the receipt of you r application . However, only short-listed candidates will be contacted for interviews
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104
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10-year gov't bonds, latest
%of GDP 2011 t
-9.0 -3 .1 -469.9 02 2.01 +2.0 +1.8 +3.9 Oct +3.5 Oct +3.2 9.0 Oct +9.5 +9.2 +13 .2 Oct +5.5 Oct +5 .6 6.1 2010 +259.3 03111 +2 .9 -1.8 3.57 6.36 6.66 03 +6 .0 -0.3 +0.4 oct -0.2 oct -0.3 4.5 oct +150.0 Sep +2.3 -8.3 1.03 77.7 84.3 03 +2.0 +0.9 -1.7 Oct +5.0 Oct§ +4.4 8.3 Septt -40.9 02 -1.5 -8.8 2.23 0.64 0.63 ~~c!! ___ .±.? ,i~ _ __:i:L'i_ .±.2.1. _ _ _ .±? 1.~_ .±_2_1.Q£t _ _:t-b.8_ _ _ l: ~ ~ --- -_i9,Zsg _ _ :1J.... ___ -~Q_ __ .1_.1§ ____ _l.Q.! ___ _LQl _ Euro area +1.4 03 +0.6 +1.6 +2.2 Sep +3.0 Nov +2 .7 10. 3 Oct -82.6 Sep -0.5 -4.0 2.07 0.75 0.76 Austria +2.8 03 +1.3 +2.9 +2 .7 Sep +3.4 Oct +3 . 2 4.1 Oct +11.2 02 +2 .6 -3 .6 3.15 0.75 0.76 Belgium +1.9 03 nil +2.1 +10.0 Aug +3.8 Nov +3.3 6.6 Octtl +7.0 Jun +1.7 -3.8 4.41 0.75 0.76 France +1.6 03 +1.6 +1.6 +2.3 Sep +2.3 Oct +2.2 9.8 Oct -64.5 Sep -2.4 -5.8 3.21 0.75 0.76 Germany +2.5 03 +2.0 +3.0 +5.7 Sep +2.4 Nov +2.4 6.9 Nov +193.7 Sep +5.2 -1.0 2.10 0.75 0.76 Greece -5.2 03 na -5 .3 -2 .1 Sep +3.0 Oct +2 .9 18.4 Aug -29 .9 Sep -8 .4 -9.1 30.31 0.75 0.76 Italy +0.8 02 +1.2 +0.6 -2 .7 Sep +3.3 Nov +2.8 8.5 Oct -79.0 Sep -3.7 -4.0 6.45 0.75 0.76 Netherlands +1.1 03 -1.1 +1 .5 -8.8 Sep +2.6 Nov +2.4 5.8 octtt +66 .0 02 +7.1 -4.2 2.53 0.75 0.76 ~~n_ _ _ _ .!9 ~~ -- .!!i l_ .:t.O.:E_ ____.:E ~ _ .±.2..1 .!:!!!v_ _:t-~0_ _ _2_b~ e!_ _ _ _ -2_6~ ~t _ _ 3~ --- -,£; '2._ __ .2·l9 ____ _Q.~ ___ Q}.&_ _ Czech Republic +1.5 03 na +2 .1 +2.5 Sep +2.3 Oct +1.9 7.9 Oct -7 .1 02 -3 .1 -4.6 3.84 18.9 18.9 Denmark -0.2 03 -3.3 +1.1 -2.0 Sep +2.8 Oct +2.7 4.2 Oct +22.1 Sep +5.7 -3.9 2.00 5.55 5.64 Hungary +1.4 03 +2.0 +1.5 +3 .0 Sep +3.9 Oct +3.9 10.8 octtt +3.2 02 +1.5 +1.2 8.61 225 211 Norway +3.8 03 +5.8 +0.8 +4.2 Sep +1.4 Oct +1.4 3.3 Sep§§ +70.2 03 +13.6 +13.1 2.43 5.76 6.04 Poland +4.2 03 na +3 .8 +6.4 Oct +4.3 Oct +3.9 11.8 Octtl -26 .2 Sep -4.8 -6.0 5.87 3.34 3.07 Russia +4.8 03 na +4.0 +3.6 Oct +6.7 Nov +8.5 6.4 Octtl +86.3 03 +5.0 -0.8 4.73 31.3 31.1 Sweden +4.6 03 +6.6 +4.1 +4.8 Sep +2.9 Oct +2.8 6.9 octtl +39.7 03 +6.7 +0.2 1.69 6.74 6.92 Switzerland +1.3 03 +0.9 +1.8 +2 .3 02 -0 .5 Nov +0.4 3.0 Nov +86.1 02 +13 .3 +0.8 0.79 0.93 0.99 Turkey +8 .8 02 na :!]. 5 +7.3 Oct +9.5 Nov +6.3 9. 2_Augtl -]] .5 Sep .::J.8 -1.7 9.l.1 1.83 1.49 Australia +1.4 02 +4.8 +1.7 -3 .3 02 +3.5 03 +3 .4 5.3 Nov -32.6 03 -2 .3 -2.6 3.98 0.97 1.02 Hong Kong +4.3 03 +0.4 +5.4 +2.0 02 +5.8 oct +5.1 3.3 octtt +14.3 02 +4.2 +1.8 1.29 7.77 7.77 India +6.9 03 na +7 .9 +1.9 Sep +9.4 Oct +8.3 10.8 2010 -46 .2 02 -3.5 -4.9 8.79 51.7 45.1 Indonesia +6.5 03 na +6.5 +10.1 Sep +4.2 Nov +5.4 6.8 Feb +3.6 03 +0.4 -1.0 4.14ttt 9,035 9,020 Malaysia +5.8 03 na +4.5 +2 .5 Sep +3.4 Oct +3 .3 3.3 Sep +32.7 03 +10.4 -5 .6 3.10ttt 3.12 3.15 Pakistan +2.4 2011.. na +2.4 +5.1 Sep +10.2 Nov +12.2 5.6 2010 -0.2 03 -1.3 -5.9 13.72 ttt 89.4 85.7 Singapore +6.1 03 +1.9 +5 .1 +24.4 Oct +5.4 Oct +5.1 2.0 03 +49 .2 03 +17.7 +0.3 1.66 1.29 1.32 South Korea +3.4 03 +3.0 +3 .8 +6.2 Oct +4.2 Nov +4.2 3.1 Oct +22.2 Oct +2 .0 +1.5 3.75 1,126 1,146 Taiwan +3.4 03 +5.0 +4.4 +1.4 Oct +1.0 Nov +1 .5 4.3 Oct +38.6 03 +8.0 -2.7 1.30 30.2 30.2 Thailand ;!].5 03 +2.1 +2.5 -~.8 Q£t +4.2 Nov__+~2O. '!_J un _ _ _+13.2 Oct_ _ +4.1 -2.9 _ _l.28 _ 2_0.8 lQ:l Argentina +9.1 02 +10.2 +8.5 +4.3 Sep +9.7 Oct*** +9.6 7.2 Q311 +1.1 02 -0.3 -1.4 na 4.28 3.97 Brazil +2.1 03 -0.2 +3.0 -2.2 oct +7.0 oct +6.7 5.8 octtl -47.3 Oct -2.2 -2.7 11.18 1.79 1.69 Chile +4.8 03 +2.6 +6.3 -0.8 Oct +3.7 Oct +3.2 7.2 Oct!ttl -1.2 03 -0.5 +0.2 2.38ttt 510 477 Colombia +5.1 02 +8.5 +5.1 +5.2 Sep +4.0 Nov +3.5 9.0 Octtl -10.6 02 -2.7 -2.5 3.57 ttt 1,934 1,889 Mexico +4.5 03 +5.5 +3.4 +3.6 Sep +3.2 Oct +3.4 5.0 octtl -10.0 02 -1.9 -2.5 6.14 13.5 12.4 ~~~e~ -- ~1.~ _ _ .!:!_a_ .±.2~ --- .±.? ~~-+1_8.:2.!:!!!v_ .:f:?§.:.L _ _ ~ ~~ ---+1_6,Q ~ -- .:':§ ~ _ _ _ -2.,L_ __ _§_.2?!.!!_ ___ .2· ~ ----~ Egypt +0.3 02 na +1.8 -1.8 02 +7 .1 oct +10 . 2 11.9 Q3 tl -2.8 02 -1 .7 -10.0 7.21 ttt 6.01 5.79 Israel +5.1 03 +3.4 +4.4 +7 .1 Sep +2.7 Oct +3.3 5.6 03 +2.5 02 -0 .1 -2.8 3.68 3.75 3.62 Saudi Arabia +6.7 2011 na +6.7 na +5.3 Sep +4.9 na +75.3 2010111 +25.9 +14.3 na 3.75 3.75 South Africa +3 .1 03 +1.4 +3 .1 +7.7 Sep +6.0 Oct +5 .0 25 .0 03 t1 -10.7 02 -4.1 -5 .2 7.77 8.05 6.94 +1.5 +9.1 nil +0.5
03 03
*%change on previous quarter, annual rate. tThe Economist poll or Economist Intelligence Unit estimate/forecast. tNational definitions §RPI inflation rate 5.4 in October. **Year ending June. tt Latest 3 months . ti Not seasonally adjusted. §§Centred 3·month average. ***Unofficial estimates are higher. ttt oollar-denominated bonds. Ill Estimate.
The Economist December lOth 2011 Markets
Economic and financial indicators 105
%change on
Dec 31st 2010 one in local in $ week currency terms United States (DJIA) +0.9 +4.9 +4.9 China (SSEA) nil -16 .9 -13 .9 Japan (Nikkei 225) +3 .4 -14.7 -11 .0 +0.8 -6.0 -5.9 Britain (FTSE 100) ~'!!d~(~I?_TS1) _ _ _ ll,Q§U _ .:1-.Q.. _ :10.1. _ -.Dl. Euro area (FTSE Euro 100) 755.8 +0.4 -15.5 -15 .7 Euro area (OJ STOXX 50) 2,344.9 +0.6 -16.0 -16.2 Austria (ATX) 1,878.0 +1.7 -35.3 -35.5 Belgium (Bel20) 2,084.7 +0.5 -19.2 -19.3 France (CAC40) 3,176.0 +0.7 -16.5 -16 .7 Germany (DAX)* 5,994.7 -1 .5 -13.3 -13 .5 Greece (Athex Comp) 686.2 +0.6 -51.5 -51.6 Italy (FTSE/MIB) 15,650.9 +2.5 -22 .4 -22.6 Netherlands (AEX) 304.3 +1.5 -14.2 -14.3 867.2 +2.5 -13.6 -13.8 Spain (Madrid SE) Czech Republic (PX) 880.0 +0.1 -28.2 -28.9 Denmark (OMXCB) 355.1 +0.1 -16.8 -16.8 Hungary (BUX) 17,209.3 -2.4 -19.3 -25.4 Norway (OSEAX) 435.3 -0.3 -10.5 -9.7 Index Dec 7th 12,150.1 2,444.1 8,722.2 5,546.9
~@rid ~~)
____ J.2,Q.?1L.:ll _ :1.7.& _ -n .2
Russia (RTS, $terms) Sweden (OMXS30) Switzerland(SMI) Turkey (ISE) Australia (AllOrd.) Hong Kong (Hang Seng) India (BSE) Indonesia (JSX) ~~~aJ!
1,467.7 977.5 5,767.9 55,138.9 4,351.3 19,240.6 16,877.1 3,793.2
-4.7 -0.2 +2.0 +1.1 +4.0 +7 .0 +4.7 +2.1
-15.0 -15.4 -10.4 -16.5 -10.2 -16.5 -17.7 +2.4
___ .J ,~:gl- ~1.. _ ....-:.Z.:i _
Pakistan (KSE) 11,283.9 Singapore (STI) 2,782.6 South Korea (KOSPI) 1,919.4 Taiwan (TWI) 7,033.0 Thailand (SET) 1,046.7 Argentina (MERV) 2,615.6 Brazil (BVSP) 59,536.2 Chile(IGPA) 19,817.8 Colombia (IGBC) 12,665.3 Mexico (IPC) 37,071.2 ~nezuela (IBC) _ _119 02.4 Egypt (Case30) 3,993.7 Israel (TA-100) 970.9 Saudi Arabia (Tadawul) 6,216.9 South Africa (JSEAS) ~ 760.3
-2.2 +3.0 +3.9 +1 .9 +5.2 +2.1 +4.7 -1 .1 -2.0 +0.7 !Q-1._ -0.7 -1.4 +1.7 -0.2
-6.1 -12.8 -6.4 -21 .6 +1.4 -25.8 -14.1 -13.8 -18.3 -3.8 +74_& -43.6 -20.8 -6.1 +2.0
-17 .1 -15.6 -9.7 -29.9 -10.2 -16.5 -28.9 +2.1
_i?:§. -10.0 -13 .1 -5.7 -24.2 -0.7 -31.1 -20.5 -20.8 -18.9 -12.3 n_9. -45.5 -25.2 -6.1 -16.1
I
The Economist poll of forecasters, December averages Real GOP,% change Lowfhigh range average 2011 2012 2011 2012
(previous month's, if changed)
Consumer prices %change 2011 2012
Current account %of GOP 2011 2012
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.ta..o. n ...
Sources: BNP Paribas, Citigroup, Commerzbank, Decision Economics, Deutsche Bank, Economist Intelligence Unit, Goldman Sachs, HSBC Securities, lNG, JPMorgan Chase, KBC Bank, Morgan Stanley, RBC, RBS, Schroders, Scotia bank, Societe Generale, UBS
The Economist commodity-price index
Other markets %change on Index Dec 7th United States (S&P 500) 1,258.5 United States (NAScomp) 2,649.6 China (SSEB, $terms) 222.4 Japan (Topix) 749.6
Dec 31st 2010 one in local in$ week curren cy terms +0.9 +0.1 +0.1 +1.1 -0.1 -0.1 -3.0 -29.4 -26 .9 +2 .9 -16.6 -13.0
2005=100 Nov 29th
Dec 6th*
Dollar index _ _ _}Z§l. _ _ l§QJ_ _ _: ~9_ _:2.!-2. _E2q£ ____ _}~&_ __ 1JZ.:..8__ _: ~2__ _:E.1_
~l_i_t:_e~s-
Industrials
!!!~~(~.s~!!~~t1_0Q} _ ~~ - !Q L _ :l1.:2. _-~.Q World, dev'd (MSCI) 1,193.7 +0.8 -6.7 -6 .7 Emerging markets (MSCI) 953.5 +2.7 -17.2 -17 .2 World, all (MSCI) 303.5 +1.0 -8.2 -8 .2 ~o!!_d!_o!!.Q~(Ci!j!)!.O!!.J.I)_ _ 2?~ _ !Q-2. _ ~6~ _ ~-Q EMBI+ (JPMorgan) 599.4 +0.8 +8.7 +8.7 Hedge funds (HFRX) 1,112.9 +0.3 -8.6 -8.6 Volatility, US (VIX) 29.2 +27.8 +17.8 (levels) CDSs, Eur (iTRAXX)t 167.0 -9.8 +59.6 +59.3 CDSs, N Am (CDX) t 122.2 -4.5 +43.5 +43 .5 Carbon trading (EU ETS) € 7.7 -8.2 -45.8 -45.9
f\~l ' .. )57_,9 1_7~._0 ..Nfat.. Metals 150.1 Sterling index All items 207 .6 Euroindex All items 166.2 Gold l.Rer oz 1,709 .1 West Texas Intermediate $per barrel 99.8
*Total return index. tcredit-default-swap spreads, basis points. Sources: National statistics offices, central banks and stock exchanges; Bloomberg; CBOE; CBOT; CMIE; Cotlook; Darmenn &
•Provisional !Non-food agriculturals.
Curl; EEX; FT;HKMA; ICCO; !CO; ISO; Jackson Rice; JPMorgan Chase; NZ WoolServices; Thompson Lloyd & Ewart; Thomson Reuters; Urner Barry;WSJ; WM/Reuters
%change on one one month year
"
163_.4
"
. 1.79.,0.. 156.7
~2-,1 . ~ 1?.. 7 :4-.9 ... ~.23._9 -0.7 -14.3
210.9
-0.9
-10.5
168.1
-0.9
-12 .0
1,709.8
-4.7
+20.8
101.2
+4.4
+14 .2
Indicators for more countries and additional series, go to: Economist.comfindicators
Socrates Socrates Brasileiro Sampaio de Souza Vieira de Oliveira, Brazilian footballer and political agitator, died on December 4th, aged 57
NE was short, fat and famously ugly; the other was handsome, slim and 0 very tall indeed, with tumbling dark curls caught back in a headband. One skulked about in a grubby robe and sandals; the other shone in blue micro-shorts and the sun-yellow shirt of Brazil. One wandered round the market place, teasing out the Good with onslaughts of severely logical questions. The other played football; and that was pretty good, too. The fact that both men were called Socrates was not the only link between them. For the one born in Belem do Para, at the humid mouth of the Amazon, was also an intellectual. In a sport in which most players' brains soon take residence in their boots, he talked of Van Gogh and Cuban history, practised medicine and worried about democracy. Over a career that included almost 300 games for his main club, Corinthians of Sao Paulo, and 6o games for Brazil, he trod the pitch as a man of thought, reading the game like a mathematician before, almost nonchalantly, applying some genius touch. Whether this love of wisdom had soaked in with the baptismal water, or whether he had picked it up in the library proudly assembled by his self-taught father (who also named two of his brothers S6focles and Sostenes), no one knew. He
himself said his childhood heroes were Fidel Castro, Che Guevara and John Lennon. Yet his book, "Football Philosophy", ended with a maxim that would have pleased his namesake: "Beauty comes first. Victory is secondary. What matters is joy." He meant what he said. He was never in a team that won the World Cup (though Brazil has done so five times); but then the relentless focus and discipline required to lift that trophy never pleased him. Like his namesake, he sought Beauty. And spectators found it whenever he played, with his elegant gazelle runs, his leaps and accelerations, his classy back-heels and his long, loping passes from midfield. There were few keener reminders of the Beautiful than the game against Italy in the 1982 World Cup, when he was captain: a game of surpassing skill and spontaneity capped by a wonderfully deceptive goal of his own, almost disguising the fact that Brazil then lost and left at the second-group stage. A gadfly in boots Yet Dr Socrates, as Brazilian fans called him, never put football first in his life. Early on he would miss training sessions if they clashed with his medical studies. In a country that eats, breathes and lives football, where commerce stops for it and elections are planned by it, he insisted that the
most vital thing was to get rid of poverty, build roads and schools and, not least, teach manners. His namesake would have called this pursuing the virtuous life. He called it "prioritising the human being". The best thing about football, he said once, was the ordinary people he met-including those of Garforth, near Leeds in northern England, whose non-league team he coached for a chilly month in 2004. He also spoke up for the common man. Like the first Socrates, he saw himself as a gadfly of the tyrannical, lazy or self-satisfied. He disliked the way Corinthians was run, with management treating players like children, and organised a system where everyone in the club, from kit-boy to president, would vote about the length of training and the time of lunch-hoping, no doubt, for greater laxity about parties and smoking and beer, all of which he found essential to his own free-ranging game. ("I am an anti-athlete," he explained. "You have to take me as I am.") He disliked the way Brazil was run too, under a cohort of generals after a coup in 1964; he pestered for free elections by leading a Corinthians team with "Democracia" printed on their shirts, and by marching off in 1984-85, when Congress failed to pass the necessary laws, to play for Fiorentina in Italy. If this was subversion and "corrupting the youth", he revelled in his dangerous influence. And he didn't let up: Lula was good, he said, but earned a mere seven or so out of ten for how he had governed Brazil. For Socrates only outright revolution, Fidel-style, rated a ten. Retired from football, he continued to campaign against the corruption rampant in the game. He demanded open elections-by players, fans, everyone-for the top job in the Brazilian Football Confederation, and toyed with fielding his teammate Zico against the scandal-tangled president. He began to write a novel, set during Brazil's hosting of the World Cup in 2014, in which public money was yet again disappearing into private pockets, and white-elephant stadiums were rising across the land. He saw no change in prospect. His own Corinthians, once struggling, were rolling in money, but he preferred his political slogans to the dozens of sponsors now blazoned on their shirts. And he would rather have seen a creative defeat than the ill-tempered game that made them national champions a few hours after his death. He died too young, after a dinner with friends which his weakened liver couldn't take. But he always needed to set Brazil to rights over copious cacha~as at some cafe table: his own "Symposium", where ideals would be pursued through smoke, alcohol and argument. As a doctor and ex-midfielder, he knew he should not have done it. As a philosopher, he sealed his death warrant with his usual wit and serenity. •
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